Residential segment will continue to drive sector outlook- Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Property
India
Residential segment will continue to drive sector outlook. The residential segment
accounts for more than 3X the other segments and will remain the most relevant as
retail and commercial/office space vacancies are still set to rise and will peak only in
CY2011E. Mumbai residential pricing is emerging as the key variable to monitor with
anecdotal evidence of developers easing payment terms marginally. We maintain that
MLIFE, PHNX and OBER are the key stocks that stand out in a more adverse funding
environment.

Residential still remains the key for sector outlook
Commercial/retail rentals have increased marginally/stabilized and anecdotal evidence suggests
some uptick in leasing in the commercial/office space segment, however, residential demand
across the key regions will be the key determinant for sector outlook at least over the next 12
months as (1) activity levels (launches, sales/leases) in the residential segment are at least 3X versus
non-residential and (2) vacancies in office and retail space are expected to peak in CY2011E
indicating that a sustained increase in rental rates is still some time away. Mumbai and NCR-Delhi
remain the largest micro markets in the residential space—both of which have prices at close to or
above all-time peaks whereas Hyderabad, Chennai and Kolkata remain relatively subdued.
Non-residential – (1) Bangalore is emerging as key market and (2) vacancies to peak in CY2011E

Retail space in Bangalore is expected to double by end-CY2011E and while vacancies are expected
to go up to 20%, they will still remain lower than the country-wide average. Even for office space,
Bangalore will have the lowest vacancy rate at 15% and with IT/ITES contributing 48% of the
incremental demand (2QFY11) will likely remain a key focal area for growth. Overall, vacancies for
retail and commercial space will peak in FY2012E at 28% and 25% in CY2011E based on current
demand and supply projections (source: State of the Nation, October 2010 – Jones Lang Lasalle).
Residential pricing in Mumbai will be critical to monitor

Mumbai price action will be key to monitor given (1) deliveries picking up in FY2014E and
FY2015E (discussed later in this report), (2) prices close to all-time highs, (3) anecdotal evidence
suggesting that developers are easing payment terms marginally indicating that time-value
adjusted rates are down in response to slower sales and (4) recent issues (RBI action, CBI
investigation) which could slow down credit flow to the sector.

Unitech, Sobha, Phoenix Mills and India Bulls Real Estate have share pledges by promoters
Our analysis of shares pledged by respective promoters indicates that DLF, HDIL, MLIFE, Oberoi
Reality and Puravankara have no shares pledged. For PHNX it is 1% of promoter shareholding that
is pledged, for IBREL, it is 38.6%, 18% for Sobha and 67% for Unitech. For Unitech and Sobha,
the number of shares pledged has remained largely stable compared to end-FY2009 levels, which
is the first period from when such data is available. For IBREL, the shares have been pledged in
4QFY10 (March 23, 2010). We do not know either the loan amounts outstanding based on these
pledges or the margin requirement of the respective lenders and hence cannot predict the stock
prices that will trigger an invocation of these pledges.


􀁠 Residential segment with higher growth trajectory versus retail and commercial/office
segments and accounting for over 75% of total real estate sold will continue to drive
sector outlook.
􀁠 Mumbai price action will be key to monitor given (1) deliveries picking up in FY2014E and
FY2015E (discussed later in this report), (2) prices close to all-time highs, (3) anecdotal
evidence suggesting that developers are easing payment terms marginally indicating that
time-value adjusted rates are down in response to slower sales and (4) recent issues (RBI
action, CBI investigation) which could slow down credit flow to the sector.
􀁠 Bangalore real estate seems to be in a relatively sweeter spot with lowest vacancies in the
commercial/office segment and a doubling mall capacity which will get absorbed though
vacancy is expected to increase to 20% in CY2011E which is still lower than all-India
average.