Jefferies Picks Top Real Estate Bets As It Sees Testing Housing Market In 2023

The residential property cycle's resilience will be tested in 2023 amid higher mortgage rate, while weaker IT industry hiring will likely keep office vacancies and lease rentals flat, according to Jefferies.

The Indian housing market has seen volume surge of 25% year-on-year in 2022 to a record high, the research house said in a Jan. 8 note.

"We expect the upturn to enter its third year in 2023. The mortgage rates have risen by 200 basis points from their lows in 2022, though as rate hike cycle probably peaks, mortgage rate hikes should be behind us by early 2023," Jefferies said.

Pricing sentiment is more important for demand, it said. As inflationary price hikes should sustain through 2023, and affordability is better than mid-cycle, the Indian property market should see positive sentiment for home buying persisting this year, according to Jefferies.

Housing supply, while saw a sharp rise last year, has trailed sales leading to inventory hitting 10-year plus lows. Consequently, pricing has demonstrated a 10-year-high jump of 10% in 2022, the note said.

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

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

The research house is expecting the spending on new projects, either through partnership or outright purchase, to rise in 2023, likely ending the deleveraging trend.

"While improved sector performance is attracting new players, the large consolidation among the unorganized segment and the limitation of growth capital to select developers implies that consolidation is here to stay," the note said.

Weaker prospects for IT hiring in 2023 would have a larger impact on the office segment, it said. Supply should start declining, too, as developers shift attention to residential spaces. The overall office vacancy and lease rentals may not improve much in 2023, the note said.

The shift to quality office space is firmly in place post-Covid and selective office markets, including non-IT spaces, could still see good performance, the research house said.

The realty index underperformed the Nifty by 14 percentage points during 2022, largely due to rising interest rates that created concern on demand sustainability and impacted valuations given large land banks, according to the research house.

For 2023, the RBI rate hike cycle is nearing its end and demand is still strong, the note said. "We believe real estate stocks should outperform in 2023," it said.

Here are the top stocks recommended by Jefferies: