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Property: 2011 is all about cash flows
Key themes for 2011
Reversal in Mumbai; improving traction in office
sector
1) Office volumes /rents recovery to gain momentum on
the back of improving capex outlook by IT companies/
domestic institutions.
2) Mumbai residential real estate should reach some sort
of inflexion point in 2H as prices have started to correct
and are in general down 15-20% in new launches.
Bangalore RE market should continue to do well due to
improved hiring/salary trends in the IT sector. NCR can
see a slowdown as pricing has crossed peak levels.
3) Reduction in pace of interest rate rises as the policy
moves towards a more neutralish stance.
How the business is expected to evolve through the
year - 2011 is all about cash flows
Cash generation is likely to emerge as the main
differentiator between winners and losers in 2011. 20011
is the third year of stabilization in the RE market post the
slowdown in 2009 and incrementally cash flows from
operations should start stabilizing as the need for land
buying is not very high at the margin.
FY12 should see earnings recovery as the contribution of
old sales (pre 2010) becomes relatively low in the P&L
and the business stabilizes on the basis of sales achieved
over 2010/11. Earnings hence should continue to recover
and we forecast an aggregate 20-30% Y/Y earnings
growth for the sector next year.
De-leveraging story should continue to play out in 2011.
Over 2009/10 most developers have fixed their balance
sheets and reduced debt levels significantly. In fact ex
DLF most large Indian developers have gearing of less
than 0.5x and in many cases (especially in case of
Mumbai developers), there is virtually no debt on
balance sheet.
Physical market outlook
Residential
a) Mumbai residential volumes have started to slow
down given affordability concerns with prices surpassing
their 2007-08 peaks over the last year. CY10 absorption
run rate was 17% below CY09 levels. However, pricing
has already started to correct at the margin in select
micro markets such as South Central Mumbai. Mediumterm
demand outlook remains positive, though, as we
expect volumes will start to return once prices correct
downwards by 10-15%.
b) Gurgaon volumes have continued to remain strong
with CY10 absorption run rate broadly in line with.
Pricing however is now 15-20% above 2007-08 peaks.
This may incrementally start to constrain affordability
and could adversely impact volumes going ahead.
b) Bangalore should continue to do well, given healthy
hiring/salary trends in the IT sector. CY10 absorption run
rate was 15% above 2009 levels and we expect the trend
to continue. More importantly, price growth in the
market has been relatively muted (5-10%) as against
other markets which should continue to support volumes.
Commercial
Office recovery is on a strong foothold with CY10
leasing run rate recovering to 7-7.5msf per quarter as
against ~4msf in 2009. NCR and Bangalore are the key
markets leading the recovery. More importantly, rentals
too have started to inch up over the last few months
given robust leasing trends and deferment of new supply.
Sector view
We see the highest level of out-performance coming out
from betting on a) trend reversals in Mumbai real estate,
and b) office sector recovery. Mumbai property stocks
are cheap, trading at mid-single-digit earnings multiples,
have low leverage and decent earnings growth coming
through in FY11E.
Stock recommendations
DLF is our top pick as we believe the company’s debt
levels have peaked and cash flows should improve, aided
by planned launches in Gurgaon/Panchkula. The outlook
on office leasing is improving as well. We remain
cautious on Unitech given its extensive reliance on the
NCR market (~70-80% of overall bookings).
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