Housing demand trend to stay intact, says Jefferies; downgrades Prestige, Sobha, upgrades Mindspace REIT

The Indian housing market volumes surged 25% YoY in 2023, doubling in 3 years, and this positive trend in the residential real estate demand is expected to stay intact, said Jefferies. After a seven year long weak phase, there is a significant headroom for volume to grow in the medium term, the foreign brokerage added.

It expects housing volume growth 10% despite a cool down in the pace. The housing upcycle has been premium led, whose share has risen by 14 percentage points since 2019. Meanwhile, the affordable segment has been hurt by rising interest rates and income losses. But Jefferies believes that is now behind us and expects potentially lower mortgage rates in H2CY24, which will be positive.

“Also, the government reintroducing the interest subvention scheme (guidelines likely in Feb24 budget) could provide a trigger. We expect some demand to shift to mid end or affordable in 2024," Jefferies said in a report. The brokerage noted that inventory was at cycle lows at 17 months supply, which should keep pricing strong (10% gains) in 2024.

However, it believes disciplined price hikes are important for the residential cycle to continue, given low rental yields. This is because sharp price jumps drive end users away as affordability declines and also lead to weaker quality supply. “It may also risk attracting regulatory action, with for example, RBI recently tightening consumer lending regulations a case in point.

We remain watchful," Jefferies said. Meanwhile, the risk appetite among developers is finally rising, as they bet on market strength and potential consolidation. Strong cash flow generation is expected to persist thru 2024; though rising competition and higher pricing would raise scrutiny of land deal economics.

Jefferies said there is little room for error for developers. After a 127% Nifty Realty index rally since March 2023 lows, valuations for the real estate stocks are mostly at highest levels. “Strong growth and developer discipline is supportive; though high expectations leave little scope for disappointment.

Developers which are better placed on valuations viz. and Sunteck Realty are the top large/mid cap picks," Jefferies said. Top picks Jefferies downgraded Prestige Estate Projects to ‘Underperform’ from ‘Hold’ but raised its target price to 1,000 per share from 750 earlier. It also downgraded to ‘Hold’ from ‘Buy’ but raised the target price to 1,265 from 900 earlier, as after sharp recent rallies, Jefferies await better entry points.

Meanwhile, in the office space, leasing uptick for offices in late 2023 is driving vacancy levels lower; though still 6 7 percentage points above pre COVID. The brokerage believes relaxation in SEZ rules should drive improved flexibility for large office holders. Rental uptick is still only back ended, at best, in 2024, with NCR/MMR and CBDs leading the upturn.

Jefferies upgraded Mindspace Business Parks REIT to ‘Buy’ from ‘Hold’ with a target price of 365. Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.