Why the real estate index is an outperformer

For well-established real estate players the last two years have seen a revival of sorts. Pre-sales have increased as buyers have flocked to buy apartments with the purpose of living in them Image: Shutterstock
 
A real estate company that can sell in advance of construction is in a good position. Even better is when the company can collect money from buyers in advance of construction.
 
For well-established real estate players the last two years have seen a revival of sorts. Pre-sales have increased as buyers have flocked to buy apartments with the purpose of living in them. A large part of this is on account of stable prices that have driven speculators out of the market.
 

"Your execution capabilities are more important than the land bank and if you can execute you make the brand and get customers to buy from you in advance,” says Abhishek Kiran Gupta, CEO at CRE Matrix, a real estate market research firm.
 
Out of a sample of large listed players surveyed by Forbes India almost all have seen increased advance received from buyers as disclosed in their annual reports. Bangalore-based Sobha has seen it rise 13 percent a year from Rs3,914 crore in March 2020 to Rs5,024 crore in March 2022. Rival Kolte Patil Developers saw buyer advances rise 17 percent from Rs1,490 crore to Rs 2,056 crore. Others like Macrotech Developers (also known as Lodha Group) saw buyer advances fall 7 percent a year to Rs7,431 crore in the year ended March 2022 but they also saw inventories fall to Rs27,358 crore from Rs29,301 crore. This means they had less outstanding apartments to build and sell. (Macrotech also has a large office park portfolio.) While Sobha is a part of the Nifty Realty Index, Macrotech and Kotle Patil aren't.


 
This also ties in with housing loan data from the Reserve Bank of India. The year ended 31 July 2022 saw a 16 percent growth in home loans (including affordable housing loans) to Rs17,69,249 crore. This was better than the 10 percent growth recorded in the same period last year.

Also read: Infra.Market: Getting back into the saddle
 
The improving balance sheets of listed developers have not gone unnoticed by investors. The Nifty Realty Index is positive across the last one, two and three years with gains of 10 percent, 105 percent and 75 percent respectively. (These are not CAGR numbers; Macrotech and Kolte Patil are not part of Nifty Realty). Compare this with 0.5 percent, 51 percent and 59 percent for the Nifty and the outperformance is stark.

Taking buyer advances into consideration Sobha and Kolte Patil are quoting at market caps that are only 1.25 and 1.29 times buyer advances. If they can continue pre-sales as aggressively as during the pandemic period the companies could see a substantial jump in their market cap. (A point to note is that buyer advances is actual cash received by the company and not booking amounts where buyers can pay as little as Rs1,00,000 to block their apartment. A large portion of those sales are cancelled.)
 
Gupta of CRE Matrix has also looked at data on real estate profitability over the last decade. He points to the fact that while companies have grown their top line, operating margins have fallen making prices more reasonable for end buyers. A case in point is Oberoi Realty where operating margins have fallen from 58 percent to 48 percent over the last decade. As homes are more reasonably priced more fence sitters have taken the buy decision more often than not favouring well-known names in the industry.