Kotak securities believe the impact of rising interest rates on real estate will likely be limited by lower risk premium and higher post-tax disposable incomes. The street, however, appears to think otherwise, leading to underperformance in real estate stocks in the near past despite improvement in the physical market. As concerns on interest rate impact abate over next couple of months, we believe P/NAV multiples for the sector could improve.
Interest rates impact a real estate developer in multiple ways (1) borrowing cost, (2) end-user affordability and (3) asset valuations. We believe an increase in 100-125 bps in interest rates is likely to have a minimal impact on developers given - Borrowing costs for real estate companies have already declined by 350-400 bps from peak, End user affordability will likely remain neutral as the negative impact of the increase in mortgage rates will be countered by the increase in salaries and lower personal tax rate in FY2011E
As concerns on interest rate impact abate over the next couple of months, P/NAV multiples for the Real sector can increase.
