Real Estate: Festive discounts could drive volumes
Aided by new launches and a lower base in July, real estate volumes have revived
MoM across India in August ’10. Mumbai has seen a spate of project launches
over the last fortnight even as the NCR gears up for the festive season post Shradh
(inauspicious period ending 7 October). Inventory at the builder level is low and
we expect the launch momentum to continue in October–November. However,
after price increases over the past 12–15 months (Fig-7), affordability is back to
FY06–07 levels (still good but worse than FY09–10). Having said this, we believe
discounts or other promotional offers during the festive season may keep volumes
high. Hence, despite overall optimism, we see little upside on prices (-10% to
10% over the next 12 months) without an adverse impact on volumes. Cash flows
are more sensitive to pricing rather than volumes and hence, there are downside
risks to valuations.
We roll over our NAV estimates to FY12 and upgrade target prices. We are more
selective after the 10–30% appreciation in stock prices over the past one month.
IBREL, Anantraj and Phoenix Mills (PHNX) are the ones with most upside
potential. Key risks are property prices and new IPOs which are at discounts.
Bangalore leads in Aug ’10 volumes: After weak volumes in July, new launches
in Bangalore tripled MoM to 4msf (1.2msf in July) and sales touched 3.5msf (up
59% MoM). Gurgaon/Mumbai/Chennai also clocked higher launches of
3.8/1.5/2.2msf (2.4/0.4/2.2msf in July) with absorption levels of 3.8/2.6/2.0msf.
Absorption was flat in Chennai and 15% higher MoM in Mumbai. Moderate
price increases in August supported volumes.
Commercial volumes buoyant but rentals stay muted: Office space also
improved MoM though inventory was high and rentals subdued. We expect new
leasing to pick up for all players, with DLF likely to clock 5–6msf of new leases
in FY11 (versus less than 1msf in FY10). Rentals, though, are likely to be down
10–15% from peak levels for IT SEZs.
Festive season to drive new launches: As per our analysis, given the increase in
property prices since lows, affordability in all cities except Bangalore is close to
FY06–07 levels ((lower affordability than earlier but still healthy; it has taken only
half the time to reach this level compared to the earlier cycle). We believe
discounts and other promotional offers are needed to sustain volumes (such as
Indiabulls Real Estate’s EMI scheme), though there may be upside risks to prices
in the DLF–NTC Mumbai and Unitech–Gurgaon projects. Sensitivity to prices is
higher and given the low upside risks to prices in general, we think the risks to
NAV are on the downside.
Turn selective after recent run-up: Frontline real estate stocks have appreciated
anywhere between 10–30% in the past one month. IBREL, Anantraj, and PHNX
remain the ones with highest upside. We roll over our NAV estimates to March
’12 and align our price targets to March ’12 expectations.
We upgrade Godrej Properties from HOLD to BUY after increasing the price
target from Rs 520 to Rs 920 based on potential value accretion from Godrej
group land development in Vikhroli, Mumbai. We retain HOLD on DLF after
increasing our price target from Rs 335 to Rs 380. Our target revision largely stems
from a) higher estimates for prices in select properties in Gurgaon, Mumbai, b)
higher leasing of 5msf p.a. versus 4msf earlier, and c) rolling forward of NAV.
With dismal results from ACC and Guj Ambuja, Unitech could possibly see levels of 65 soon if the market moves sideways/downwards.
ReplyDeleteDLF will also move downwards for the next 1-2 months till Dec 2010.
Its sad that there was a lot of hype in the infra space sometime age which ditched a lot of investors. But I think its beeter late than never, this could be a good time to exit these companies before further downfall.
Raj