Property – Positive : Daiwa

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Sector thesis: improving demand is driving sales-volume growth
The India Property Sector (with the exception of Mumbai) depends mainly on the
expansion of the Information Technology/Information Technology Enabled
Services (IT/ITES) Sector. Improving buyer sentiment, rising salaries and an
increase in the number of people being hired have led to improvements in
residential sales volumes. In Mumbai, the sales volume has been driven by an
increase in job security and rising salaries in the financial services sector. While the
increase in the sales volume throughout the country was driven initially (2H09) by
end users, in recent months we have noticed increasing speculative activity in some
markets, such as Gurgaon. In Mumbai, sales volume has declined over the past few
months, due to increasing prices of properties being launched (higher than prices
for properties launched during the previous peak in 2007). In other cities, launch
prices have remained low, which has helped push up the country’s residential sales
volume. We expect launch prices to remain stable in the near term and to start
improving from 2012, as we expect demand to outstrip supply. As a result, we
maintain our Positive rating on the sector.


Commercial and retail leasing and sales have been weak over the past two-to-three
years, although they have shown signs of improvement over the past few months.
We expect leasing volume to start improving from 1H11.
In our view, the current average P/NAV of the property developers we cover is still
reasonable, given the improving demand in both the commercial and residential
sectors. Most of the stocks (excluding DLF, Unitech and HDIL) are trading
currently at P/NAVs below our FY12 NAV forecasts. We believe the improving
demand for commercial and retail-leasing properties, as well as improvements in
the balance sheets of the companies we cover from 3Q FY11, should lead to a
re-rating for DLF, as 30% of its landbank is made up of commercial and retail
properties. DLF trades currently at a PBR of 1.5x on our FY12 BVPS forecast,
which we think implies that its current share price has not factored in the sector’s
current upcycle.
Structural outlook: three-year view
Over the next three years, we expect to see structural changes in three key areas:
1) a shift from tier-one cities to tier-two and tier-three cities following the shift in
the IT/ITES Sector to these cities, 2) a shift by property companies from a
‘develop-and-sell’ model to a ‘develop-and-lease’ model, and 3) a shift to a
‘hub-and-spoke’ model for main cities.
1. Shift to tier-two and tier-three cities: With India’s large cities becoming
increasingly expensive in terms of the cost of labour and rents, many IT/ITES
companies have started setting up offices in tier-two and tier-three cities that
have good schools and colleges in order to get cheaper manpower and
rents/purchasing prices for office space. We expect this trend to continue over
the next three-to-five years.
2. Shift from ‘develop-and-sell’ business model to ‘develop-and-lease’ model:
In the past, most of India’s real-estate companies primarily sold commercial
and retail space, as they did not have any experience in managing it. However,
given the experience these companies have gained over the past few years, we
expect a shift in their business models from the ‘develop-and-sell’ type to the
‘develop-and-lease’ type. We believe more companies will make this shift
when REITs are introduced or a larger number of Real Estate Mutual Funds
start operating in India.



Best-positioned: DLF
We believe DLF, the market leader in our real-estate universe, is best-positioned to
benefit from the ongoing cyclical recovery in the property market. We think our
view is supported by the company’s 60-year track record, well-located landbank
that is focused on IT/ITES locations, and by the fact that it focuses the most
(among its peers) on the commercial-leasing sector. The commercial real-estate
sector is showing signs of recovery (increasing leasing volume), and we believe
DLF is best-positioned to benefit from this (we expect the pick-up to lead to NAV
upside). We expect to see improvements in DLF’s balance sheet as its cash flow
improves on the back of rises in the residential sales and leasing volume.


Worst-positioned: HDIL
HDIL is focused on slum rehabilitation in Mumbai and has built up its reputation
as a property developer in Mumbai over the past few years. It has a presence in
residential and commercial developments in the suburbs of Mumbai. However,
residential prices in Mumbai for newly launched projects are higher than the peak
pricing of 2007 (the previous high of the property cycle). This, in our view, is
likely to limit any residential-pricing upside compared with that for other cities,
thus limiting increases in its FY12 NAV.