Realty stocks: Expect consolidation to accelerate in CY20

The BSE Realty Index (BSEREAL) corrected 31% in CY18 on account of liquidity concerns due to the NBFC funding crisis. However, the BSEREAL has bounced back strongly in CY19 with YTD returns of 18% as the sector theme of consolidation in favour of large, organised developers has begun to play out. We expect this consolidation to accelerate in CY20 as a number of unlisted developers continue to remain in financial trouble and grapple with stalled projects. The listing of India’s first Real Estate Investment Trust (REIT) by Embassy Office Parks and strong office space absorption in CY19 opens the door for more potential REIT listings by other large annuity asset developers. We reiterate our BUY rating on DLF, Prestige Estates Projects, Brigade Enterprises and The Phoenix Mills.

The Indian real estate sector has undergone multiple rounds of disruption over CY17-19, beginning with the demonetisation impact, followed by RERA and GST implementation, change in accounting to project completion under IND-AS 115 and the NBFC funding problems that continue to plague the sector. These disruptions are in addition to the existing issues of ~43 months of unsold inventory across tier-I cities and prices remaining stagnant for the last three years. At the same time, during possibly the toughest times for the sector, the larger organised developers have emerged stronger which is reflected in the 64% cumulative return of the BSEREAL over CY17-19. While the sector has historically been one where the entry point has been crucial for making returns, we are of the view that continued consolidation in the residential space, rental growth through annuity assets and availability of capital to a select number of developers, offers further upside to stock prices over the medium term.