Real Estate: Sumit Kumar talks about recent trends in India’s real estate market

“We have to take into account the fact that the first quarter was a bit weak due to the heatwave, footfall at project sites was lower; the impact of the elections, approvals did not come through and therefore supply for launches was subdued and therefore obviously uptake was also affected,” he says. Sumit Kumar, JM Financial.

What kind of trends are we seeing around the world? real estate Space. The fact that we’ve seen an uptick in both demand and pricing. Could you walk us through some of the observations you’ve made, perhaps by city, where we’re seeing pricing trends have seen a big difference?
Sumit Kumar: So, let’s take a step back. In FY22, the real estate sector started taking the first steps towards recovery. It grew by around 38%. In FY23, the number was 51%, albeit on a low base, because we were coming out of a COVID lockdown. And in FY24, as we have highlighted in our report, the positive streak continues. The sector-level growth was around 30%. This is broken down into two components. Volume growth was around 20% and price growth was around 10%. And this is for the pan-India level for the seven major cities that we cover.

Now, looking ahead, we are roughly expecting 12-14% volume growth for this year and price growth somewhere in the range of 6-7%, which means the overall industry will likely grow at a 20% revenue growth rate for FY25.

We have to be aware of the fact that the first quarter was a bit of a weak quarter due to the heat wave, footfall at project sites was lower; the impact of the elections, approvals did not come through and therefore supply for launches was subdued and therefore obviously absorption was also affected. In that context, I think 20% growth looks solid. And if you look at the market share gains from publicly traded or Tier I developers that continued last year from the top 15 developers we track, pre-sales grew by around 42%, which is similar to the 30% growth in today’s context.

So we expect that to continue and kind of overlaying past numbers, we expect the developer universe, the top tier and the publicly traded to probably have 30% revenue growth.

Coming to the second part of the question, which is basically the cities, I think in terms of pricing, Delhi NCR has been leading, followed by Hyderabad and then Bangalore.

The overall price growth in the last five years from CY19 to CY24, whatever we have seen, is more or less at a pan-India average of 40%, where Delhi is almost like 2x, so it is at the top of the pack, then Hyderabad is somewhere around 1.8x.

Mumbai is probably at the lower end, at around 40%, close to the national average, so that has been the split. As far as volume growth is concerned, we all know that MMR is the largest market today in the country, with a share of around 40-45%. The top market in terms of MMR volume is Thane, followed by Pune, Bangalore and Hyderabad.

That is exactly the point, because real estate is no longer a region-specific story and I am talking only about the listed universe, because the big players have diversified. I mean, the players from Delhi are now in Mumbai and Bangalore, and the ones from Bangalore are now here in Mumbai. And it is becoming a more pan-India story. So how can you know which real estate stocks to invest in?
Sumit Kumar: So, I think this geographic expansion is a natural extension of their growth story. Obviously, you have to understand that real estate is a very localised affair. The demand and supply dynamics vary across micro markets. Even in the city, an area in south-central Mumbai may have very different dynamics than Thane or Panvel. But there is room for each and every credible player. If you look at the market share of the top 25 developers today, it is around 20% and this is the data I am quoting from PropEquity. The figure will be somewhere between 20-30% but the point is that the organised segment probably accounts for a third of the total market and it is growing.
So, there is room for any self-respecting developer, who knows how to carry out a proper marketing and sales plan, who can get approvals in a timely manner and execute the project within three to four years. So, it is about managing working capital well, without being too aggressive in capital allocation.

And to be fair to all the listed players, they have actually deleveraged their balance sheet, helped obviously by the cash flows that have come in over the last three years, helped by good pre-sales numbers and supported by valuations, they have also raised money and they have not really spent aggressively on land acquisitions either.
If we look at most of the commercial development that developers have done, it’s largely been the asset-light route through JDAs and JVs.

So to be fair to them, they’ve been pretty cautious on the capital side and obviously there’s a bull cycle in the industry that everyone has benefited from.

So, players with a decent track record of execution, players who have invested wisely in business development and have the ability to do land deals because of economies of scale, scope or they have brand power so they attract traction, landowners are willing to work with them, these types of developers will probably outperform the entire industry and that has happened and we expect it to continue.

Let’s be specific also in terms of stocks and companies that are specific to different cities. For example, Delhi NCR, because a lot of projects really seem to be selling out here, that’s the conversation we had with some of the executives as well. There are a lot of co-working spaces, IT hiring has been a big factor for Bengaluru. So for players like Prestige Estate or other players that are dominant in that region, what is your outlook in terms of what might influence the price movement of some of these players?
Sumit Kumar: As for the four asset classes that we generally classify real estate into, I think the residential sector is the one that is performing the best at present. The office sector is still in a recovery mode. And the retail sector has seen moderate consumption growth.

Obviously, on the storage side, from the peak we saw during the COVID period, there is now a bit of a calmer environment. In terms of cash flow, I think the coverage universe we have, as well as the top 15 developers, have achieved good growth in pre-sales.

We expect collections to grow similarly and gross operating surplus to look healthy for most listed developers, save a few. I expect collections to also move in line with pre-sales, which is roughly 25-30%.

On the commercial side, it’s still on a slow recovery path, although we have seen certain players where occupancies have started to go above 90%, and it will take them another two to three quarters to get back to the occupancies that were at pre-COVID levels of around 95% and that gives you massive operating leverage from the security deposit flow and the incremental rents coming in, so that will help as well.

But from a listed coverage perspective, I think there are some players that have a diversified profile and you can also consider them to probably make an investment in the public market there.