Jefferies affirms housing demand continuity; downgrades Prestige and Sobha

Jefferies, a foreign brokerage, anticipates that the positive trend in residential real estate demand in India will continue, with a 10% growth in housing volumes despite a potential slowdown. The housing market experienced a 25% YoY surge in volumes in 2023, doubling in a span of three years.

The premium segment of the housing market has seen a 14% increase in its share since 2019, while the affordable segment faced challenges due to rising interest rates and income losses. However, Jefferies believes that these challenges are now in the past and foresees the possibility of lower mortgage rates in the second half of 2024.

The brokerage also highlights the government's potential reintroduction of the interest subvention scheme in the upcoming budget, expecting some demand to shift towards mid-end or affordable housing in 2024.

Jefferies notes that the housing inventory is at cycle lows with a 17-month supply, which is expected to keep pricing strong, showing a potential 10% gain in 2024. However, the brokerage emphasizes the importance of disciplined price hikes to sustain the residential cycle, considering low rental yields. Sharp price increases can deter end-users due to declining affordability and may result in weaker quality supply. Regulatory actions, such as recent consumer lending regulations by the RBI, are also a potential risk.

Developers are showing an increased risk appetite, betting on market strength and potential consolidation. Despite strong cash flow generation expected through 2024, rising competition and higher pricing may lead to increased scrutiny of land deal economics.

Jefferies points out that after a 127% rally in the Nifty Realty index since March 2023 lows, real estate stock valuations are at their highest levels. While developer discipline and strong growth support these valuations, the high expectations leave little room for disappointment. Jefferies recommends Godrej Properties and Sunteck Realty as the top large/mid-cap picks.

In terms of specific recommendations, Jefferies downgraded Prestige Estate Projects to 'Underperform' from 'Hold' but raised the target price to ₹1,000 per share from ₹750. Sobha was also downgraded to 'Hold' from 'Buy,' with the target price increased to ₹1,265 from ₹900. On the other hand, Jefferies upgraded Mindspace Business Parks REIT to 'Buy' from 'Hold' with a target price of ₹365.