Realty stocks sizzle as RERA era dawns

Stocks of real estate companies forming part of the Nifty Realty Index surged up to 10 per cent on Tuesday after the Real Estate (Regulation and Development) Act, 2016, became effective on Monday.

Real estate companies have rallied in the last one year on positive developments such as amendments in regulations related to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), government’s focus on affordable housing, strong demand in smaller cities/towns, stable interest rates and softening of prices in certain pockets, besides RERA. However, market experts believe real estate stocks have rallied quite fast and the rally is not sustainable.

They are not bullish on the prospects of the sector yet, despite RERA. Kunj Bansal, Executive Director & CIO - Equity, Centrum Broking, expects a correction in the medium term as he believes that RERA is more likely to be negative in the short term and will affect cash flows of the companies as they reorient their business models and adjust to the new Act.

While foreign institutional investors have fairly large amount of holdings in the large and frontline companies, domestic investors have stayed away and are unlikely to be in a hurry to lap up real estate stocks. “While RERA is directionally positive, it will take one-two years for the effects to be seen in terms of improvement in fundamentals. One needs to see whether the balance sheet and muted sales growth are improving,” said a fund manager who did not wish to be named.

According to the shareholding pattern provided by companies constituting the Nifty Realty index for the March 2017 quarter, mutual fund holding in leading real estate companies was up to 7 per cent compared to foreign holdings of 9-45 per cent.

On the other hand, market experts are bullish on beneficiaries of a pick up in demand for homes due to RERA. This includes housing finance companies, cement and building materials.

The outlook on housing finance companies, especially those focused on affordable housing, continues to be bullish even though many stocks under spectrum have more than doubled.

Some of the stocks that had stellar run were Housing Development Finance Corporation, LIC HFL, Indiabulls Housing Finance, Repco Home Finance, Gruh Finance, Dewan Housing Finance and CanFin Homes.

Strong loan growth, relatively cleaner balance sheets (compared to banks) and stable interest rates, helped many stocks in this space.