Is the rally in real estate stocks sustainable?

The BSE Realty Index has gained close to 50% since the beginning of the year as investors believe the worst is over

Published 3 years ago on May 16, 2017 Read

Manish Sonthalia, head of equities-PMS, Motilal Oswal AMC

The implementation of the Real Estate Regulation Act (RERA) will improve the prospects for the sector. The Act will set a benchmark in terms of corporate governance given that the real estate business is largely unorganised. Currently, the supply of real estate exceeds demand. RERA is expected to correct the over supply situation in the real estate sector. Listed developers stand to gain as weak hands would have to exit the sector given the stringent RERA norms. Though legacy issues of non-performing real estate assets in the banking sector will persist, things will incrementally get better. If one combines affordable housing with corporate governance, it can be a huge theme to play. In short, RERA is a win-win situation for both buyers [of physical assets] as well as investors [in real estate stocks].

Parikshit D Kandpal, senior analyst, HDFC Securities

The rally in realty stocks is largely driven by the expectation that RERA will result in the organised sector gaining ground over the unorganised developers. Also, the cost of capital — which is 18-20% for the sector — is likely to come down owing to increased transparency imposed by the Act. But, the ground reality is still different. Demand continues to be weak. Given that developers will not be able to roll over money, as funds for a particular project will now have to be earmarked in a separate escrow account, supply will be hit as new project launches get impacted. Over the next few quarters, a combination of slower launches and weak pre-sales will dampen growth as developers make the transition to the new norms. In the near term, we will see a slow correction in stock prices as valuations are already expensive and any positive benefits from the Act will take their time coming.


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