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After sharp run in realty stocks, analysts say it's time to be selective

For a sector that was shunned by investors in 2018, the recovery in the real estate stocks the first half of calendar year 2019 (H1CY19) has been quite sharp and swift. This is despite the liquidity issues and the fact that most players in the segment have been saddled with huge inventory since the past few years owing to tepid demand.

At the broad index level, the Nifty Realty has outperformed the Nifty 50 with a rise of nearly 20 per cent thus far in H1CY19, as compared to 9 per cent up move in the frontline benchmark. In CY18, the Nifty Realty lost 33 per cent as compared to 3 per cent rise in the Nifty50, ACE Equity data show.

Gains in some of the individual stocks have been even sharper. All stocks that comprise the Nifty Realty have given a positive return thus far in CY19 with Godrej Properties topping the charts with a rise of over 47 per cent till June 26. Indiabulls Real Estate, Oberoi Realty, Sunteck Realty and Prestige Estate Projects have moved up 20 per cent to 32 per cent during this period.

Real Estate (Regulation and Development) Act, 2016 (RERA), exemption of inventory tax from one to two years and the Good and Services Tax (GST) rate rationalisation have helped boost sentiment, experts say.

That apart, the inventory position with the developers is also on the mend. As per data from ANAROCK property Consultants, the housing sales (units) in the top seven cities - the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bangalore, Pune, Hyderabad, Chennai and Kolkata - has been rising. Housing sales in the NCR region, for instance, have surged 88 per cent in the past two years followed by Bangalore (80 per cent), MMR (78 per cent) and Hyderabad (76 per cent).

“With rising sales across the city backed by rising consumer demand, Bangalore’s inventory overhang declined from 42 months in Q1 2017 to merely 15 months as on Q1 2019 end. At any given point, an inventory overhang within 18 months is considered a healthy market,” said Anuj Puri, chairman, ANAROCK Property Consultants.

So, what should you do with the realty stocks then?

While analysts remain bullish on the road ahead for the sector, they do caution that a full recovery is still far away. A lot, they say, will depend on the upcoming budget and the measures adopted to ease the liquidity crunch in the system.

“The government needs to take fiscal measures to address the worsening NBFC (non-bank finance company) liquidity crisis. Permission to issue tax-free bonds to raise capital will be a prudent step in this direction,” says Shishir Baijal, Chairman & Managing Director at Knight Frank India.

That said, analysts suggest investors should not paint the entire sector with the same brush and there still are investment-worthy opportunities despite the sharp run seen thus far in CY19.

"Listed players with a good operational track record will be the key beneficiaries over the medium-to-long term. Structural reforms-led consolidation is likely to continue with larger players gaining a significant market share at the cost of developers with poor balance sheets and funding constraints. Affordable housing will also continue to gain traction on government grants and subsidies," suggests Gautam Duggad, head of research at Motilal Oswal Financial Services.

In this backdrop, A K Prabhakar, head of research at IDBI Capital suggests investors remain selective and choose only those developers that have a clean and strong balance-sheet. He is bullish on DLF, Oberoi Realty and Godrej Properties.

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