Union Budget 2020: How will real estate stocks react?

Union Budget is likely to focus on revival of the real estate industry that has continued struggling with huge piles of unsold inventory throughout 2019.

With the budget being the key event now for any sign of revival in the economy, market participants will be keenly awaiting index specific leads in the realty sector, country's second-largest employer.

Given the sector contributes to around 8-10 per cent of the total GDP of the country, the industry experts not only anticipate further improvisation of earlier announced measures.

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In the last year, the government has taken steps like 'housing for all' by 2022, tax sops, a sharp cut in GST rates for under-construction flats and a Rs 25,000 crore fund to salvage stalled residential projects.

The industry experts anticipate measures relative to non-banking financial company (NBFC) crisis that has further slowed the recovery of the residential sector. Delayed delivery of insolvent projects and un-regularised cases in National Company Law Tribunal (NCLT) have also led to deter the economic slowdown for the sector. The realisation of the scenario and staging proper initiatives for the same can help in the recovery of stock prices as well.

Heavy taxation faced by homeowners is another fundamental obstacle to the industry slowdown. The marginal personal income tax rate in India at a 10 year high, coupled with 18% Goods and Services Tax has caused a heavy burden on taxpayers and a reduction in disposable income. This has eventually led to a tepid demand trend in the residential real estate market in 2019 and a decline in sales during the second half, compared to the first six months of the year. Household debt to GDP has risen consistently in the past four years, to 11.6% from being under 9% in 2014-15.

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Allowing tax breaks for buying property is likely to sort the real estate sector, suggest experts, as it will help in recovery in the economy, causing a rise in domestic housing demand. This, in turn, will be beneficial for the realty indices and stocks.

Another major expectation from the industry lies with an alternative or additional infusion of investment funds to rescue stressed residential projects as many developers are unable to raise fresh funds. Industry experts believe that swift disbursement of money from the Rs 25,000-crore fund, which seeks to complete over 1,500 stalled housing projects comprising around 4.5 lakh units, would be key for revival in demand for the real estate sector.

Satish Magar, President, CREDAI listed recommendations such as deduction of interest on home loans, GST modifications, one-time restructuring scheme for real estate projects and easing flow of funds for housing and universally applicable definition of affordable housing.

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When asked about the expectations by the measures to boost industry demand, Bhairav Dalal, Leader - Real Estate Tax, PwC India suggested various initiatives such as rollback of limit on house property loss set off currently set at Rs 2 lakh,  relief from GST regime, opening up FPI route for companies engaged in real estate construction and development, liberalisation of FDI framework in Limited Liability Partnerships (LLPs).

Prasun Kumar, Marketing Head-Real Estate Sector from Magicbricks expects Finance Minister to bring in robust reforms & take steps to help ease the liquidity crisis and boost consumer confidence. He suggested incentives such as completion of stuck projects and allowing the home buyers in these projects to avail full income tax benefit, immediate and effective disbursal of the Rs 25,000 crore stress fund, removal of tax on vacant properties, increasing the bracket to claim tax benefit for interest on home loans, tax rationalisation on REIT, and simplification of land acquisition process. "The industry also keenly expects to increase the bracket to claim tax benefit for interest on home loans, tax rationalization on REIT, and simplification of land acquisition process", he added.

In terms of the technical outlook of the industry index Nifty realty, the last 5 days trend of Nifty Realty index record mere 0.8% rise, amid the weakness in the broader market, tracking negative cues from overseas due to coronavirus outbreak. Besides this, the pre-budget volatility and January expiry on Thursday also led to an overall decline in the equity market segment.

Although India's property industry looks for better prospects of recovery from the budget, market investors have already started betting on the sector, that anticipates such revival measures. The index rose 1% in the last one month period, suggesting the same. The index has risen 47% overall in a period of one year.

Nifty Realty index outperformed every other sectoral index in the market, thanks to the government sops for the sector including Rs 25,000 crore funds infusion to revive stalled projects.

As per HDFC securities report, stocks to rally on Budget day from this industry include Mahindra Life Space, Brigade, DLF, Godrej Properties, Kolte Patil and Dilip Buildcon.

Pankaj Pandey, Head- Research at ICICI Securities, said commercial portfolios are likely to continue outperformance aided by their robust price structure. Suggesting top picks in the sector, he recommended stocks of JK Lakshmi Cement, Nesco, Brigade, KNR Construction to extend rallies and PNC Infra, Sagar Cement to offer favourable risk-reward setup.

Karvi brokerage house said scrips of Sunteck Realty, Sobha, Prestige Estates, Godrej Properties are likely to gain from the initiatives towards boosting the residential housing market.