The One Real Estate Stock to Buy Now - The 5 Minute WrapUp by Equitymaster
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The One Real Estate Stock to Buy Now

Feb 13, 2019

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

We asked ourselves a question to at the start of 2018 - 'Is the worst over for real estate?'

You see, the sector has been a disaster for investors for quite some time.

Demonetisation, RERA, GST...

Everything came in its way.

All this slowed down home sales, severely impacted new launches and expansion plans of several developers.

This was the worst nightmare for real estate companies. What more could go wrong? We thought the nightmare was coming to an end.

'The industry has gone through some structural changes which are good for the medium to long term'. This was the response of many people in the sector, including managements of several real estate companies.

We began seeing some improvements in sales and booking numbers in some markets.

We could finally see the light at the end of this tunnel.

But we didn't know the tunnel would get longer and darker.

There were issues such as project delays as well as delays in getting possession.

Companies such as Amrapali, Jaypee, Unitech have shaken the confidence of home buyers. Events concerning these companies further widened the trust deficit.

The final straw came in the form of the NBFC crisis.

It struck a massive blow. It sucked out liquidity and brought loan disbursals to a grinding halt.

You see, In the last few years, NBFCs and housing finance companies started contributing a major chunk of developer funding. A slowdown in this funding meant drying up of funds available to developers.

This, in turn, impacted the pace of construction of projects. It also impacted private equity funds flowing into the sector.

No wonder the real estate index was the worst performer in 2018. It fell by a whopping 31%.

Now, I ask the same question again.

'Is there light at the end of the tunnel?'

I believe, yes.

Let me explain this using the steel sector as an example.

Back in 2015, the steel sector was going through tough times.

There was excessive dumping from China. Steel prices declined globally. The sector was bleeding.

However, the government came to the rescue with minimum import pricing. This move made imports virtually impossible. It helped the steel industry to curb the supply side problem.

Since then, the health of the steel industry has improved significantly.

The real estate sector is going through similar troubles. The government has finally realised the pain in this sector.

The single biggest beneficiary of the Interim Budget was the real estate sector. The government proposed the following:

  1. The TDS threshold for deduction of tax on rent has been proposed to be increased from Rs 1,80,000 to Rs 2,40,000.
  2. A notional rent earlier applicable to the second house has been waived off.
  3. The government has also proposed rollover of capital gains up to Rs 2 crore towards buying two houses compared to only one under the present scenario.
  4. It announced to drop tax charges for two years on notional rent with regards to unsold properties from the date of project completion. Currently, this is for one year.
  5. Besides, the government has also proposed a number of income tax sops for small and middle-income taxpayers. This will give a boost to consumption.

Further, the government is considering reducing GST from the current rate of 12%.

These measures indicate that the government is looking at real estate as an essential driving force of the economy.

Certainly, these actions would help to revive demand.

In January 2018, we recommended a company from the real estate sector in Smart Money Secrets.

The company is showing good signs of revival.

Its booking numbers are improving.

Its inventories are falling.

It's not dependent on NBFC loans.

What makes this company stand out, in a very risky industry, is its conservative management which believes in the timely delivery of projects.

Further, it does not depend solely on its land bank but relies on customer goodwill to expand.

At the current price, the valuations of the stock are very attractive. We believe, this is a good opportunity to enter the stock for the long term.

Smart money Secrets subscribers can click here for the recommendation report.

If you haven't subscribed, you can access the report by signing up here.

In 2016, when steel prices bounced back, companies with strong balance sheet thrived.

The same is true with the real estate sector. Companies with good management quality and strong balance sheets will certainly rise from the ashes.

Chart of the Day

The BSE Realty index has been volatile in the last five years.

Just look at last two years.

In 2017, the BSE Realty index was the best performer with a massive gain of 98%. In the next year, the index was the worst performer with a decline of 31%.

Volatile Performance of BSE Realty Index in the Last Five Years

In 2018, the realty sector took a beating on the back of concerns of higher interest rates and accounting changes (from percentage of completion method to completion method). The NBFC crisis added to the woes.

Interestingly, 2018 also witnessed some improvement in real estate sales.

2019 hasn't been good so far with the index down about 3%.

However, the recent budgetary support and interest rate reduction by the RBI could help to revive demand.

We believe this could be the turning point for the real estate sector.

Buying the right real estate stock today is the way to go.

Regards,
Sarvajeet Bodas
Sarvajeet Bodas (Research Analyst)
Co-editor, Smart Money Secrets

PS: Sarvajeet Bodas and Radhika Pandit, co-editors of Smart Money Secrets, are fully convinced about the real estate stock they've recommended. The stock is in the buy zone today and offers an upside potential of more than 100%. Get access to Smart Money Secrets here.

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2 Responses to "The One Real Estate Stock to Buy Now"

neeraj kumar

Feb 22, 2019

very good news

Like 

Syed Parvez Alam

Feb 21, 2019

Please recommend me.

Like 
  
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