Anand Rathi: Mumbai Property - The old order changeth, yielding place to new

Mumbai Property - The old order changeth, yielding place to new

Mumbai-based developers would continue witnessing high profits over the next 3-5 years given: i) low ready-inventory in the market, ii) high demand, iii) lower land cost vs high margins, iv) low execution due to regulations. Given the city’s unique geography and dense population (in slum areas, chawls), acquisitions via the rehabilitation/redevelopment mode will give access to prime land at low cost, with the older construction giving way to large areas for new projects (higher FSI). Although we expect slight correction in the next 3-4 months, we believe inflation-adjusted prices would remain stable in the long term(4-5 years). We have an Overweight stance on the sector.

n       Land limited, area unlimited. Due to its tight geography, Mumbai market has limited land; however, its old constructions viz. slums, chawls, cessed buildings are opening up for redevelopment (higher FSI) via slum rehab schemes (SRS) and urban renewal schemes (URS), thereby freeing up land for organised development. Such projects involve lower (and deferred) acquisition costs, leading to higher profits for developers.

n       Residential demand high. With an estimated 1.2% population CAGR over the next decade, demand would remain strong owing to Mumbai continuing to attract commercial activity and, hence, high immigration, for which +300m sqft of residential space will be required. Although we do not expect a major price correction, we believe prices will soften on account of affordability concerns in the near-term. Inflation-adjusted stable prices over the next few years are likely to lead to volumes, given healthy economic growth. We are positive on central suburbs and Bandra (E) and expect them to outperform vis-à-vis other micro-markets.

n       Stock ideas. We favour HDIL (on execution & location skills) and Ackruti City (on niche developments). We initiate coverage with Buy on DB Realty, Orbit Corp, Peninsula Land and Sunteck Realty.

n       Risks. i) Economic slowdown ii) Regulatory risks iii) De-coupling of MMR from Mumbai City.