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India Property
Takeaways from K Raheja Corp conference call: office recovery on sound footing, risks to central Mumbai supply
Ishaan (promoted by K Raheja Corp) hosted an analyst conference call to
discuss the latest September quarter results and trends in the property market.
Overall, the outlook remains fairly bullish on the office segment, with the
company reporting its best pre-leasing over the last two years. Rentals have
started to stabilize and may even inch up marginally in select markets. Cost
inflation (6-10%), changes in the political landscape, and any negative impact
on account of direct tax code for SEZ were highlighted as key risk factors to
valuations. Key highlights of the conference call were:
• Office recovery theme remains sound: The last eight months have seen
Ishaan achieve its best pre-leasing momentum since the launch of the
portfolio in early 2007. The company has transacted ~2.3msf of space since
Apr-10, thereby taking the overall leased portfolio to 6.2msf, or 68% of its
ongoing portfolio (9msf). Mumbai is leading the revival with >56% of the
overall absorption with YTD FY11 coming from its Airoli project.
Encouraged by positive absorption trends, the company has brought an
additional 3msf of area under these projects, thereby increasing the ongoing
portfolio to ~9msf. Rentals are stabilizing at the margin and in select
markets such as Mumbai the company is hopeful of seeing some increase.
Competition in the office market (as in retail) is reducing, with only a select
number of larger players left developing supply in this segment.
• Risks on cost inflation, politics, and tax code: Construction costs have
inched up by 6-10% and given depressed rental levels this may affect
valuations near term. Changes in the political landscape in Mumbai and
Hyderabad have also made approvals a bit slow to materialize. On the direct
tax code, while the company said customers still prefer SEZ, there is some
uncertainty from investors who are looking to buy out income assets (on
account of MAT taxation), which could lead to some delays in exit.
• A more “conservative” outlook on Central Mumbai residential: The
company’s scope to increase pricing in Central Mumbai is very limited
given the sharp increase. The company is now following a far more
conservative strategy of launching only when all approvals are in place
(similar to DLF) to mitigate risks on delivery. Management feels that a
lot of announced supply in South Mumbai may not happen, given
challenges on approval sourcing and execution.
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