05 December 2010
Citi :Real Estate: 2011 Sector Outlook
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Near term funding challenges likely; Remain Selective
Structural demand story intact — With the economy bouncing back and
heading for a 8-9% growth in 2010, urbanization continuing, changing social
structure- increasing nuclear families, job security coming back and salaries
picking up, the fundamental story for real estate in India remains intact. This
is pronounced by the existing housing shortage – most estimates suggest a
shortfall of > 24m houses.
Recent quarter and outlook going forward — In the recently concluded
quarter, revenues came in largely in line with estimates but bottom line fell
short, owing to contraction in EBITDA margins, given the cost and labour
hurdles, compounded by heavy monsoons which slowed execution. Overall
1H performance was muted in terms of slower pace of pre-sales,
construction activity and limited launches. While developers have lined up a
slew of new launches in 2H, we believe impact of high prices, particularly in
markets like Mumbai, will be prices will be the key to watch out for.
Commercial leasing is picking pace – IT/ITES is the key sector here.
Near Term Funding, interest rate cycle & pricing in some areas could pose
challenges — 1) Prices have sharply risen in few locations (surpassing 2008
peak) and has begun adversely impacting volumes, as per our channel
checks 2) Further hike in interest rates could prove to be a bane for home
buyers 3) While there lack of clarity on recent bribery scam, we believe this
would impact future funding (both debt and equity). This could put pricing
pressure on developers as they may be forced to execute/sell faster.
However, it all depends on how events shape up over coming days.
What do we prefer… — a) Plays where large part of assets are already on
ground – low execution risks (b) Commercial plays – leasing picking up and
prices still reasonable; lower regulatory risk as well. (c) Developers with
diversified land banks. In our view, high prices in certain markets (like
Mumbai) will prove to be a challenge.
Prefer to be Selective — Among developers, we continue to prefer 1) DLF
with a diversified good land bank, strong commercial presence although
high D/E is a challenge 2) Phoenix Mills as large part of their value comes
from up and running HSP 3) A-reit – a good defensive play on Indian Real
Estate- Lowe D/E, steady annuity income, a healthy div yield (7.7% for
FY11E) and a growth option – safe in current scenario. We remain wary of
execution challenges in SRA projects – HDIL remains a sell.