Real estate stocks show steady performance, yet mutual funds remain wary

India’s listed real estate developers delivered a decent June quarter, with record pre-sales driving broad-based growth in revenues and profits. Mutual funds, however, have largely remained on the sidelines.

Data from Ace MF show that holdings in Lodha, DLF, and Godrej Properties have remained largely unchanged. At the AMC level, according to Elara Securities’ Domestic Liquidity tracker, HDFC MF is 1.5 per cent underweight on the sector, SBI MF 0.5 per cent underweight, and Nippon India MF 1 per cent underweight, while only Axis MF, Mirae MF, Tata MF, and Quant MF maintain overweight positions.

This, even as pre-sales during the quarter touched Rs 4.32 lakh crore, up 45 per cent year-on-year and already 31 per cent of the sector’s full-year target. This translated into a 30-40 per cent rise in revenues and a 25-35 per cent increase in profits. While high-margin players such as Oberoi Realty and Phoenix Mills sustained operating margins above 60 per cent, mid-sized developers like Anant Raj and Raymond also reported decent performance.

Affordability remains a key factor behind this caution about the sector, say experts. “While housing sales have improved recently, they declined for almost a year before that,” said Shibani Kurian, Fund Manager and Head of Equity Research at Kotak Mahindra AMC. “Higher prices have impacted mid-income housing. Going forward, recovery may be gradual, but listed players are better placed thanks to stronger balance sheets and brand strength,” she added. Kotak MF remains underweight on the segment.

Market dynamics have also influenced mutual fund behaviour. “Real estate is always higher beta relative to the market, so when the market does well, real estate benefits from the wealth effect,” explained Rahul Agarwal, VP – Equities, fund manager at Bandhan AMC. “Over the past year, equity returns have been broadly flat, reducing that tailwind. Higher beta also makes investors cautious in the current muted market.”

Agrawal added that the slow pace of new launches is another factor. “Sales absorption has been healthy in the top seven cities, but new launches have been weak. Until launches pick up, gains in sales velocity will remain limited. The BD pipeline also needs improvement, which is one reason mutual funds aren’t aggressively buying real estate now.”

Despite these challenges, structural positives continue to support the sector. Kurian emphasized that “the shift away from unorganized developers toward listed, organized players offers a strong runway for growth.” She also noted that valuations have moderated closer to average levels, and companies with “strong brands, low leverage, and a solid pre-sales base are better positioned to capture medium-term demand.”

Macro factors, however, remain a concern. Agrawal highlighted the impact of IT sector trends, a historically key driver of urban housing demand. “The IT sector has seen high attrition and low headcount additions, which may dampen demand,” he said. “Stagnant income growth and employment constraints mean mutual funds remain careful. Yet, such periods often create good accumulation opportunities for companies with strong balance sheets and execution capabilities,” he added.

Agrawal noted that Bandhan’s funds ( that he oversees) remain selectively overweight on real estate. “We have incrementally added to some positions, though dynamically,” he said. “We also churn where value is insufficient, or profits have been realized. Valuations across metrics—NAV, pre-sales, EV/EBITDA—are attractive, and low leverage limits downside risk. It’s only a matter of time before returns are realized, and we can expect a good run in the sector.”

Valuation trends remain mixed

Companies such as Sobha, Raymond, and Prestige Estates are trading significantly above their 10-year historical averages, suggesting either overvaluation or growth expectations already priced in. Others, including Godrej Properties, Oberoi Realty, Lodha, Brigade Enterprises, and Anant Raj, are trading below their historical averages, reflecting market caution. Phoenix Mills and DLF are roughly in line with their long-term P/E ratios. On average, the sector trades at a 1-year forward P/E of 33.8, slightly below the 10-year average of 35.8.

The sector’s outlook remains measured. Kurian expects the recovery in housing demand to be gradual, with affordability and volume growth key to watch. Falling interest rates could provide support, but developers with stronger balance sheets, established brands, and consistent execution are likely to have an advantage. Agrawal noted that while a sharp near-term surge may be unlikely, disciplined players are positioned to deliver medium-term gains. “In this kind of market, companies that keep execution tight and manage leverage well can continue to create value,” he said.

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