Jefferies picks the best real estate bets as it sees the market to test in 2023

The resilience of the residential real estate cycle will be tested in 2023 amid higher mortgage rates, while weaker hiring in the IT industry is likely to keep vacancies and rents flat, Jeffries said.

India’s real estate market has seen volume rise 25% year-on-year in 2022 to a record high, the research house said in a Jan. 8 note.

“We expect the rise to enter its third year.” 2023 Mortgage rates are up 200 basis points from 2022 lows, although as the rate hike cycle likely peaks, mortgage rate hikes should be behind us by early 2023,” Jeffries said.

Pricing is more important to demand, it says. With inflationary price increases set to hold until 2023 and affordability better than mid-cycle, India’s real estate market should see positive home buying sentiment continuing this year, Jeffries says.

Housing supply, while surging last year, has lagged behind sales, sending inventory down to a 10-year-plus low. Accordingly, prices indicated a 10-year jump of 10% in 2022, the note said.

As supply catches up with demand over the next few quarters, “we believe price increases of 8-10% are likely again in 2023,” it said.

According to Jeffries, the listed developer space saw record sales in 2022. Market share gains are visible and several developers are also exploring new geographies and micro markets.

The research house expects spending on new projects, whether through partnerships or outright purchases, to increase in 2023, likely ending the deleveraging trend.

“While the sector’s improved performance is attracting new players, heavy consolidation among the unorganized segment and limited growth capital for select developers implies that consolidation is here to stay,” the note said.

A weaker outlook for IT employment in 2023 would have a greater impact on the office segment, it said. Supply should also begin to decline as developers shift their focus to residential space. Total office vacancies and rents may not improve much in 2023, the note said.

The shift to quality office space is firmly established post-Covid, and selective office markets, including non-IT spaces, can still perform well, the research house said.

The property index underperformed the Nifty by 14 percentage points during 2022, mainly due to rising interest rates that created concerns about demand sustainability and weighed on valuations of major land banks, the research house said.

For 2023, the RBI rate hike cycle is coming to an end and demand remains strong, the note said. “We believe real estate stocks should outperform in 2023,” the statement said.

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