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
1) Homes have undergone a significant time correction while nominal incomes have grown double digits for 5-10 years
2) Record low interest rates mean EMI's as a percentage of income have decreased along with home prices being at relative lows
3) Large surge in investor demand for mortgage credit has driven a supply side boom due to high valuations afforded by the sector
4) 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-
1) Peninsula Land
2) Nitesh Estates
Views and criticisms invited!