The realty index has gained over 41% in the past three months, also aided by the Budget sops for REITs
VIKAS CHIMAKURTHY , PARAG PARIKH
While Budget initiatives like real estate investment trusts and infrastructure investments along with associated tax breaks offered to the vehicle are positive for real estate players, it doesn’t justify the hike of 2-3 times in their valuations. I would never buy a real estate stock. In this country, cash changes hands in real estate deals and it doesn’t enter the books. The land banks reported in balance sheets don’t reflect the truth. Stock prices fluctuate for no reason. The real estate stocks have piggybacked the rally that began with talks of a Modi government coming to power. The sector is plagued with ills that cannot be addressed by Budget measures. The rally in realty stocks is driven by sentiment and does not reflect the true fundamentals of the sector.
Photograph by Soumik Kar
Vikas Chimakurthy
Director, Kotak Realty Fund
The trigger for the movement in realty stocks is the REIT regulation and tax clarity on the vehicle. It is estimated that total household savings in India is $6 trillion; of that 56% is in real estate and most of it is residential property, which generates rental yields of 1-2%. Except HNI investors, retail investors cannot afford to buy commercial property. Once REITs comes in, they will be able to participate in the commercial real estate market. The liquidity could potentially lead to cap rate compression — that is, a rise in values — and a benchmark may be set. This benchmark could be used to value commercial assets owned by real estate companies and, hence, potentially lead to a re-rating of stocks that have a significant commercial portfolio.
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