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Property
Residential market to slow across India as high prices and lack of
easy credit curtail housing demand in 2011
We maintain our positive outlook on commercial property, driven by
increased IT/ITES and financial services hiring
DLF is our top sector pick, given its strong focus on the commercial
segment and healthy balance sheet
2011 sector outlook
We expect residential prices to remain firm in the
near to medium term across Tier II cities, while
volumes will take a hit. Mumbai, though, could see a
sharper volume correction owing to sustained high
property prices and falling affordability levels.
Developers with ability to cut prices and launch
competitively priced units will attract demand.
Sustained improvement in the IT/ITES sector’s
business environment along with the growth of the
financial services industry suggests commercial
office space demand will continue to rise. We expect
commercial volumes to grow by 20-30% during
2011 with marginal price growth of 5-10%.
However, commercial demand is unlikely to
percolate to mid-sized developers, as large
developers use their existing business relationships
to attract demand and increase market share.
HSBC India property outlook
Segment Outlook
Residential Neutral
--Luxury Positive
--Mid income Negative
Commercial Positive
Retailing Negative
2011 top pick
DLF, OW(V), TP INR386
Our top pick in the sector, DLF fits well on both our
key parameters of higher commercial office space
exposure (highest exposure to commercial at c44%
of GAV vs 25-35% for peers) and healthy balance
sheet. This along with several planned residential
launches should allow DLF to achieve better fresh
volume sales, which we believe will act as catalysts
for sector outperformance.
We believe DLF offers investors a proxy for India’s
reviving property sector. The company is India’s
largest real estate developer with pan-India
development potential of c432m sq ft and a focus on
the National Capital Region (NCR). We like its
leadership position in the commercial segment,
which should help it benefit from the expected
commercial segment revival over FY10-13. It has
c15m sq ft of commercial assets under construction,
which puts its industry market share at c10%.
We are also positive on DLF’s residential
business, where the company is targeting city
centre projects in the near-medium term. We
estimate DLF will post 14.3m sq ft of residential/
outright commercial space sales in FY11 and
15.3m sq ft in FY12. With its focus on city centre
projects, and the price appreciation witnessed in
the residential segment over the past nine months,
we estimate EBITDA margin will further expand
150-200bp over FY11-12. We expect DLF to
report an earnings CAGR of 35% for FY10-12e.
We value DLF at INR386, which is at par to its
FY11e NAV (calculated using DCF analysis of its
real estate project cash flows), along with INR19
as a terminal value using a WACC of 14.5% (risk
free rate: 7.5%, market risk premium: 5.5%, CoD:
11%, CoE: 15.2%). DLF’s premium valuation
(peers valued at c10-20% discount to NAV)
seems justified, given its industry leadership
position, improving balance sheet and sector
position as a large market cap proxy play on
India’s reviving property industry.
Counter-consensus view: We continue to prefer
sector players like DLF with higher commercial
property exposure, unlike consensus which
favours residential players.
Key share price catalysts: Increased news flow
on successful new residential project launches in
North India and commercial space leasing
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Property
Residential market to slow across India as high prices and lack of
easy credit curtail housing demand in 2011
We maintain our positive outlook on commercial property, driven by
increased IT/ITES and financial services hiring
DLF is our top sector pick, given its strong focus on the commercial
segment and healthy balance sheet
2011 sector outlook
We expect residential prices to remain firm in the
near to medium term across Tier II cities, while
volumes will take a hit. Mumbai, though, could see a
sharper volume correction owing to sustained high
property prices and falling affordability levels.
Developers with ability to cut prices and launch
competitively priced units will attract demand.
Sustained improvement in the IT/ITES sector’s
business environment along with the growth of the
financial services industry suggests commercial
office space demand will continue to rise. We expect
commercial volumes to grow by 20-30% during
2011 with marginal price growth of 5-10%.
However, commercial demand is unlikely to
percolate to mid-sized developers, as large
developers use their existing business relationships
to attract demand and increase market share.
HSBC India property outlook
Segment Outlook
Residential Neutral
--Luxury Positive
--Mid income Negative
Commercial Positive
Retailing Negative
2011 top pick
DLF, OW(V), TP INR386
Our top pick in the sector, DLF fits well on both our
key parameters of higher commercial office space
exposure (highest exposure to commercial at c44%
of GAV vs 25-35% for peers) and healthy balance
sheet. This along with several planned residential
launches should allow DLF to achieve better fresh
volume sales, which we believe will act as catalysts
for sector outperformance.
We believe DLF offers investors a proxy for India’s
reviving property sector. The company is India’s
largest real estate developer with pan-India
development potential of c432m sq ft and a focus on
the National Capital Region (NCR). We like its
leadership position in the commercial segment,
which should help it benefit from the expected
commercial segment revival over FY10-13. It has
c15m sq ft of commercial assets under construction,
which puts its industry market share at c10%.
We are also positive on DLF’s residential
business, where the company is targeting city
centre projects in the near-medium term. We
estimate DLF will post 14.3m sq ft of residential/
outright commercial space sales in FY11 and
15.3m sq ft in FY12. With its focus on city centre
projects, and the price appreciation witnessed in
the residential segment over the past nine months,
we estimate EBITDA margin will further expand
150-200bp over FY11-12. We expect DLF to
report an earnings CAGR of 35% for FY10-12e.
We value DLF at INR386, which is at par to its
FY11e NAV (calculated using DCF analysis of its
real estate project cash flows), along with INR19
as a terminal value using a WACC of 14.5% (risk
free rate: 7.5%, market risk premium: 5.5%, CoD:
11%, CoE: 15.2%). DLF’s premium valuation
(peers valued at c10-20% discount to NAV)
seems justified, given its industry leadership
position, improving balance sheet and sector
position as a large market cap proxy play on
India’s reviving property industry.
Counter-consensus view: We continue to prefer
sector players like DLF with higher commercial
property exposure, unlike consensus which
favours residential players.
Key share price catalysts: Increased news flow
on successful new residential project launches in
North India and commercial space leasing
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