Employees work at the Xiaomi Corp. headquarters in Bengaluru. (Photographer: Dhiraj Singh/Bloomberg)

Higher Office Rentals And Government’s Reform Push A Heady Mix For Real Estate Stocks

Shares of real estate companies have surged this year on a lower-than-anticipated drop in property prices after the government’s surprise currency purge coupled with a sharp pick-up in private equity (PE) investments, according to analysts.

The demonetisation-led price correction lasted only for a quarter and the markets are buoyant once again, Mohit Agarwal, assistant vice-president at IIFL Institutional Equities told BloombergQuint.

The NSE Realty Index has gained close to 49 percent in the first 110 days of the year, four times the benchmark NSE Nifty 50 Index, year-to-date (YTD). Construction companies with a large presence in the commercial renting space are among the top gainers.

Higher Office Rentals And Government’s Reform Push A Heady Mix For Real Estate Stocks

The government’s recent reform measures have also provided a fillip to investments in the sector as a number of big-ticket deals were finalised in the last few months.

A higher proportion of private equity investments are now being channelised into the commercial space. Thirty-five percent of the total private equity investment in the real estate sector were made in the office rental space, according to a report by consultancy firm Knight Frank India. Office rentals made up only 18 percent of the PE portfolio in 2015, according to the same report.

Higher Office Rentals And Government’s Reform Push A Heady Mix For Real Estate Stocks

Road Ahead

Nothing concrete has changed in the last couple of months, said Adhidev Chattopadhyay, research analyst - Infrastructure & Real Estate, Emkay Global Financial Services Ltd. A turnaround has been in the works over the last couple of years. The market seems to have realised this now and is ascribing a value to that turnaround, he added.

The government’s reform push has also given a new lease of life to these companies. With the Real Estate Regulatory Act (RERA) and Real Estate Investment Trusts (REITs), the sector is headed for a cleanup, according to analysts.

(RERA and other reforms) will drive the clean-up of the sector. The cleaner and good guys will gain market share. Volumes will also pick up. Of course this is for the long term.
Mohit Agarwal, Assistant Vice-President, IIFL Institutional Equities

The office market and mall assets story makes Emkay bullish on the sector. “We are seeing deals especially in the commercial sector, and the hope that REITs would be a reality this year are making people positive about the sector,” said Chattopadhyay.

Information technology companies occupy about 35-40 percent of the available office space according to the brokerage, and a slowdown in demand in that category could be the only hindrance. “If there is a slowdown in demand from IT companies, there could be a slight risk,”Chattopadhyay added.