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Realty Check India
Post correction valuations are attractive, but macro
headwinds to keep sector performance under check
•Investment view– BSE Realty has corrected by sharp 40% from its highs
in Oct-10 primarily on the back of macro headwinds (political, inflation)
and credit tightening concerns (post loan-for-bribe scam). Physical market
fundamentals though have remained fairly healthy across most markets (ex
Mumbai residential) during the same time period. Post the correction,
valuations on select name are compelling (IBREL/HDIL at 0.3x/0.6x FY12
P/B & 5x FY12 P/E). While overall negative sentiment will continue to
weigh on sector performance over 1H; earnings growth (given strong pre
sales done over FY10/11) and FCF generation (limited need for incremental
land acq.) will be the key re-rating catalysts over 2HCY11, in our view.
•Top picks –DLF is our top pick as we believe its debt levels have peaked
out and incrementally cash flow should start to improve partly aided by
plotted sales in Gurgaon/Panchkula. Outlook on office leasing is improving
as well. We continue to prefer Bangalore based developers (Prestige/Sobha)
on the back of improved hiring/salary trends in the IT sector.
•Physical market- What’s performing / what’s not:
o CY10 residential volumes across key Indian cities ended 4% below
CY09 levels primarily attributable to slowdown in Mumbai market (-
18% Y/Y) given affordability concerns. Amongst the other markets,
Chennai was a standout performer (+30% Y/Y) registering its highest
absorption in the last 4 years. While Gurgaon witnessed an impressive
pick up over the festive season (+34% Q/Q in Dec-Q); overall CY10
volumes for the market remained largely flat at 2009 levels. In terms of
pricing, Mumbai has started to see price correction given slowing
absorption trends; prices in Gurgaon though strengthened further over
Dec-Q (+15% Q/Q) and are now above their 2007-08 peak levels.
o Office recovery is on a strong foothold with Dec-Q absorption
increasing by meaningful ~45% Q/Q to 11.3msf – highest quarterly
leasing over the last two years. Overall CY10 leasing across key
markets has recovered to 33msf from 19msf in 2009. While NCR and
Bangalore have been leading the demand revival over the last one year;
recovery in Chennai (+175% Q/Q) and Hyderabad (+211% Q/Q) has
been impressive over Dec-Q. While capital values across select markets
have already started to show signs of strength; JLL expects rentals to
start recovering meaningfully from towards end 2011.
o Retail recovery gaining momentum - 2010 marked the beginning of a
meaningful recovery in the retail segment with retailers resuming back
their expansion plans. JLL expects the absorption to strengthen further
in 2011 to almost 12msf against 4.9msf in 2010. While the retail rents
seem to have bottomed out; they are unlikely to appreciate anytime
soon given adequate supply pipeline (20msf in 2011).
Residential: CY10 volumes largely flat at 2009 levels
Absorption run rate across key Indian cities (Mumbai, Gurgaon, Chennai &
Bangalore) increased by a healthy 11% in Dec-Q despite a 17% Q/Q absorption
decline in Mumbai market. This is primarily attributable to an impressive pick up
witnessed in Chennai (+62% Q/Q) and Gurgaon (+34% Q/Q) market over the festive
season; while absorption increase in Bangalore stood at modest 7%. Launches
remained high across all markets (+60% Q/Q) given the festive season in Dec-Q.
Overall CY10 absorption across key cities was 4% below 2009 levels. This is
primarily attributable to slowdown in Mumbai market (down 18% Y/Y); while rest
of the markets fared reasonably well (Chennai- +30% Y/Y; Gurgaon – flat Y/Y;
Bangalore - +10% Y/Y). Chennai was a standout performer registering its highest
ever absorption over the last 4 years.
In terms of pricing, while Mumbai has started to see price correction given slowing
absorption trends; prices in Gurgaon strengthened further over Dec-Q (+15% Q/Q)
and are now above their peak levels. Price growth in other markets
(Bangalore/Chennai) remains healthy (5-10%).
Months of unsold inventory remained largely stable in Gurgaon (8 months) and
Bangalore (12 months) as absorption kept pace with launches. Chennai being the best
performing market over Dec-Q has seen unsold inventory declining meaningfully to
9months (vs. 12 months in Jun-Q). Mumbai however has seen an increase in unsold
inventory given high launch activity despite weak absorption trends (c11 months vs.
8months in 2Q).
In terms of various markets-
1. Gurgaon witnessed an impressive 34% Q/Q increase in sales volumes thereby
taking the overall Dec-Q absorption back to near peak levels following a 23%
Q/Q decline in Sep-Q. This is primarily on the back of strong festive demand
and slew of new launches (+134% Q/Q, flat Y/Y). Prices too strengthened
further by 15% in Dec-Q and are now back to their 2007 peak levels. While
CY10 absorption run rate was broadly in line with CY09 levels; high prices may
incrementally start to adversely impact volumes going ahead. Months of unsold
inventory has remained largely stable at lows of 7-8 months over the Dec-Q.
2. MMR registered a further 17% decline in volumes over the Dec-Q (post a 18%
decline in Sep-Q) as sharp price increases across micro markets over the last one
year has started to constrain affordability. Noticeably, volumes in Island City
after a 10-15% price correction have bounced back in Dec-Q (+66% Q/Q, +27%
Y/Y) following a subdued Sep-Q (-23% Q/Q). However, volumes in other
markets continue to remain weak and any meaningful price correction is yet to
be seen in these markets. Launches (+29% Q/Q) though remained high across all
micro markets on the back of festive season. Unsold inventory has increased
over the last few months given high launches despite slowing absorption trends.
Overall CY10 absorption run rate ended 18% below CY09 levels.
3. Bangalore posted a 7% increase in volumes over the Dec-Q. Overall volume
trends in Bangalore remain healthy with CY10 registering 10% higher
absorption than 2009 levels given healthy hiring/salary trends in the IT sector.
Launches too have started to pick up over the last 3 months (+44% Q/Q). More
importantly, price growth in the market has been relatively modest (5-10%) as
against other markets thereby keeping the affordability healthy. Months of
unsold inventory has remained largely stable over the Dec-Q.
4. Chennai was the best performing market registering a 62% Q/Q increase in
absorption over Dec-Q. Overall volumes for CY10 stood 30% higher than 2009
levels. Launches have picked up meaningfully over the last 2 Qs (+6x from 2Q).
More importantly, months of unsold inventory has come down over the past two
quarters given sharp pick up in absorption (c9 months vs. 12 months in Jun-Q
5. Among other markets Hyderabad was a key out performer in Dec-Q
registering an impressive 52% Q/Q increase in absorption; while absorption run
rate remained largely stable in other markets (Pune/Kolkata). Unsold inventory
in most cities is declining and is currently at 8-10 months; Hyderabad however
has almost two years (20 months) of unsold inventory.
Policy getting counter-cyclical
National housing board (the regulator for housing finance companies) late last
months tightened norms for housing lending /developer financing by Housing
Finance companies (HFCs). The change in norms was essentially an equalization of
policy between banks and HFCs thereby taking provisioning and risk weight
requirements for HFCs inline with the guidelines issued by RBI in October.
The measures announced in Dec included (a) Increase in risk weights on high value
home loans (>Rs7.5M) and higher provisioning for builder loans; (b) Intermediation
not allowed in builder/developer loan origination; (c) Higher disclosure requirements
for banks in case of developer lending. These measures are essentially aimed at
tightening developer finance in order to check "asset inflation".
Over the last one year, policy direction on real estate has been counter cyclical and is
expected to remain so in the medium term. The central bank has largely reversed
back most of the stimulus measures given in 2008 to revive the real estate sector
(please see table below). In general property stocks tends to under perform in the
early stages of rate tightening but as confidence in GDP improves the correlation
breaks down mid to late cycle. Concern
Table 6: Regulatory/Policy action over the last three years
- Risk weights on housing loans above Rs 7.5MM to be raised to 125bps from 75-100bps. Provisioning Oct-10 for teaser loans to go up from 0.4% to 2%
Oct-10 - LTVs for housing loans have been capped at 80%
Aug-10 - HDFC hikes home loan rates by 50bps
Jul-10 - HDFC extends the teaser home loan scheme to Mar-11
Date Comments
May-10 - SBI has extended its offer on teaser rate schemes till end June (by 2 months). Now followed by other private sector banks
Apr-10 - Incidence on service tax on home purchase reduced to 2.5% from 3.5% earlier (proposed on the budget). Additionally for low cost housing projects funded under
special govt initiatives (JNUURM / RYA) have been exempted from imposition of these taxes
Feb-10 -Withdrawal of teaser home loan rates by a number of banks ICICI, HDFC, BOI etc
Feb-10 -Budget proposes imposition of service tax on sales/rentals and increases input costs (excise hike).
Feb-10 -RBI disallowed restructuring of loans for real estate developers.
Oct-09 - Increase in provisioning requirements for commercial real estate loans from 0.4% to 1%
Sep 09 - RBI eases lending norms for SEZs (classified as infrastructure lending)
Jul 09 -Extension of 80IB(B) scheme by one year and interest subsidy of 1 %
Jul 09 -Norms relaxation for SEZ development
Jan-09 - ECB norms for overseas lending relaxed
Dec-08 - Home loan rates on below Rs 20L segment to be cut by about 200bps
Dec-08 - Rs40B credit line to National Housing Bank to to kick start lending in the Rs 2MM category (priority sector lending)
Dec-08 - Permitted real estate loan restructuring upto Jun-09 as standard loans without requiring banks to classify these as NPAs
Nov-08 - HFCs allowed to raise short term foreign currency borrowings under the approval route
Nov-08 - Reduction in provisioning requirements on advances to the commercial real estate sector and home loans beyond Rs 2MM to 0.4%
Nov-08 - RBI reduced risk weightings on banks' exposures to commercial real estate to 100% from 150% earlier
May-08 -Lower risk weight (50%) on home loans upto 30L (20L earlier)
May-07 -Ban on ECB's for township projects. Likely to hit the development plans of large developers
Jan-07 -Increase in provisioning requirements for real estate loans
Sep-06 - RBI asks banks to treat loans to SEZs as real estate loans
May-06 - RBI increases risk weightings on banks' exposures to commercial real estate to 150% from 125%
May-06 - Increase risk weightings and general provisioning of residential housing/commercial loans above Rs 2MM
Apr-06 - FII entry into real estate IPOs comes under scanner with RBI trying to classify it as FDI
Office recovery on a strong foothold; rentals too improving
at the margin
Leasing activity picked up meaningfully over the Dec-Q to 11.3msf (+44% Q/Q) as
against 7.7msf/6.8msf in Sep-Q/Jun-Q. Overall CY10 leasing run rate has almost
doubled to 7.5-8msf per quarter from 4msf in 2009. While NCR and Bangalore have
been leading the revival over the last one year; recovery in Chennai (+175% Q/Q)
and Hyderabad (+211% Q/Q) has been impressive over the Dec-Q. Overall for 2010
pan India absorption recovered to 33msf from 20msf in CY09. IT/ITES and BFSI
continues to drive 60-70% of the office demand.
Going into 2011, most IPCs expect absorption to strengthen further with SEZ’s likely
to be the key demand driver as new DTC has spelled out a timeline of 2014 for the
operationalization of tenants to avail tax benefits. Further, STPI tax benefits are also
set to expire by Mar-11.
Vacancy level declined across most markets during the Dec-Q as supply got deferred
to CY11. Rentals have started to appreciate in select markets in Bangalore and NCR;
while other markets remained largely stable Q/Q. JLL expects the rentals to start
recovering meaningfully from towards end 2011 given positive absorption trends
across most markets. Office investment yields have started to come down over the
last one year (-80-100bps) and currently range from 10%-11%.
Encouraged by encouraging revival over the last two quarters, developers have
started to expedite construction as well as revive few office projects which had been
put on halt over the lat two years due to weak demand. Hence, most markets are
expected to witness large supply in 2011. JLL expects supply of 60 msf in 2011
against estimated absorption of 36msf.
In terms of various markets,
1. NCR continues to register steady increase in office absorption (+36% Q/Q,
+90% Y/Y). Overall 1.9msf was leased in Dec-Q (Gurgaon – 1.5msf; Noida
– 0.3msf) as against 1.4msf/1msf in Sep/Jun-Q. Gurgaon accounted for over
80% of the total absorption. Correspondingly, supply in the market was also
high at 2.9msf (highest in last two years) thereby keeping vacancy levels
largely stable Q/Q. Overall vacancy levels stood at high >30% primarily due
to huge vacant space in Noida (>40%). Rentals have started to inch up esp
in prime Delhi/Gurgaon (up ~5%Q/Q) on the back of improving absorption.
2. Mumbai continues to register healthy leasing run rate with 2.1msf of leases
being concluded in Dec-Q (+10% Q/Q). Leasing run rate in Mumbai has
stabilized at 2msf (double of CY09) over the last four quarters. BFSI sector
accounted for majority of absorption in CY10. Supply during the Q
declined by 50% Q/Q as project completions got deferred to CY11 thereby
resulting in marginal dip in vacancy levels (20%). Rentals remained largely
stable Q/Q across most markets with the exception of CBD as occupiers
shift to quality developments in SBD locations (Bandra/Lower Parel).
3. Bangalore recorded highest absorption across all key markets for the third
consecutive quarter primarily driven by IT/ITeS sector. Dec-Q leasing
stood at 2.4msf thereby taking overall CY10 absorption to 8.1msf against
4.5msf for CY09. Interestingly, Whitefield accounted for close to 40% of
the absorption in Dec-Q on account of low vacancy in ORR market. With
Bangalore market witnessing modest supply of 0.8msf during Dec-Q;
vacancy levels came down to 21% from 23% in Sep-Q. Rentals appreciated
by 5-10% primarily in CBD and SBD markets; while Whitefield and
Electronic City remained stable Q/Q (given high vacancy rates ~>40%).
4. Chennai witnessed an impressive pick up in leasing over the last few
months registering a threefold increase in absorption over Dec-Q. Overall
absorption at 2.2msf (+175% Q/Q) is highest take up recorded over the last
two years. Further with no additional supply becoming operational during
the Q (as projects completions got deferred), vacancy levels declined by
meaningful 500bps during Dec-Q (to 29%). Rentals in CBD/off CBD
appreciated by 5-8% on the back of improving demand trends.
5. Other markets (Hyderabad, Pune, Kolkata) with the exception of
Kolkata too continue to register robust leasing trends. Hyderabad stood out
with Dec-Q leasing at 1.8msf (+211% Q/Q). Rentals and vacancy levels
have largely remained stable Q/Q given high vacancy levels and supply
overhang across most markets.
Retail recover gaining momentum; however rentals unlikely
to appreciate anytime soon given supply overhang
2010 marked the beginning of a meaningful recovery in the retail segment with both
domestic and foreign retailers resuming back their expansion plans. Developers have
become more accommodative in terms of their asking rents and lease terms in order
to ensure higher occupancy. Rentals across markets have corrected by 30-40% from
their peak levels. Revenue share models are emerging as favored model of lease
agreement among retailers as well as developers.
Most retailers (Pantaloons, Shoppers Stop) have reported healthy sales trends over
the last 6 months driven by improved consumer spending and now seem to have
resumed back their expansion plans. Further, opening up of FDI in multi brand retail
bodes well for the sector. However, given the associated negative effects to
unorganized retail market the proposition will be tough to get accepted.
JLL expects the absorption to strengthen further in 2011 to almost 12msf against
4.9msf in 2010. While the retail rents seem to have bottomed out and face limited
downside pressure; JLL does not see rentals to appreciate anytime soon given
adequate supply pipeline (20msf in 2011). Majority (>80%) of the supply expected
over 2011 is at advanced stage of construction and is therefore certain to become
operational by 2010 end. This would keep the vacancy levels elevated
In terms various markets
1. NCR witnessed supply of 1.3msf in 3Q primarily in South Delhi market.
Leasing has picked up meaningfully with most new brands/retailers looking
to establish their presence in the mall capital of India (Delhi-NCR). Rentals
remained largely stable with the exception of Noida which witnessed 9%
correction on account of limited leasing activity and high vacancy levels.
2. Mumbai witnessed fresh mall supply of 1.4msf in Sep-Q. Leasing activity
remained buoyant in the city on the back of improving retailer sentiment.
While overall rents remained largely stable, few micro markets like
Goregaon and Vashi have started to see some upward pressure on rentals.
3. Bangalore and Chennai did not witness any new supply addition during
3Q. Lack of new supply coupled with low vacancy levels in existing
operational malls has kept the leasing activity muted in the market. Rentals
remained stable Q/Q across both markets. With new project additions over
the next 2Qs and increasing enquiries, leasing should pick up going ahead.
These cities continue to witness considerable activity on the high streets.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Realty Check India
Post correction valuations are attractive, but macro
headwinds to keep sector performance under check
•Investment view– BSE Realty has corrected by sharp 40% from its highs
in Oct-10 primarily on the back of macro headwinds (political, inflation)
and credit tightening concerns (post loan-for-bribe scam). Physical market
fundamentals though have remained fairly healthy across most markets (ex
Mumbai residential) during the same time period. Post the correction,
valuations on select name are compelling (IBREL/HDIL at 0.3x/0.6x FY12
P/B & 5x FY12 P/E). While overall negative sentiment will continue to
weigh on sector performance over 1H; earnings growth (given strong pre
sales done over FY10/11) and FCF generation (limited need for incremental
land acq.) will be the key re-rating catalysts over 2HCY11, in our view.
•Top picks –DLF is our top pick as we believe its debt levels have peaked
out and incrementally cash flow should start to improve partly aided by
plotted sales in Gurgaon/Panchkula. Outlook on office leasing is improving
as well. We continue to prefer Bangalore based developers (Prestige/Sobha)
on the back of improved hiring/salary trends in the IT sector.
•Physical market- What’s performing / what’s not:
o CY10 residential volumes across key Indian cities ended 4% below
CY09 levels primarily attributable to slowdown in Mumbai market (-
18% Y/Y) given affordability concerns. Amongst the other markets,
Chennai was a standout performer (+30% Y/Y) registering its highest
absorption in the last 4 years. While Gurgaon witnessed an impressive
pick up over the festive season (+34% Q/Q in Dec-Q); overall CY10
volumes for the market remained largely flat at 2009 levels. In terms of
pricing, Mumbai has started to see price correction given slowing
absorption trends; prices in Gurgaon though strengthened further over
Dec-Q (+15% Q/Q) and are now above their 2007-08 peak levels.
o Office recovery is on a strong foothold with Dec-Q absorption
increasing by meaningful ~45% Q/Q to 11.3msf – highest quarterly
leasing over the last two years. Overall CY10 leasing across key
markets has recovered to 33msf from 19msf in 2009. While NCR and
Bangalore have been leading the demand revival over the last one year;
recovery in Chennai (+175% Q/Q) and Hyderabad (+211% Q/Q) has
been impressive over Dec-Q. While capital values across select markets
have already started to show signs of strength; JLL expects rentals to
start recovering meaningfully from towards end 2011.
o Retail recovery gaining momentum - 2010 marked the beginning of a
meaningful recovery in the retail segment with retailers resuming back
their expansion plans. JLL expects the absorption to strengthen further
in 2011 to almost 12msf against 4.9msf in 2010. While the retail rents
seem to have bottomed out; they are unlikely to appreciate anytime
soon given adequate supply pipeline (20msf in 2011).
Residential: CY10 volumes largely flat at 2009 levels
Absorption run rate across key Indian cities (Mumbai, Gurgaon, Chennai &
Bangalore) increased by a healthy 11% in Dec-Q despite a 17% Q/Q absorption
decline in Mumbai market. This is primarily attributable to an impressive pick up
witnessed in Chennai (+62% Q/Q) and Gurgaon (+34% Q/Q) market over the festive
season; while absorption increase in Bangalore stood at modest 7%. Launches
remained high across all markets (+60% Q/Q) given the festive season in Dec-Q.
Overall CY10 absorption across key cities was 4% below 2009 levels. This is
primarily attributable to slowdown in Mumbai market (down 18% Y/Y); while rest
of the markets fared reasonably well (Chennai- +30% Y/Y; Gurgaon – flat Y/Y;
Bangalore - +10% Y/Y). Chennai was a standout performer registering its highest
ever absorption over the last 4 years.
In terms of pricing, while Mumbai has started to see price correction given slowing
absorption trends; prices in Gurgaon strengthened further over Dec-Q (+15% Q/Q)
and are now above their peak levels. Price growth in other markets
(Bangalore/Chennai) remains healthy (5-10%).
Months of unsold inventory remained largely stable in Gurgaon (8 months) and
Bangalore (12 months) as absorption kept pace with launches. Chennai being the best
performing market over Dec-Q has seen unsold inventory declining meaningfully to
9months (vs. 12 months in Jun-Q). Mumbai however has seen an increase in unsold
inventory given high launch activity despite weak absorption trends (c11 months vs.
8months in 2Q).
In terms of various markets-
1. Gurgaon witnessed an impressive 34% Q/Q increase in sales volumes thereby
taking the overall Dec-Q absorption back to near peak levels following a 23%
Q/Q decline in Sep-Q. This is primarily on the back of strong festive demand
and slew of new launches (+134% Q/Q, flat Y/Y). Prices too strengthened
further by 15% in Dec-Q and are now back to their 2007 peak levels. While
CY10 absorption run rate was broadly in line with CY09 levels; high prices may
incrementally start to adversely impact volumes going ahead. Months of unsold
inventory has remained largely stable at lows of 7-8 months over the Dec-Q.
2. MMR registered a further 17% decline in volumes over the Dec-Q (post a 18%
decline in Sep-Q) as sharp price increases across micro markets over the last one
year has started to constrain affordability. Noticeably, volumes in Island City
after a 10-15% price correction have bounced back in Dec-Q (+66% Q/Q, +27%
Y/Y) following a subdued Sep-Q (-23% Q/Q). However, volumes in other
markets continue to remain weak and any meaningful price correction is yet to
be seen in these markets. Launches (+29% Q/Q) though remained high across all
micro markets on the back of festive season. Unsold inventory has increased
over the last few months given high launches despite slowing absorption trends.
Overall CY10 absorption run rate ended 18% below CY09 levels.
3. Bangalore posted a 7% increase in volumes over the Dec-Q. Overall volume
trends in Bangalore remain healthy with CY10 registering 10% higher
absorption than 2009 levels given healthy hiring/salary trends in the IT sector.
Launches too have started to pick up over the last 3 months (+44% Q/Q). More
importantly, price growth in the market has been relatively modest (5-10%) as
against other markets thereby keeping the affordability healthy. Months of
unsold inventory has remained largely stable over the Dec-Q.
4. Chennai was the best performing market registering a 62% Q/Q increase in
absorption over Dec-Q. Overall volumes for CY10 stood 30% higher than 2009
levels. Launches have picked up meaningfully over the last 2 Qs (+6x from 2Q).
More importantly, months of unsold inventory has come down over the past two
quarters given sharp pick up in absorption (c9 months vs. 12 months in Jun-Q
5. Among other markets Hyderabad was a key out performer in Dec-Q
registering an impressive 52% Q/Q increase in absorption; while absorption run
rate remained largely stable in other markets (Pune/Kolkata). Unsold inventory
in most cities is declining and is currently at 8-10 months; Hyderabad however
has almost two years (20 months) of unsold inventory.
Policy getting counter-cyclical
National housing board (the regulator for housing finance companies) late last
months tightened norms for housing lending /developer financing by Housing
Finance companies (HFCs). The change in norms was essentially an equalization of
policy between banks and HFCs thereby taking provisioning and risk weight
requirements for HFCs inline with the guidelines issued by RBI in October.
The measures announced in Dec included (a) Increase in risk weights on high value
home loans (>Rs7.5M) and higher provisioning for builder loans; (b) Intermediation
not allowed in builder/developer loan origination; (c) Higher disclosure requirements
for banks in case of developer lending. These measures are essentially aimed at
tightening developer finance in order to check "asset inflation".
Over the last one year, policy direction on real estate has been counter cyclical and is
expected to remain so in the medium term. The central bank has largely reversed
back most of the stimulus measures given in 2008 to revive the real estate sector
(please see table below). In general property stocks tends to under perform in the
early stages of rate tightening but as confidence in GDP improves the correlation
breaks down mid to late cycle. Concern
Table 6: Regulatory/Policy action over the last three years
- Risk weights on housing loans above Rs 7.5MM to be raised to 125bps from 75-100bps. Provisioning Oct-10 for teaser loans to go up from 0.4% to 2%
Oct-10 - LTVs for housing loans have been capped at 80%
Aug-10 - HDFC hikes home loan rates by 50bps
Jul-10 - HDFC extends the teaser home loan scheme to Mar-11
Date Comments
May-10 - SBI has extended its offer on teaser rate schemes till end June (by 2 months). Now followed by other private sector banks
Apr-10 - Incidence on service tax on home purchase reduced to 2.5% from 3.5% earlier (proposed on the budget). Additionally for low cost housing projects funded under
special govt initiatives (JNUURM / RYA) have been exempted from imposition of these taxes
Feb-10 -Withdrawal of teaser home loan rates by a number of banks ICICI, HDFC, BOI etc
Feb-10 -Budget proposes imposition of service tax on sales/rentals and increases input costs (excise hike).
Feb-10 -RBI disallowed restructuring of loans for real estate developers.
Oct-09 - Increase in provisioning requirements for commercial real estate loans from 0.4% to 1%
Sep 09 - RBI eases lending norms for SEZs (classified as infrastructure lending)
Jul 09 -Extension of 80IB(B) scheme by one year and interest subsidy of 1 %
Jul 09 -Norms relaxation for SEZ development
Jan-09 - ECB norms for overseas lending relaxed
Dec-08 - Home loan rates on below Rs 20L segment to be cut by about 200bps
Dec-08 - Rs40B credit line to National Housing Bank to to kick start lending in the Rs 2MM category (priority sector lending)
Dec-08 - Permitted real estate loan restructuring upto Jun-09 as standard loans without requiring banks to classify these as NPAs
Nov-08 - HFCs allowed to raise short term foreign currency borrowings under the approval route
Nov-08 - Reduction in provisioning requirements on advances to the commercial real estate sector and home loans beyond Rs 2MM to 0.4%
Nov-08 - RBI reduced risk weightings on banks' exposures to commercial real estate to 100% from 150% earlier
May-08 -Lower risk weight (50%) on home loans upto 30L (20L earlier)
May-07 -Ban on ECB's for township projects. Likely to hit the development plans of large developers
Jan-07 -Increase in provisioning requirements for real estate loans
Sep-06 - RBI asks banks to treat loans to SEZs as real estate loans
May-06 - RBI increases risk weightings on banks' exposures to commercial real estate to 150% from 125%
May-06 - Increase risk weightings and general provisioning of residential housing/commercial loans above Rs 2MM
Apr-06 - FII entry into real estate IPOs comes under scanner with RBI trying to classify it as FDI
Office recovery on a strong foothold; rentals too improving
at the margin
Leasing activity picked up meaningfully over the Dec-Q to 11.3msf (+44% Q/Q) as
against 7.7msf/6.8msf in Sep-Q/Jun-Q. Overall CY10 leasing run rate has almost
doubled to 7.5-8msf per quarter from 4msf in 2009. While NCR and Bangalore have
been leading the revival over the last one year; recovery in Chennai (+175% Q/Q)
and Hyderabad (+211% Q/Q) has been impressive over the Dec-Q. Overall for 2010
pan India absorption recovered to 33msf from 20msf in CY09. IT/ITES and BFSI
continues to drive 60-70% of the office demand.
Going into 2011, most IPCs expect absorption to strengthen further with SEZ’s likely
to be the key demand driver as new DTC has spelled out a timeline of 2014 for the
operationalization of tenants to avail tax benefits. Further, STPI tax benefits are also
set to expire by Mar-11.
Vacancy level declined across most markets during the Dec-Q as supply got deferred
to CY11. Rentals have started to appreciate in select markets in Bangalore and NCR;
while other markets remained largely stable Q/Q. JLL expects the rentals to start
recovering meaningfully from towards end 2011 given positive absorption trends
across most markets. Office investment yields have started to come down over the
last one year (-80-100bps) and currently range from 10%-11%.
Encouraged by encouraging revival over the last two quarters, developers have
started to expedite construction as well as revive few office projects which had been
put on halt over the lat two years due to weak demand. Hence, most markets are
expected to witness large supply in 2011. JLL expects supply of 60 msf in 2011
against estimated absorption of 36msf.
In terms of various markets,
1. NCR continues to register steady increase in office absorption (+36% Q/Q,
+90% Y/Y). Overall 1.9msf was leased in Dec-Q (Gurgaon – 1.5msf; Noida
– 0.3msf) as against 1.4msf/1msf in Sep/Jun-Q. Gurgaon accounted for over
80% of the total absorption. Correspondingly, supply in the market was also
high at 2.9msf (highest in last two years) thereby keeping vacancy levels
largely stable Q/Q. Overall vacancy levels stood at high >30% primarily due
to huge vacant space in Noida (>40%). Rentals have started to inch up esp
in prime Delhi/Gurgaon (up ~5%Q/Q) on the back of improving absorption.
2. Mumbai continues to register healthy leasing run rate with 2.1msf of leases
being concluded in Dec-Q (+10% Q/Q). Leasing run rate in Mumbai has
stabilized at 2msf (double of CY09) over the last four quarters. BFSI sector
accounted for majority of absorption in CY10. Supply during the Q
declined by 50% Q/Q as project completions got deferred to CY11 thereby
resulting in marginal dip in vacancy levels (20%). Rentals remained largely
stable Q/Q across most markets with the exception of CBD as occupiers
shift to quality developments in SBD locations (Bandra/Lower Parel).
3. Bangalore recorded highest absorption across all key markets for the third
consecutive quarter primarily driven by IT/ITeS sector. Dec-Q leasing
stood at 2.4msf thereby taking overall CY10 absorption to 8.1msf against
4.5msf for CY09. Interestingly, Whitefield accounted for close to 40% of
the absorption in Dec-Q on account of low vacancy in ORR market. With
Bangalore market witnessing modest supply of 0.8msf during Dec-Q;
vacancy levels came down to 21% from 23% in Sep-Q. Rentals appreciated
by 5-10% primarily in CBD and SBD markets; while Whitefield and
Electronic City remained stable Q/Q (given high vacancy rates ~>40%).
4. Chennai witnessed an impressive pick up in leasing over the last few
months registering a threefold increase in absorption over Dec-Q. Overall
absorption at 2.2msf (+175% Q/Q) is highest take up recorded over the last
two years. Further with no additional supply becoming operational during
the Q (as projects completions got deferred), vacancy levels declined by
meaningful 500bps during Dec-Q (to 29%). Rentals in CBD/off CBD
appreciated by 5-8% on the back of improving demand trends.
5. Other markets (Hyderabad, Pune, Kolkata) with the exception of
Kolkata too continue to register robust leasing trends. Hyderabad stood out
with Dec-Q leasing at 1.8msf (+211% Q/Q). Rentals and vacancy levels
have largely remained stable Q/Q given high vacancy levels and supply
overhang across most markets.
Retail recover gaining momentum; however rentals unlikely
to appreciate anytime soon given supply overhang
2010 marked the beginning of a meaningful recovery in the retail segment with both
domestic and foreign retailers resuming back their expansion plans. Developers have
become more accommodative in terms of their asking rents and lease terms in order
to ensure higher occupancy. Rentals across markets have corrected by 30-40% from
their peak levels. Revenue share models are emerging as favored model of lease
agreement among retailers as well as developers.
Most retailers (Pantaloons, Shoppers Stop) have reported healthy sales trends over
the last 6 months driven by improved consumer spending and now seem to have
resumed back their expansion plans. Further, opening up of FDI in multi brand retail
bodes well for the sector. However, given the associated negative effects to
unorganized retail market the proposition will be tough to get accepted.
JLL expects the absorption to strengthen further in 2011 to almost 12msf against
4.9msf in 2010. While the retail rents seem to have bottomed out and face limited
downside pressure; JLL does not see rentals to appreciate anytime soon given
adequate supply pipeline (20msf in 2011). Majority (>80%) of the supply expected
over 2011 is at advanced stage of construction and is therefore certain to become
operational by 2010 end. This would keep the vacancy levels elevated
In terms various markets
1. NCR witnessed supply of 1.3msf in 3Q primarily in South Delhi market.
Leasing has picked up meaningfully with most new brands/retailers looking
to establish their presence in the mall capital of India (Delhi-NCR). Rentals
remained largely stable with the exception of Noida which witnessed 9%
correction on account of limited leasing activity and high vacancy levels.
2. Mumbai witnessed fresh mall supply of 1.4msf in Sep-Q. Leasing activity
remained buoyant in the city on the back of improving retailer sentiment.
While overall rents remained largely stable, few micro markets like
Goregaon and Vashi have started to see some upward pressure on rentals.
3. Bangalore and Chennai did not witness any new supply addition during
3Q. Lack of new supply coupled with low vacancy levels in existing
operational malls has kept the leasing activity muted in the market. Rentals
remained stable Q/Q across both markets. With new project additions over
the next 2Qs and increasing enquiries, leasing should pick up going ahead.
These cities continue to witness considerable activity on the high streets.
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