Agree to your point that it’s not about checking stock prices, may be I mis communicated ,so, putting my thoughts in detail . With my limited experience, there are few possible scenarios of turnaround from an investor return perspective :1. Even though headwinds continue , valuations become so attractive due to overall pessimism that it makes sense to invest 2. Turnaround signs are dependent not on direct business but business impact levers like regulations 3. The core business goes through a turnaround . Now coming to real estate , for me, as a sector it was not of much interest aa I find 95% plus companies not suitable for investment based on rules I follow, however, few companies passed the rules n on valuating them I found the pessimism in prices good enough to find value and hence invested. Fortunately , the lever push happening in a segment of real estate now which should get reflected in sales in next few quarters .Disc : invested in Ashiyana housing with a major allocation n few more like kolte patil, arvind infra n NESCO with small allocations since last 6-8 months
RE forms around ~28% of my PF because of the valuation and pessimism reasons. I’m up over 95%+ on Sunteck Reality, and Peninland is my other big position in this space. I think Peninland is one of the most undervalued players in this market - they apparently had 675cr of sales in 2 months, for a stock with 700cr mcap.
Most of Real estate stocks have doubled since I started this thread !! Unfortunately, as in Stock market, the participants optimism and interest is directly proportional with rise in stock prices !!
When I started the thread I bought RE stocks heavily because I found quite a disconnect and total pessimism. I have gone through threads of other RE stocks and much of discussion centers around Affordable housing - the new buzz word, company’s projects, land bank, execution capability, etc. While I do not deny that all this is important but most important is to understand that it is a cyclical sector. It will behave like commodity sector - all stocks will benefit disproportionately when the cycle turns positive and will languish at the bottom when cycle goes negative. At micro level, most important is that company’s balance sheet is not so leveraged that it will fail to see good times !! Rest it will run with the tide
GST is likely to give a temporary boost to the sector cause rates are expected to go up by around 8% due to change in taxations. So as a result people are buying by giving full money in advance which is good for cash starved real estate companies.
Any other VP members still tracking Real Estate stocks/cycle?
I am super bullish on this sector, owing to large time correction in a country where nominal GDP growth is 10-15% but RE prices haven’t moved. This combined with materially lower interest rates historically means that EMI’s have gotten much cheaper in real terms - as a function of your salary. Here’s a BQuint chart depicting the same:
Look at the current levels v/s those seen at the start of the 2007-08 cycle in 2003/4.
One of the key triggers I see going forward is the stock market euphoria surrounding Housing Finance companies. India is incredibly under penetrated in terms of mortgages, a fact recognised (and IMHO overdone) with the sky high valuations of Hsg. finance companies. In fact, home loan disbursement is the only sector where credit growth remains positive while lenders pare down their exposure to corporate debt due to high NPAs. I have also started hearing rumours of aggressive lending, which is bound to happen with such large interest in increasing disbursements to this sector. Heck, when people are no longer contrained by savings but instead can borrow on future earnings to fund their is house is the perfect environment for a housing boom. Here’s a graph by Reliance HF on the same
It’s impossible to predict when this would lead to sales finally picking up from developers, but there is some encouraging “green shoots” in current inventory data.
So in summary:
Supply side picture
- Homes have undergone a significant time correction while nominal incomes have grown double digits for 5-10 years
- Record low interest rates mean EMI’s as a percentage of income have decreased along with home prices being at relative lows
- Large surge in investor demand for mortgage credit has driven a supply side boom due to high valuations afforded by the sector
- Investor expectations for disbursement growth are reflected in high P/BV and phemnominal disbursement growth seen in large lenders
I think the thesis for investing in HFC’s is pretty clear from the above. But a direct result of this boom is where the money will go to - towards the purchase of new homes. While these co’s make some bps on this credit spread, this large swathes of money is ultimately going to go the real estate market.
Now there isn’t really a limit or monopoly with one HFC to provide money - LIC’s money is as green as Gruh’s is as green as HDFCs - its a cost/credit risk game. But there is a limited amount of developable land, currently unsold in the hands of the survivors of the last RE boom. I am talking about companies like DLF, HDIL, even Jaypee etc. With so much money disbursed from HFC’s taps, this is the end use of that cash. You also can’t really generate more of it.
I am heavily invested (~30% of PF) in RE stocks, mostly companies with a lot of land other un-monetized assets trading at large discounts to their current valuations. As land prices rise, not only will the value of their land bank increase, I am hoping the discount narrows as it gets monetised.
Stocks I’m invested in-
- Peninsula Land
- Nitesh Estates
Views and criticisms invited!
Like other cyclical sectors play this through a basket of say 5 stocks…3 companies with good balance sheet and good reputation and 2 leveraged ones. You never know which one will give 5x or 3x or 0x. Keep stop loss. Also note the transpareny level in this sector is one of the worst.
So play it like any other cyclical sector do not fall in love with it !
Right now real estate seems to be a interesting investment ,with market interest rates going down and debt too of most RE companies .but what attracted me the most is the affordable housing theme. More and more companies are coming up with affordable housing recently I saw that with mahindra lifespace.Owning a home is everyone’s dream,there are a lot of ppl who doesn’t have a home in urban areas.So PMAY could have a real impact,considering the fact that it is launched only in urban areas as of now.It could in itself drive up the demand in urban areas ,any resident of urban area who doesn’t own a home can be a beneficiary of this scheme if he wants to buy house in urban area .Almost all the big RE companies will be having 90% of their land bank in urban areas only.So considering the improved demand I think it will be a good time to unlock the land bank held by many in metros.Mahindra lifespace has already launched projects starting from 20 lakhs.obviously margin will be lower.but volumes will be much higher.And secondly PMAY will have to be extended to other areas too,or else it will be gross discrimination ,maybe in a year or two.govt may extend it to other areas before the next elections anyway.once it gets started implemented in other areas demand may move elsewhere due to the very high square feet rates in metros.So the companies which is having sizeable landbank in metros and the means to get is developed in a year or two may significantly gain from the PMAY scheme.I feel Mahindra lifespace is gotta be a beneficiary… Can anyone find flaw in my analysis… Happy to know… Moreover you can tell me any other RE companies with significant land banks who may gain from PMAY
Hypothesis in qualitative terms until and unless backed by numbers remains a hypothesis . Would be great if you can quantify the price bands and market size of affordable housing , the price points etc prospect companies r targeting . Disc : invested in few real estate companies which are exploring affordable housing but not certain due to profitability attractiveness n policy uncertainities .
Also there is another thread on affordable housing , you may check that for details
This post by @bheeshma is very good for estimating RE companies.
Here is the link.
Hope this helps.
@sarangg : Do you hold Peninsula land? It has excellent promoters in Piramals and has high-end real estate development. But it is not much in the usual talk/news. Especially when the reality sector is back in the investing chatter. Could you share any note in it, if available?
@ramanhp By piramals , you mean Ajay Piramal or his brother and if it is his brother , do you consider him equally capable ?
I recently got a feedback from a real estate consultant(Blackstone) and he was positive in the management. I have no measure to compare the promoters to Ajay Piramal but had positive inputs.
Hey Raman - ended up having a quicker exit from Peninland, much before stock ran up. The promotors are indeed related to Ajay Piramal, but I couldn’t end up developing comfort over their deleveraging plans. They also didn’t seem intent to put in more equity in the company to help it deleverage, while land sales (which were given very positive colour by management) have not been completed despite repeated assurances by the management. I might re-enter stock at higher levels if they meaningfully deleverage, because the equity might be a gamble given they need to raise funds at 14-15% type of rates, which makes it very hard for them to create shareholder value at a time when land prices are high and stagnant.
If they could sell their assets at their fair-value/find a white knight financing partner, Peninsula Land would be valued at several fold its CMP.
Going by the recent results their sales have soared a 1000% bt another quarter of net loss…plzz explain…
Our efforts at understanding Real Estate. In this article, we’ve touched upon the past, the causes of it and how it has shaped the present. We also take cognizance of the factors changing the shape of the industry and how the future could pan out
Good article. Waiting for your next one on individual companies.
Have you read these blog posts: