What Drives The Surge In Realty Stocks?
There were two classes of stocks, which were riding high on hope before Reserve Bank of India (RBI) Governor Raghuram Rajan announced the radical 50 basis point interest rate cut on September 29. After banking, it was realty stocks that rallied the most, as the sector was pinning its hopes on a low interest rate regime to push its falling sales.
Also, this time banks passed on rate cut benefits to customers. In past one month, the Bombay Stock Exchange (BSE) realty index went up by 11 per cent.
Up, down and up again
Despite the RBI rate cut announcement and banks following suit, customers have yet to see revision on interest rates for home loans of both existing loans as well as new ones. Banks could be waiting longer to see how demand picks up in the sector after Rajan asked developers to cut property prices to sell off the unsold inventory.
The stocks in the sector, however, rose after the initial disappointment. One of the reasons for the rise could be the upcoming festival season, which might bring cheer to sales in properties. Investors might also bet on the fact that the passing of the benefit might be slow, but is inevitable. Banks, too, like real estate developers might plan to come up with festival loans melas.
What does the future hold?
Analysts believe that sector fundamentals have to improve, along with a rise in sales. Sales fell by over 50 per cent in past two years in the residential markets, leading to accumulation of more than half-a-million homes in unsold inventory.
Investor confidence is likely to come back with a quick spurt in sales growth and cut in inventory, which will convince them of strong performance by companies.
“Performance of the sector remains under pressure due to a weak demand and sluggish market conditions. However, RBI's recent repo rate‐cut of 50 basis points should have a positive impact on the sector. Also, RBI's steps such as lowering interest rates for construction loans, and reduction in risk weight for affordable housing segment look positive,” Indianivesh Securities said in a report.
Moreover, sector analysts are betting on commercial real estate more than the residential segment. “As per our channel check, we see demand revival for commercial real estate segment both for lease rental and outright purchase. We see relatively stable Q2FY16 performance for stocks ,” the report said.
Movement of *top realty stocks in last one year
| Stocks | Movement (In %) |
| DLF Ltd | +13.98 |
| Unitech | -55.38 |
| Housing Development and Infrastructure (HDIL) | +1.35 |
| National Buildings Construction Corporation (NBCC) | +28.66 |
| Indiabulls Real Estate | +2.19 |
*These stocks are top five stocks listed on BSE with highest volume in trading.