JPMorgan: Realty Check India

•Investment view– Share price rally in the property sector has been sharp
off late (+13% M/M). However, incrementally we expect this to moderate
given (a) likely muted Sep-Q results given overall sluggish volumes and
slow construction progress (b) High relative valuations and (c) Overhang of
new paper issuance. Post DLF’s / Sobha’s ~50% rise since June we remove
them as our top sector picks as they have largely closed the gap to our Price
Targets. We continue to like IBREL given 1.Cheap valuations with it being
the only property stock trading below a well defined FY10 book (Rs
235/Share) 2. Improvement in fundamentals given increased sales activity
in core Lower Parel asset and 3. Relative underperformance (down 20%
YTD) vs. Index (+16%).
•Physical market- What’s performing / what’s not:
o Bangalore volumes continue steady uptrend; Central Mumbai
perks up after 15% price reduction suggesting base price formation
– 3Q absorption run rate in key Indian cities declined by 7% Q/Q
primarily led by slowdown in Mumbai/NCR (down 23%/13%) on
seasonal weakness. Bangalore/Chennai however stood out registering a
13%/21% Q/Q increase in volumes in 3Q despite July/Aug being a
weak months in South India. Unsold inventory in Mumbai/NCR
continues to remain low (~7 months); Bangalore has started to see
meaningful price increases (10-15%) coming back after a lull of almost
one year. IBREL’s new launch in Central Mumbai saw good traction
given a ~17% price reduction (via zero financing cost scheme). Stock
impact-IBREL, DBRL/Sobha most exposed to Central Mumbai /
Bangalore
o Gurgaon leading office recovery – Office absorption continues to
improve across most markets with Gurgaon witnessing a meaningful
pick up in Jul/Aug (>30% Q/Q). Overall JLL expects the pan India
leasing to recover to over 30msf in CY10 vs. 19msf in CY09. Notably
rental values too have started to inch up in few micro markets (prime
Gurgaon/Mumbai). This then is encouraging though overhang of new
supply line (52msf expected in 2010) remains. Stocks- DLF/IBREL has
the highest commercial exposure.
o Retail demand showing signs of life, with most retailers reporting
positive sales trends and looking favorably at space expansion.
However supply remains a challenge. Against total 13.9 msf of
expected completions, demand this year is likely to be only 7msf which
should keep vacancies high at 24-25% levels. Stocks- Phoenix mills is
the only pure play retail mall developer