Real Estate – A Contrarian Bet
Stallion Asset is popular for catching long term trends but here is one sector where contrarian Investors can look at.
What Doesn’t kill you makes you Stronger. Real Estate Companies have been in a mess for last many years and things have started to improve especially for the top 3 builders in every city. We at Stallion Asset Strongly believe that there will be massive market share gain for the top 3 builders in every city v/s the unorganized market. Real Estate had problems and over the last 8 years most problems have been Solved atleast for the Top 3 Builders in each City.
1) Black Money – Black Money has reduced Substantially as more than 75% of new home sales are happening via housing loans . For the Home Buyer it makes no sense to pay in black when he is getting loan at 8.5%. Real Estate Companies have understood that dealing in white makes more sense as they can raise more equity and get debt at cheaper rates.
2) RERA (SureShot Death of Unorganized Players) – RERA has very strong implications for unorganized builders and Stallion Asset’s Internal calculation suggest that inventory will reduce drastically going forward in all major cities especially on the commercial side. RERA will increase consumer confidence which is much needed for Real estate players. Again the larger branded Real Estate Players will take over market share of the Smaller players.
3) Housing Real Estate is unprofitable if not pre-booked – Trust deficit in smaller builders is helping the top 3 players charge in premium. If a builder doesn’t get pre-bookings of atleast 50% of its total inventory, there is no way the ROE of the project to be in double digits. The Entire IRR of the Real Estate project depends on the pre-bookings, and except for the top 3 builder in every city, the other builders are facing serious problems getting pre-bookings. Godrej sold 1,000 crores worth of flats in a week in may 2017 showing that there is demand for reputed Builders.
4) Valuation looks Cheap – The total Market Cap of Real Estate companies is less than the Market of Sun Pharma (Even After a 50% fall in Sun Pharma). Real Estate represents 5% of GDP in India but less than 1% of Market cap of Indian Equity Market.
5) Debt Reducing – None of the top 10 players in Indian Real Estate have debt to Equity of more than 2. The Average Debt to Equity stands at a comfortable 1x, The Pressure on Debt has been reducing as Interest rates fall and builders liquidate some of their asset to cut down more debt. DLF Sold Stake in their commercial real Estate Arm to Blackstone, and many more such deals are happening like purvankara selling some of its land Parel in hyderabad to cut down debt.
6) CNX Realty- Cnx Realty was in a downtrend from 2008 where it topped out at 1878 till 2016 and it bottomed out at 125 after a 93% fall from the top. Today after about 10 years its still at 280 i.e. 85% Away from the top. In a 10 year period every tom dick and harry who ever held real estate stocks has sold out of it, there is deep value in most of these companies who have huge land banks and won’t need to buy any fresh land for next 10 years.
Conclusion – Real Estate is a Contrarian bet, the Industry is influenced by economic cycles but our understanding is that tough times are behind it. Our Understand is that real estate companies will beat the nifty for next 5-10 years. Real Estate will not have bubble valuations for this bull market but investors who are looking for a stock to hold for a decade, Real Estate fits well. The business environment will become difficult for unorganized player after the implementation of RERA whereas the top 3 builders in every city will do well. Overall we at Stallion Asset are very convinced that Real Estate Index will beat nifty and a great bet for patient long term Investors.
Disclourse – Amit Jeswani and Family have vested Interest in Real Estate, use this for Education purpose only. Stallion Asset is registered with SEBI (INH000002582) but this is not a recommendation.