'Realty stocks correction a good buying opportunity', says Jefferies. Here are its top picks
Premium- Despite commodity costs seeing a sharp rise, Jefferies believes that real estate stocks provide an attractive hedge
The realty index has declined 29%, with Jefferies' coverage stocks down 23-45% from their recent peaks. Strong demand-supply fundamentals and early-cycle home affordability imply recent sector correction is a good buying opportunity, the global brokerage said in a note.
Housing cycle strength continued in 4Q and Jefferies thinks the rising developer optimism will propel supply to a 9-year-high in 2022. Sharp risk-off correction ignores the inflation hedge nature of realty stocks and improved balance sheets, it added.
Sharing as its top stock picks in the realty space, Jefferies said its preferred developers with positive FCF in FY23 are DLF, Lodha, & Sobha. "Large land bank developers such as DLF, Lodha, and Sobha are able to generate significant FCF." Despite commodity costs seeing a sharp rise, Jefferies' believe that property stocks provide an attractive hedge.
Construction costs are 25-40% of selling prices, and around 50% of them are stickier labor costs. As such, a 10% selling price appreciation can absorb the recent construction commodity price spikes, it highlighted. Large, listed developers are leading in supply jump. It expects market share gains to continue for listed developers.
Industry leaders at the global brokerage's housing summit, though, don't expect a return to oversupply given continued consolidation, which should be supportive of pricing.
“Our analysis of Propequity data shows continued inventory declines across geographies. New launches were +30% year-on-year (YoY) in Tr-3 mths (Nov-Jan 2022) but lower than the absorption levels by around 20%. Inventory levels have declined to ~8-9 year lows in sales/absolute terms and at around 24 months on Top-7 city basis, we believe the inventory levels are low enough to drive price appreciation," the note stated.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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