Best way to play real estate boom: Jefferies shares top stock picks

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The housing cycle is now rising with the pickup in volume & pricing. While there are multiple ways to play the cycle, analysts at Jefferies believe property developers offer the best risk reward. They expect the upcoming festive season to likely see a pick-up in new launches, further driving housing activity up a notch. 

Developers benefit from improving industry growth & market share gains for listed players. Potential price uptick leaves a scope for NAV upgrades. High beta nature implies higher risk but we still prefer developers given the early stage of a potential 4-5 year upcycle.

The housing value chain has multiple economic connections and hence there are multiple ways to play the theme. Within developers, the brokerage firm prefers Godrej Properties (GPL) and DLF. HDFC Ltd. is advised as the preferred play among mortgage financiers. 

L&T is a good way to play the associated construction contracting business. Cement cos (ACC) and building material providers such as Supreme and Kajaria are also attractive plays, as recommended by the brokerage.

“We maintain our preference for developers as the best way to play the housing cycle and developers are the largest O-WT in our model portfolio. Key reasons to prefer developers is that it’s an early cycle play,” Jefferies said in a note. 

RERA (Real Estate Regulation Act) and the turmoil in the NBFC segment (after IL&FS) has driven industry consolidation and now driving market share gains for listed developers. 

“Profits and NAV have a large leverage to the property price trend. GPL, Sobha and Lodha have the highest residential pricing leverage. Credit growth for housing finance cos, on the other hand, should pick up with a lag due to the balance sheet effect,” it added.

While the developers have seen recent strong rally, Jefferies believes strong newsflow and high sensitivity of profit/NAV to property pricing leaves rooms for upgrade. However, it sees the negatives to owning developers could include higher concentration risk (city specific developers) for most developers and governance concerns in the sector due to historical reasons. 

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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