Real Estate Stocks and REITs
(An update dated 21May2023 is available)
Disclaimer: The analysis is purely for information purposes. This should not be construed as investment advice. The author has a vested interest in financial markets.
Reams and reams have been written about the vicissitudes of stock prices. Financial markets are inherently volatile depending on the mood swings of investors-cum-speculators.
Now, the narrative in Indian stock markets is that real estate (realty) stocks are going to have their place in the sun once again. Realty stocks caught investors' fancy in the boom years of 2006 and 2007. In recent months, Indian real estate stocks have attracted market attention.
Nifty Realty index has risen by 140 per cent in the past one year while Nifty 50 delivered a comparatively 'modest' return of 65 per cent in the same period. Nifty Realty index is dominated by stocks of DLF Ltd, Godrej Properties, Oberoi Realty, Phoenix Mills and Prestige Estate Projects.
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Read more on REITs:
DLF versus Embassy Office Parks REIT
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Two years ago, investors were extremely excited about REITs or real estate investment trusts but real estate stocks were down in the dumps at that time. (REITs trade on stock exchanges, having characteristics of both stocks and bonds, holding commercial properties as the underlying ).
Now the enthusiasm is reversed with investors flocking in droves to real estate stocks and neglecting REIT stocks.
The following table (courtesy Margin Value) provides a glimpse of price action of realty stocks and REITs in the past one year:
Two years ago, I made the following observation:
"DLF & Embassy Office Park REIT have a market cap of Rs 35,600 crore & Rs 33,150 crore respectively. 🥺 Market fancy or irrationality? Investors seem to be erring on the side of caution based on perceived corporate governance. Of course, there's no penalty for erring on caution."
After two years, DLF Ltd's market capitalisation is Rs 101,600 crore while that of Embassy Office Parks REIT is Rs 31,600 crore (values as at close of last Friday)--which means, DLF's market cap surged by 185 per cent while Embassy's market cap fell by 5 per cent nearly.
The momentum now seems to be in favour of realty stocks as compared to REITs. Investors seem to be betting on demand for individual housing (reflected partly in higher realty stock prices) while discounting the commercial real estate space (partly reflected in subdued market prices of REITs).
This divergence between investors' outlook appears strange to me considering the fact that real estate stocks' fortunes are a function of both the demand for individual housing and commercial real estate. I don't know how long this infatuation for realty stocks continues. However, it's safe to assume that at some point in future the fortunes are likely to be reversed. Once again.
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References:
My Tweet thread dated 08Oct2019
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
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Twitter @vrk100
I have the same opinion and you have put the entire argument in very beautiful way.
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