Will the realty sector revive?

Thu, 3 Jul Pre-Open

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The Indian stock markets seem to be in the grip of the bulls! Many sectors have been re-rated on the back of the change in government. Stocks from infrastructure, power, mining, oil and gas, capital goods etc have run up a lot over the last few months. It is no secret that stocks from these sectors are being driven more by sentiment rather than any change in fundamentals. The markets are certainly discounting the promise of better days ahead well in advance. But in this surge of enthusiasm, one sector underperformed until last month. The Real Estate sector is highly correlated to economic growth as well as market sentiment. Thus the realty index should have been one of the big outperformers over the last 6-12 months. However, it was only after the government took charge in May, did realty stocks start performing. So what has been the trigger?

The answer can be found in the term 'affordable housing'. The BJP had, in its manifesto, promised housing for all by 2022 and had also promised to give a big push to low-cost housing. The managements of realty companies are now expecting tax sops in the budget. These sops they say will kick start the revival process for the sector. Also hopes are high that the government may make a few big announcements to promote low-cost housing. These pertain to the granting of infrastructure status for the sector as well as clarity on the REIT policy. REITs or Real Estate Investment Trusts are basically trusts formed to manage investments in real estate assets on behalf of investors. They are currently not treated at par with mutual funds. Clarity on the tax aspect of REITs could offer more funding opportunities for realty firms. As far as the infrastructure status is concerned, it would be a positive long term development for the sector.

However, a closer look at these reforms will reveal that they are focused more on the liquidity and taxation aspects and not on the crucial issue of demand. We are all aware that the real problem in the realty sector is the fall in demand due to sky high property prices. While big macro reforms are positive for the sector, it will not have much of an impact on the home buyer unless the reforms result in a fall in prices. We believe that a strong real estate regulator is the need of the hour. If the government can take decisive steps in this regard, along with the tax breaks, it will go a long way to improve the prospects of the sector. Investors will do well to keep this factor in mind before jumping into real estate stocks purely on the basis of policy announcements.

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