The real estate sector is witnessing a slowdown nowadays.
From 2004 to 2014, the real estate sector grew at double digits with around 30-40 % CAGR.
The sector saw a good bull run for 10 years but is currently stagnant.
After a period of 10 years, it is common that a sector will experience a slowdown. These are cyclical in nature.
After introducing RERA, i.e. the real estate regulation act, many fraudulent practices in the industry stopped.
RERA also gave confidence to buyers of properties, who earlier struggled to get the possession even after full payment.
In a sector, after a long bull run, two types of correction can come, the first one is price correction, and the second is time correction.
Price corrections refer to the reduction in prices of the goods, in this case, real estate properties.
Time correction means the prices would remain the same for a long period of time.
Real estate is currently facing time correction, and in some cases price correction too.
The situation is improving too as rent yields are getting better, at least in residential space.
People are looking to rent and buy better properties which are sure about working from home in the future.
Many states like Maharashtra have reduced their Stamp duty(a tax which has to be paid while buying a property) to 2% from 6%.
This significant tax reduction resulted in the massive sale of properties during December 2020.
When we talk about listed companies in this sector, we should focus mainly on management quality and corporate governance.
This sector has many cases of fraud, where promoters never delivered the desired projects within the deadline.
Godrej properties is a good stock from this sector.
There are no corporate governance issues with the company.
It has good backing from the Godrej group, and they have significant projects in major cities of the country.
Foreign institutional investors are also interested in this stock as they have a 20% holding in it, Domestic institutional investors hold 5%, and promoters hold around 64% of the company.
A very important thing about analyzing this sector is the promoters' ability to complete the projects as buyers are reluctant to buy properties because of non-delivery issues.
Since it is one of the few companies with good financials and corporate governance, this stock enjoys premium valuations.
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