The good news for residential real estate equity investors is that major listed companies are expected to see robust sales growth in the March quarter of FY22 (Q4FY22). Despite the third wave of covid which caused some disruption at the start of the quarter, residential real estate projects saw increased demand.
Analysts at Jefferies India Pvt. Ltd estimates property sales for five of the six property developers listed under its coverage will hit a record high in FY22. “Our analysis of Propequity data shows core residential sales in the seven largest cities rose by ‘about 15-20% year-over-year in February,’ analysts wrote in a March 28 report. Sales in these cities hit a record high this year. quarter, despite some volume impact in January and February due to the impact of Omicron, according to the report.
The lack of new projects had weighed on the business performance of some listed developers during the December quarter. During the March quarter, Mumbai-based Godrej Properties Ltd launched several projects. Others like DLF Ltd and Macrotech Developers Ltd (Lodha) also launched projects during the period.
This, along with encouraging property records and inventory data, points to a remarkable Q4FY22 for the sector. Inventory levels fell to nine-year lows in both sales and absolute terms across all regions, Jefferies analysis showed.
However, the good news ends there. Towards the end of FY22, high input costs are playing a detrimental role for real estate companies, making it difficult for developers to maintain sales momentum in FY23 without raising prices further. .
Prices for key materials such as steel and aluminum have jumped 30% and 44%, respectively, over the past year, according to data from real estate consultant Colliers. With this, the average construction cost per square foot of a residential real estate project would go from ₹2,060 in March 2021 at ₹2,300, according to Colliers. This estimate does not include Goods and Services Tax.
“Channel checks show that prices were selectively increased project by project in the fourth quarter and that another 7-10% price increase is needed to counter cost inflation. Some developers such as DLF and Lodha, which have inventory ready to move, would be in a better position than those in the construction phase to raise prices,” said an analyst at a national brokerage on condition of anonymity.
However, if the size of the price increase is more than double digits, volumes could suffer in the first quarters of FY23, the analyst warned. That said, listed developers can be expected to increase their prices gradually instead of increasing them sharply all at once.
By segment, it would be more difficult to pass on the burden of high construction costs to affordable housing projects. Here, margins are below 15% and bargaining power is limited, analysts say, while the high-end and luxury housing segments enjoy margins of more than 30% and therefore the scope of the price revision is better.
Another important driver of lower interest rates on home loans would also begin to fade as monetary policy normalization gathers pace. Stamp duty benefits on the purchase of property on the primary market in the cities of Mumbai and Pune can be waived from FY23.
These have weighed on the Nifty Realty index, which is down 6% so far in CY222, but all is not lost. The sector index was one of the best in CY21, gaining 54%, significantly beating the benchmark Nifty50’s 24% rise.
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