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The recent run-up in stocks just a catchup of two years of strong performance; Growth outlook remains positive

* As per Knight Frank, residential sales in top 8 cities grew by 5% YoY to ~330,000 units in CY23, matching the CY13 run rate but 9% below the peak sales of 360,000 units clocked in CY12, leaving further headroom for growth.

* Supply inched up 7% YoY to 350,000 units in CY23, but it was just marginally above the demand, keeping inventory levels in check (inventory overhang of 17 months). As a result, realizations increased by 6% YoY.

* Despite the price hikes, affordability improved across markets as income growth surpassed pricing growth, which should keep momentum intact in demand and pricing. Further, demand revival in the affordable segment, macro tailwinds amid rising per capita income, and scale-up in demand in cities like Bangalore, NCR and Chennai can further increase the absorption beyond the previous cycle’s peak.

* Thus, we believe that we are in the middle of a 7-8 year-long real estate growth cycle; accordingly, we believe that growth momentum in both demand and pricing should continue. While the Nifty Realty Index has doubled in last one year, its returns since Jan’22 (two years) has been ~80%, similar to pre-sales or cash flow growth for top-12 listed players. Thus, the recent run-up has just been the catchup and future growth is yet to reflect.

* PEPL, SOBHA, GPL, and Sunteck are our preferred picks as we believe their valuations do not reflect their robust cash flows and strong growth potential.

Demand at multi-year high, surpassing previous peak

? As per Knight Frank, residential sales in top 8 cities grew by 5% YoY to ~330,000 units in CY23, matching the CY13 run rate but 9% below the peak sales of 360,000 units clocked in CY12.

* However, going by the numbers from ANAROCK and PropEquity, absorption in CY23 surpassed its previous cycle’s peak. As per ANAROCK, absorption in top 7 cities was up ~30% at 470,000 units. As per PropEquity, it is estimated to have increased by ~15-16% in CY23 to 510,000 units.

* Thus, on the blended basis, industry volumes seem to have grown by mid-teens in CY23. Along with ~6% of pricing growth, value growth was healthy at ~20%, which should help organized listed players to clock over 30% YoY growth in presales in FY24, driven by the ongoing consolidation.

Gradual price hikes continue; affordability improves YoY

* Supply in top 8 cities grew 7% to 350,000 units and exceeded the demand for the second year in a row. Inventory increased to ~474,000 units for top-8 cities but remained flat for top 4 cities and was 40% below the peak in CY13.

* The inventory overhang was flat at 17 months in CY23. With supply matching demand, prices continued to move up and grew 6% YoY in CY23.

* Despite price increases, the affordability ratio witnessed a marginal 100-200 bp improvement in top 8 cities as income growth surpassed pricing growth and mortgage rates remained flat

* Sustained affordability will ensure that gradual price hikes will continue without affecting the demand momentum.

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