Tata Nifty Realty Index Fund NFO: Should you invest?

In the market rally over the past one year, perhaps the best-performing sector was the realty segment, with both the BSE and NSE indices on realty recording more than 100 per cent returns.

For much of the post-Covid period, the realty segment bounced back strongly after being in the doldrums for years.

All sub-segments of realty such as residential, commercial, malls and hospitality have thrived in the last few years.

Strong demand for housing, reopening offices by corporates with full-fledged employee attendance schedules, affordable interest rates on loans, a growing economy leading to greater spending power and rapid urbanisation are the factors that are driving the potential for realty players.

Close on the heels of HDFC rolling out a realty index fund last month, Tata Mutual has launched a similar scheme based on the same benchmark.  The new fund offering (NFO) is open till April 22.

Read on to take an informed call on whether you should invest in the Tata Nifty Realty Index fund.

Opportunities on the horizon

Many factors are at play in the realty market that make the outlook favourable for the segment at multiple levels.

For one, India is among the fastest growing economies in the world. The IMF has predicted 6.8 per cent growth in gross domestic product for India in 2024-25. Indian GDP is expected to triple from 2020 in this decade and touch $8 trillion by 2030. Urbanisation is set to increase from 35 per cent to 50 per cent by 2030. Home ownership is set to rise from 69 per cent to 81 per cent and the real estate market size is expected to increase five-fold from $200 billion to $ 1 trillion.

By 2030, India is expected to have 52 per cent of the households in upper middle and high income bands.

In 2023, more than 30 per cent of the total home sales was in the luxury category of ₹1 crore or more. Home inventories are at record low levels.

In the case of malls, the demand far exceeds supply. With regard to office spaces, demand is rapidly catching up with supply.

From sub 5 per cent levels in 2017, the net profit margin of Nifty Realty constituents was just a little under 20 per cent in 2023.

Interest rates on home loans are also reasonable now. Compared to the double-digit rates that prevailed about 10 years back, the rates are now at less than 9 per cent in some cases.

All these data are from Knight Frank, Bloomberg, Jefferies, World Economic Forum, IBEF and IIFL.

Should you invest?

The Nifty Realty Index comprises 10 stocks with DLF, Macrotech Developers, Godrej Properties and Phoenix Mills having double-digit weightage (13-29 per cent).

When the 10 constituents are considered, we get an excellent blend of companies that are into residential, commercial and office constructions at one end and malls at the other. Builders and developers span affordable, luxury and ultra-luxury in the residential space.

However, the index itself is quite expensively valued at 59 times price to earnings as of March 2024 and at a price to book of 5.7 times according to NSE data.

Developers across segments are in a sweet spot for the foreseeable future. However, the valuations are quite high compared to the broader markets.

Besides, the sector is deeply cyclical. For perspective, the returns from the highs of 2006-2007 recorded by the BSE or NSE realty indices are almost nil.

There can be periods of spectacular returns and multi-year corrections.

Therefore, the Nifty realty index fund is only for investors who have a very high-risk appetite.

However, in general, diversified equity funds allocate only small portions to the real estate sector.

Therefore, the Tata Nifty Realty Index fund can be considered for the satellite portion of their portfolio by investors with a penchant for taking risks, with tiny allocations.

Investors with moderate or conservative appetites can skip the NFO.

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