BoA ML: Bangalore residential- Heading for long bull run

Bangalore residential- Heading for long bull run
The Bangalore developers are up (12-40%) in last six months, outperforming
Sensex and Realty index (up12%). We reiterate our Buy ratings on the Bangalore
developers -Sobha, Puravankara, and Brigade, and increase our PO on
residential focused developers -Sobha by 18% to Rs450 and for Puravankara by
10% to Rs156. Our positive stance on Bangalore residential segment is led by:1)
expected 10-15% increase in prices in the next 12 months as compared to 5%
earlier, 2) marked improvement in affordability, and 3) Bangalore’s resurgence as
preferred destination for IT firms leading to sustained demand growth for houses.
Residential: Prices to surprise positively
We expect the Street to be positively surprised by a 10-15% price increase with
sustained volume growth in Bangalore over the next 12 months. Key reasons for
strong trends are: 1) expected high-income growth for IT employees (50-60% of
demand) led by attrition and wage hikes, 2) falling inventory levels due to lower
launches and strong sales, and 3) four fold increase in IT/ITeS employees who
can afford houses in Bangalore in last four years. Residential real estate prices in
the city are still 10-15% below the 2007 peak vs Mumbai/NCR at over 10-25%.
Bangalore is back in vogue for IT firms
The demand for office space continues to show a strong uptrend in Bangalore,
with over 3.5mn sq ft committed in 1H 2010 vs just 4mn sq ft in 2009. The
improved infrastructure, large talent pool and competitive office rentals and land
rates have led to Bangalore’s resurgence. The big three Indian IT firms are
looking to set up campuses in the city while IBM continues to bank on Bangalore
with over 4m sq ft of leased space. The planned expansion of IT firms should
continue to support strong residential demand in Bangalore.
Sobha: Top pick among Bangalore developers
We expect Sobha to lead the growth among the three Bangalore developers, due
to its relatively better-located land bank, positioning in mid-to-premium housing
(this segment has the maximum price elasticity), and superior execution
capability. We have increased our PO to Rs450 from Rs380. Puravankara is
banking on affordable housing and we expect accelerated launches to be a key
trigger. We have raised our PO to Rs156 from Rs142. Brigade derives 54% of
NAV from office space, thus improved leasing in its properties over next six
months should help drive valuations.
Risks: IT/ITeS industry growth & runaway prices
IT/ITeS sector accounts for 70-80% of office demand while 50-60% of residential
sales are to IT professionals in Bangalore. With increased US backlash against
outsourcing in recent times, we think there remains a risk that the IT sector
recovery may not sustain going forward. Further, we believe there is a risk of
runaway prices (25-30% rise) in Bangalore, similar to that seen in Mumbai and
NCR markets denting demand.