Real Estate - residential volumes stable; Mumbai volumes down 50% from peak: Edelweiss

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n  Healthy volumes in festival season; Mumbai, an exception

Volumes on a pan-India level for the October-December 2010 period (typically one of the strongest quarters for volumes due to festive season) were healthy across cities, with inventory levels also remaining stable across markets. However, Mumbai continues to be a laggard with volumes declining ~50% from peak of May 2009 on account of high prices and dampened buyer sentiment. Volume decline in Mumbai has also led to inventory levels in Mumbai rising to 11 months as of December 2010 from ~7 months in August 2010. Although we believe that prices in Mumbai may eventually correct ~10-15% by October 2011 as volumes continue to remain sluggish; in the near-term Mumbai developers will look to hold on to quoted prices anticipating a recovery in volumes. On a pan-India basis, we expect marginal appreciation of 5-10% in prices in 2011.

n  Commercial leasing steady with stable rentals

In CY10, commercial leasing activity across India saw an uptick with estimated absorption of ~40 msf in CY10 (includes pre-leasing) across top seven cities (Mumbai, NCR, Bengaluru, Kolkata, Hyderabad, Pune, Chennai) against ~28 msf in CY09 and ~35msf in CY07-CY08. Bengaluru was the strongest market with CY10 absorption of ~12 msf, which is above levels of ~10 msf leased in CY07-08. Mumbai and NCR are also witnessing leasing activity in select projects, but upcoming supply across markets in CY11 is expected to keep rental appreciation in check.

n  Funding position a key monitorable in CY11

A string of negative news flow, largely on account of the loan syndication bribery/2G telecom license allocation cases, coupled with the Reserve Bank of India’s (RBI) policy intervention, has dampened sentiment. Our channel checks indicate that loan sanctions for developers may be delayed with interest rates also likely to see an upward bias. Also, volumes may see pressure on account of loan-to-value ratio for housing loans being capped at 80%. With debt repayment assuming significance in light of tight funding to the sector and rising input costs, a key monitorable will be developers’ capacity to hold on to a margin maximisation strategy.

n  Outlook: Testing times ahead

Demand for housing in India continues to be robust on the back of increased hiring/salary hikes. However, rising interest rates, residential prices crossing 2008 peak levels in Mumbai and pockets of NCR and rising construction costs will continue to act as dampeners. Over the next six months, we see no significant upside risk to volumes on a pan-India basis, except in the case of price correction of 10-20% in overheated markets.