4 min read Last Updated: July 19, 2024 | 11:08 AM IST
Even as demand for commercial real estate is on the rise, analysts are being cautious about the stocks due to concerns about valuations, which they say have priced in much of the positive news but not the possibility of a future glut.
“Commercial real estate stocks are currently overvalued and many of them have already priced in FY26 profits. Investors should not rush into taking fresh positions unless they see significant value in the stocks,” said Deven Choksey, MD, DRChoksey FinServ.
For real estate companies like DLF, Embassy REIT and Mindspace Business Parks REIT, rental portfolio constitutes 45-100 per cent of their total portfolio, however, for companies like Brigade Enterprises and Oberoi Realty, it accounts for around 20 per cent and 18 per cent, respectively.
On the stock exchanges, stocks like Prestige Estates, Oberoi Realty, Brigade Enterprises, DLF, Embassy REIT and Mindspace Business Parks REIT have risen between 11 and 214 per cent in the past one year. In comparison, the Nifty 50 and Nifty Realty indices have risen 25.5 per cent and 109.8 per cent, respectively.
Deepak Jasani, head of retail research at HDFC Securities, also said investors should refrain from buying at current levels as there is not much upside scope in the stock given the sharp rise in the stock price.
“There is very little to look forward to anymore. Investors can still take partial profits despite last month's correction,” Jasani said.
In terms of valuation, Nifty Realty is currently trading at a price-to-earnings ratio of 68.1 times, which is higher than its two-year average of 50.71 times.
Individually, Brigade Enterprises was trading at 72.4 times, Prestige Estates at 50.2 times, Oberoi Realty at 34.6 times, DLF at 76.6 times, Embassy REIT at 36.4 times and Mindspace Business Parks REIT at 37.1 times.
Mismatch between supply and demand
Indian commercial real estate developers enjoyed strong demand in the first half of 2024 (H1 CY24) as office space leasing surged amid supply constraints.
According to a report from Nuvama Institutional Equities, demand for office space in the first half of 2024 is expected to grow 46% year-over-year to 20.5 million square feet (msf), while supply is expected to grow 19% year-over-year to 20.1 million square feet.
More recently, in the second quarter of 2024 (Q2 2024), office space leasing increased 54% year-over-year, outpacing supply, which decreased 33% year-over-year.
Analysts believe that major micro markets, except Hyderabad, are witnessing demand outstripping supply due to demand from Global Capability Centres (GCC) and corporates. Moreover, major markets are witnessing delays in developers launching projects since COVID-19.
“Typically, it takes three to four years to build an A-grade IT park. Most developers have resumed development post FY22. So, this excess demand situation will continue for the next two to three years. But, demand and supply will balance after that,” said Vijay Agrawal, managing director, investment banking at Equirus.
Still, analysts expect a lot of supply to come to the market through 2026. According to NuVama, the top seven cities are expected to add about 164 million square feet of supply between 2024 and the second quarter of 2026, with completions exceeding 50 million square feet per year, far exceeding peak demand.
It has never been sighted in any given year.
“We believe that in the medium term, rental trajectory is likely to lag behind completions, resulting in supply exceeding demand. As the gap between demand and supply narrows, we expect vacancy rates to decline slightly,” the brokerage said.
Still, the brokerage has given 'buy' ratings to Prestige Estates, Brigade Enterprises, DLF and Embassy REIT as consolidation in the office space sector could favour financially stronger developers, helping them gain market share.
First Published: 19 July 2024 | 11:07 AM IST