Dalal Street Investment Journal released a real estate report last week quoting Kaustubh Belapurkar, Morningstar Investment Adviser Director of Fund Research, on mutual funds investing in real estate stocks.
Mutual fund managers have historically been underweight on real estate stocks for many years now. As on May 31, 2017, the mutual fund industry had an aggregate exposure of Rs 2,000 crore to real estate stocks, which represents a meagre 0.3% of the overall equity exposure held by funds. Over the last one year, the value of this exposure has almost doubled from `Rs 1,100 crore in March 2016, which is primarily due to rise in the underlying stock prices and also some selective buying in certain stocks.
The top stocks held by mutual funds are Brigade Enterprises, Prestige Estates, Godrej Properties, Sobha Ltd. and DLF. Amongst these, Brigade, Godrej Properties and Sobha have seen additions in the last one year, and especially in 2017 after the stocks corrected post de-monetisation. DLF has witnessed fund managers reducing positions.
Overall, the manager sentiment towards real estate stocks remains muted, barring a few names. That said, managers have been adding positions to ancillary stocks like housing finance and cement.
Some pointers from the report:
- Real Estate is the second largest employer in India after agriculture. The housing sector contributes 5-6% to the country's GDP, with the overall industry contributing about 9%.
- The introduction of regulations, such as the Real Estate Regulatory Act (RERA), Benami Transactions (Prohibition) Amended Act, Real Estate Investment Trusts (REITs), and Goods and Services Tax (GST), should improve long-term growth, transparency and enhance overall investor sentiment.
- Impact of GST on home buyers: Currently, home buyers pay a number of taxes (VAT, service tax, excise duty, stamp duty, registration charges, etc.) GST will bring a uniform tax structure into the system. Under GST, 12% tax will be levied on purchase of new property, excluding stamp duty.
- Impact of GST on developers: GST would bring down the project cost because of the scrapping of the above taxes. The tax rates for major inputs have been marginally increased. Earlier, the indirect tax on steel was around 17% and is 18% under the GST. Taxes in total for cement were 24% per cent, now increased to 28%. The holding cost is likely to go up for the developers.
- Impact of GST on rentals: The rental housing market will also be affected post-GST as the government would be looking to tax residential leases.
- All the above factors will take India's real estate sector in an upward trajectory and we will see more and more people making a beeline to invest in the sector.
You can access the detailed report here.
