Goldman Sachs:Property tour re-affirms key theme – volumes to drive growth

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India: Real Estate
Equity Research
Property tour re-affirms key theme – volumes to drive growth 


Property tour offered key insights across three regions
We recently visited Delhi-NCR, Bangalore, and Mumbai as a part of our GS
India Property Tour. We visited about 25 sites in various stages of
completion, met with management teams and property consultants, and
made the following broad industry-wide observations.

Residential absorption, not pricing, will drive growth
As we had highlighted in our November 8, 2010 report, “On firm ground,
prefer volume-led growth; Buy HDIL (on CL), INRL,” we believe that
property prices in pockets of Delhi-NCR and Mumbai in particular seem to
have peaked, and we expect limited further price appreciation. Prices in
Bangalore have remained fairly stable, but further appreciation should be
held in check by high supply potential. We observed higher price inflation
in city-centre properties during our tour. We are forecasting a modest 5%
price appreciation in our models, but are forecasting volume growth to be
more robust.


Renewed execution focus yielding results
We have seen marked improvement in execution by most real estate
developers, and project delays have reduced. In our meetings with various
management teams, most developers emphasized their focus on
execution, and this increased construction activity was fairly apparent in
our site visits as Exhibits 1-14 demonstrate. We observed the largest
increase in activity in Unitech projects on a yoy basis.

Sales strategies being influenced by construction cost inflation
Most developers highlighted margin risks being posed by rising material
and labor costs. In addition to rising labor costs, availability is also
becoming an issue as the faster pace of execution has resulted in greater
competition to attract labor. Companies such as DLF, Sobha, and
Puravankara indicated the need for gradual selling to protect margins in an
inflationary environment. We believe that the availability of skilled labor
could be a potential risk factor in the execution progress demonstrated by
some companies.

Commercial leasing still low, but green-shoots visible
While commercial vacancy remains high, we believe that leasing could
improve in select micro-markets, particularly for retail leasing.


Property tour key takeaways
We recently visited Delhi-NCR, Bangalore, and Mumbai over five days and saw
developer sites including Unitech, DLF, Jaypee Infratech, Emaar MGF, Sobha, Prestige
Projects, Puravankara, Indiabulls, Lodha Developers, Godrej Properties, and Oberoi.
We also met with property consultants.
Residential: Good construction activity across most locations
NCR
 We observed finishing activity across delayed projects in Gurgaon. Unitech has started
delivery of The Close, Nirvana County (launched in FY2005), while DLF will start
delivery of Park Place (3.8 mn sq. ft.) and Belaire (1.8 mn sq. ft) in three to four quarters
(launched at the end of FY2007). PropEquity indicated that the average delay time
across its projects is 8.4 months.
 We observed considerable price appreciation of 40+% across various locations in
Gurgaon, which is partly driven by its rerating as a preferred destination for business
in the North. There was heavy incoming traffic from Delhi in the morning, indicating
Gurgaon has become important commercial destination in Gurgaon.
 There has been greater price inflation in city-centric properties such as DLF Magnolias.
Secondary pricing has now increased more than 50% to about Rs14,000/sq. ft.,
indicating some pricing convergence in South Delhi.
 We saw healthy progress in “Unitech Residences,” with structures nearing completion
within 12 months. Unitech indicated it will deliver this project significantly ahead of
schedule. Parking is being provided in a separate building, preventing the need for
basement construction, thus saving on time and reducing construction costs.
 DLF indicated that secondary pricing in most micro-markets is now either similar to or
higher than primary pricing.
 DLF management stated that the success of affordable housing depends on its ability
to lower costs. Management further stated that significant cost pressures are due to
higher cement/steel prices and shortage of labor.
 The inflationary environment necessitates the need for gradual selling to protect
margins.
 DLF plans to launch a 100-acre gated community with a saleable area of 2.5 mn sq. ft.
and all-inclusive l pricing of about Rs50,000/sq. yd in our estimate. DLF intends to
provide full power back-up and expects gross margin of around 75% with delivery over
18 months.

Bangalore
 Sobha Developers indicated that residential demand recovery started in 4Q2009, and
most developers have seen volume as well as pricing growth. Pricing growth is driven
by better product mix and about a 10% increase in selling prices.
 Sobha indicated that land prices have started to rise after a gap of three years.
 Sobha management indicated that there currently are limited secondary sales and the
speculative market is virtually absent. Low pre-sales also mean that new projects are
taking two to four quarters to become cash-flow neutral

 Various management teams are indicating an increase in construction costs by 15+%,
driven primarily by an increase in cement costs.
 Puravankara Projects (PPL) indicated it is trying to mitigate risks by reducing
construction costs. For its affordable housing projects, contracts were awarded at
Rs928/sq. ft. for Chennai (BL Kashyap, material cost risk borne by PPL) and Rs1,030/sq.
ft. for Bangalore (JMC Projects, limited risk of material costs inflation). PPL indicated
that not having a basement reduces construction costs by Rs250/sq. ft.
 Most companies indicated a large launch pipeline, including Sobha (12 mn sq. ft.) and
Puravankara Projects (8.5 mn sq. ft.). We expect completions in Bangalore to drop
sharply after mid-2011, as there have been very few launches since early 2008.
 Nitesh Estates indicated the need to maintain properties, especially for new developers
in the market, as good-looking properties help establish a brand name.
 We observed large price increases in Central Bangalore versus moderate price
increases in most surrounding locations. Prestige Estates has launched 8,500 sq. ft.
apartments in Central Bangalore at a pricing of Rs22,000+/sq. ft. as compared with
pricing between Rs3,000 – Rs6,000 / sq.ft. in the surrounding neighbourhoods.


Mumbai
 We observed a desire to extract better pricing than to reduce inventory in most
locations.
 We also saw rapid price inflation across most locations, with pricing in Dombivili (40
km from Nariman Point) at Rs3,000+/sq. ft.
 There are a large number of new launches in the US$2+ mn segment. We saw initial
construction progress in sites being developed by DB Realty and Indiabulls Real Estate.
 The HDIL slum rehabilitation site at Kurla has made great progress, and investors liked
the quality of showcase apartments.
Commercial: Some new launches indicate continued stabilization
 Commercial remains a low area of focus for most management teams, with limited
new activity.
 DLF indicated that the rental scenario is improving in a few locations such as Gurgaon,
and that selective rental recovery could in six months.
 Prestige Estates plans to start construction of six towers in city-centric locations and
expects rental rates of Rs70/sq. ft.-Rs100/sq. ft.
 Phoenix Mills indicated that the average monthly revenue for its mall is Rs1,700/sq. ft.
 Indiabulls has leased space in Elphinston Towers to Deloitte Consulting and Yes Bank.


Private sector initiatives aiding real estate development
We see some real estate companies now helping infrastructure development, especially if
the company has a substantial interest in the development of a particular area in order to
increase connectivity and thereby its selling prices.
 DLF plans to invest Rs1.5 bn in a Rs3 bn road that would make the connection between
the Delhi-Gurgaon Expressway and Golf Course Road signal-free.
 DLF plans to hold a 30% stake in intra-Gurgaon metro, with DLF’s contribution being
land.

 BPTP has constructed a small bridge over Yamuna canal, aiding development of the
area adjoining the bridge.
 Jaypee Infratech Expressway has opened new development areas between Noida,
Greater Noida and Agra.
 Lodha Group plans to increase the frequency of trains between its project near
Dombivali and Dobivali station.