How will back-to-office affect real estate companies?

Whether the real estate company is more residential, more commercial or a combination of both -- the market has not distinguished that, says Sandip Sabharwal, analyst, asksandipsabharwal.com

As more and more people are going back to office, the residential property boom may shift to commercial next. How will that be factored in?
Most of the real estate companies tend to have a mixed basket and the movement of the entire real estate basket has been very coordinated. It is a two-off business composition. Whether it is more residential, more commercial or a combination of that -- the market has not distinguished that.

As people go back to office, the occupancies will grow and new business start-ups in India are also quite strong. My guess is that office absorption, given the overall interest rates and economy and rental yields, will also be very strong. There should be overall traction but I don’t think any stock has lagged behind because people thought that commercial real estate will come back later.

But a stock like DLF has not even hit its IPO price. Even if we look at the way the stocks have gone up, one can get a good return. But from 2011, when the down cycle started, is there still a lot of catching up to do?
Hardly any real estate companies were listed before that time. So, people do not really know how to value these companies. I think valuations go totally out of whack. It happened with technology, it happened with some industrial companies in 2007 and it is happening to some new technology companies right now.

Later on, as people get a better idea of how the cash flows will get generated, what is the return etc, then valuations come down to normal level. I do not think benchmarking something the way it traded 10-20 years back might be the right way.

Directionally, DLF will still do well but real estate stocks are a very high beta segment. We have seen a huge outperformance and the next one or two years’ revival. There will be better opportunities to get into these stocks and those will have to be captured. For someone, who does not want to look at short-term fluctuations and has a five-seven year view, real estate as a sector will do very well.