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Property
Mumbai Property – Demand high, but uncertain milieu
We lower our estimates owing to prevailing uncertainty, local
regulatory & political changes, and price correction (already
factored in). We revisit our construction cost estimates for highrises
in Mumbai. Also, we lower our NAVs and factor in only
paid-for projects as well as projects where land is already in
possession.
We remove some projects, given uncertainty. Although
redevelopment entails long gestation, the current regulatory
environment in the state increases uncertainty. To incorporate
this, we remove projects won but where payment is pending and
land is not yet in possession, along with some other projects (SRS,
virgin land etc).
Revisit construction costs. Based on our interaction with market
participants (architects, consultants, developers and contractors),
developers have under-estimated construction costs of high-rises
in Mumbai and are likely to raise such costs in due course. Plan
changes during execution, labor issues, equipment shortages and
inexperience with high-rise constructions are key reasons for the
rise in costs. We estimate a 7-12% negative impact on NAVs of
real estate companies in our coverage.
Sales order book high, but credit may get acute. In the past
six quarters, Mumbai-based developers in our coverage have sold
stock worth +`140bn and received +`38bn. However, they have
big-ticket land/project acquisition plans, which is likely to make
cash-flow management acute. Price corrections of 15-20% in
Mumbai are imminent owing to the RBI’s current stance to
increase cost of debt and risk weights on commercial realty, as
well as the high selling prices.
Valuation and risks. Although we reduce our NAVs and price
targets for Mumbai-based developers, we are positive on them on
account of higher entry barriers, lower acquisition costs and
mounting demand. Risks: political uncertainty, credit availability.
We remove some projects, given
uncertainty
Mumbai property developers, unlike peers in NCR and Bangalore,
primarily use the rehabilitation/redevelopment route for
development of property. This involves greater dependence on the
regulatory and political machinery. Hence, project durations are
lengthened and policy-dependent. Although we estimate longer
gestation periods for such projects, given the current changes, we
introduce further discounts in certain projects till clarity emerges on
policies. Also, we remove from our valuation projects won but where
payment is pending and land is not yet in possession, along with
some other projects (SRS, virgin land etc). Such changes impact our
NAVs and estimates for companies in our coverage.
Introduce discounts
On developable area
Mumbai-centered property developers largely follow the rehabilitation and
redevelopment routes to property development – As many as 53% of
regulated developers follow this. Although developers are using different
routes/schemes for the maximum possible developable area on a plot,
approvals for some projects with the same area would be difficult to
obtain, given changes in government stance and infrastructure bottlenecks.
Such projects could decrease in future or higher premiums would require
to be paid. Such delays are likely to increase costs.
Given opaqueness in the sector and changes in recent government
policies, we introduce a discount till further clarity emerges regarding
disclosed projects of the developers.
On projects
We alter our position on development projects announced. We remove
from our valuation projects won but where payment is pending and land is
not yet in possession, given the potential for delays in land acquisition or
in clearances/encroachments. Also, delay in some projects under
construction, which could delay/affect rights to land parcels in future,
have been removed from our project valuations.
Further, for virgin-land projects, where land has already been acquired but
launch visibility is distant, we alter our position to include a certain
premium to book value vs. initial development schedules assumed, as
done for non-Mumbai developers.
Slum-rehabilitation projects and redevelopment projects in Mumbai also
entail more litigation/legal cases than virgin-land projects in Mumbai or
other cities. Although property development involves legal hassles, timely
clearances are also an issue.
Recent regulatory changes
Suburban FSI likely to go up
The government of Maharashta in its winter session in Dec ’10 gave inprinciple
clearance to increased FSI in suburban Mumbai, from 1 to 1.33.
At the same time, it kept the cap of 2 on total development. Although, the
official regulation paper has yet to come, this reduces demand for TDR
(assuming same construction) by 0.33x.
In addition to dependence on construction activity in Mumbai, prices of
TDR would depend on the premium charged on FSI in micro-markets.
We await clarity on this.
Developers affected: HDIL, DB Realty
Rethinking on public parking schemes - DCR 33(24)
The government is also rethinking the higher FSI given in lieu of
providing public parking to MCGM (Municipal Corporation of Greater
Mumbai) free of cost. This re-consideration takes into account the
infrastructure bottlenecks in south-central Mumbai, where most such
schemes were cleared. Although projects in the approval stage are likely to
be cleared, the area cleared and FSI awarded could change.
Tax exemption for FSI sales, post-rehabilitation
As per an amendment to Finance Bill 2010, slum-rehab projects cleared
before Mar ’08 and post-rehab FSI sales falling under Sec 80 I(B) would
get complete tax benefits. Developers who could avail of such benefits are
HDIL and Ackruti City.
Construction costs: underestimated
We re-visit our construction-cost estimates for high-rises planned in
the city. Our interaction with architects, consultants, contractors and
developers lead us to believe that most present project costs have
been under-estimated by developers and are likely to be raised, as in
the past. Plan changes during execution, labor issues, equipment
shortages and lack of experience in high-rise constructions are the
key reasons for rise in construction costs. Our NAVs for Mumbai
developers, therefore, drop 7-12%.
Evaluating cost pressures
Looking at construction-cost hikes by developers recently and in the past
two years, we met contractors, consultants, architects and developer teams
to evaluate construction timelines and costs for proposed high-rises
planned or to be constructed in the next few years. We believe developers
today have under-estimated construction costs, which would need to be
increased 40-90% in coming years.
Fig 3 – Increase in construction costs as one goes higher
No of Floors Const Cost (`/ sqft)
30 3,000
50 4,750
70 6,500
90 8,250
110 10,000
130 11,750
Source: Industry, Anand Rathi Research
Key reasons for increase in costs
Regulatory approvals are the biggest hindrance to starting construction.
Equally, the time to finalize plans also leads to delays in construction and
rise in prices. Lately, most large developers in Mumbai, particularly those
with land parcels in South and South-Central Mumbai, have aimed at
developing high-rises (towers of 60 floors and more). These require larger
plots and an additional set of clearances. With limited space but higher FSI
from other schemes, developers are planning higher developable area and
high-rises. Although sellable area is likely to go up, costs of construction
would also be higher.
According to our interactions, key variables to construction are:
Consultancy. For high-rise construction, architects and consultants
charge more, given the other issues such as wind-funnel tests, lifts,
infrastructure needs (fire-fighting, water treatment etc) that come into
play.
Labor. Experienced and equipped labor is required but is scarce.
Developers attract ex-pat workers, but these work on a single-project
basis.
Contractors. Since most developers outsource construction, given the
more-than-a-dozen new projects, execution capacity of contractors
has to be ramped up, notwithstanding capability. A few developers
plan to secure foreign contractors.
Equipment/technology. Although new processes are being
introduced to replace traditional structural work, their greater
efficiency has yet to be proven. This would raise cost effectiveness.
With the greater amount of work, such techniques are cheaper.
Sales order-book high, but
acquisitions to tighten purse
In the past six quarters, the top 4 Mumbai-based listed developers
have sold stock worth +`140bn, with receivables of +`38bn. These
developers have big-ticket land/project acquisition plans, which are
likely to lead to acute cash-flow management. The current RBI
stance to increase the cost of debt and risk weights on commercial
realty would lessen liquidity. Higher selling prices have hit volumes,
and corrections (15-20% in certain micro-markets) are imminent.
Sales order book – In comfortable zone
With the uptake in the market and lower prices in 1QFY10, most launched
projects then were readily absorbed in the suburbs, with absorption in the
island city being investor-led. Across markets, developers have been able
to sell projects with higher level of investors in South-Central Mumbai
than in Mumbai suburbs.
Although we reiterate that there is little ready inventory in South-Central
Mumbai at present and for the next two years, given the numerous highticket
launches offering more units, we estimate prices in the region to
correct the most vs. other sub-regions of the city. Although the western
and central suburbs have also seen high price increases, the correction
could be less, given differences in ticket size, and shifting of commercial
activity towards the suburbs.
Fig 6 – Blended average price rises across Mumbai micro-markets
Area (Mumbai) Price rise from March'09 to Dec'10
South 15%
South- Central 33%
Western Suburbs 21%
Central Suburbs 29%
Source: Anand Rathi Research
Although the breakeven of Mumbai developers comes earlier than others
(given low land costs), most developers are into land/project acquisitions.
With credit becoming harder to come by, developers are likely to correct
prices/arrest price hikes.
Comfortable balance sheets – At least till 2QFY11
With the equity raised in the past few quarters, and with good sales
recoverables, the balance sheets of most Mumbai developers have been
light, till recently. With the recent bribery issue naming property
companies, the RBI’s stance on raising weights on commercial loans and
rates, credit to developers could be difficult. Also, disbursements for
sanctioned loans could be delayed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Property
Mumbai Property – Demand high, but uncertain milieu
We lower our estimates owing to prevailing uncertainty, local
regulatory & political changes, and price correction (already
factored in). We revisit our construction cost estimates for highrises
in Mumbai. Also, we lower our NAVs and factor in only
paid-for projects as well as projects where land is already in
possession.
We remove some projects, given uncertainty. Although
redevelopment entails long gestation, the current regulatory
environment in the state increases uncertainty. To incorporate
this, we remove projects won but where payment is pending and
land is not yet in possession, along with some other projects (SRS,
virgin land etc).
Revisit construction costs. Based on our interaction with market
participants (architects, consultants, developers and contractors),
developers have under-estimated construction costs of high-rises
in Mumbai and are likely to raise such costs in due course. Plan
changes during execution, labor issues, equipment shortages and
inexperience with high-rise constructions are key reasons for the
rise in costs. We estimate a 7-12% negative impact on NAVs of
real estate companies in our coverage.
Sales order book high, but credit may get acute. In the past
six quarters, Mumbai-based developers in our coverage have sold
stock worth +`140bn and received +`38bn. However, they have
big-ticket land/project acquisition plans, which is likely to make
cash-flow management acute. Price corrections of 15-20% in
Mumbai are imminent owing to the RBI’s current stance to
increase cost of debt and risk weights on commercial realty, as
well as the high selling prices.
Valuation and risks. Although we reduce our NAVs and price
targets for Mumbai-based developers, we are positive on them on
account of higher entry barriers, lower acquisition costs and
mounting demand. Risks: political uncertainty, credit availability.
We remove some projects, given
uncertainty
Mumbai property developers, unlike peers in NCR and Bangalore,
primarily use the rehabilitation/redevelopment route for
development of property. This involves greater dependence on the
regulatory and political machinery. Hence, project durations are
lengthened and policy-dependent. Although we estimate longer
gestation periods for such projects, given the current changes, we
introduce further discounts in certain projects till clarity emerges on
policies. Also, we remove from our valuation projects won but where
payment is pending and land is not yet in possession, along with
some other projects (SRS, virgin land etc). Such changes impact our
NAVs and estimates for companies in our coverage.
Introduce discounts
On developable area
Mumbai-centered property developers largely follow the rehabilitation and
redevelopment routes to property development – As many as 53% of
regulated developers follow this. Although developers are using different
routes/schemes for the maximum possible developable area on a plot,
approvals for some projects with the same area would be difficult to
obtain, given changes in government stance and infrastructure bottlenecks.
Such projects could decrease in future or higher premiums would require
to be paid. Such delays are likely to increase costs.
Given opaqueness in the sector and changes in recent government
policies, we introduce a discount till further clarity emerges regarding
disclosed projects of the developers.
On projects
We alter our position on development projects announced. We remove
from our valuation projects won but where payment is pending and land is
not yet in possession, given the potential for delays in land acquisition or
in clearances/encroachments. Also, delay in some projects under
construction, which could delay/affect rights to land parcels in future,
have been removed from our project valuations.
Further, for virgin-land projects, where land has already been acquired but
launch visibility is distant, we alter our position to include a certain
premium to book value vs. initial development schedules assumed, as
done for non-Mumbai developers.
Slum-rehabilitation projects and redevelopment projects in Mumbai also
entail more litigation/legal cases than virgin-land projects in Mumbai or
other cities. Although property development involves legal hassles, timely
clearances are also an issue.
Recent regulatory changes
Suburban FSI likely to go up
The government of Maharashta in its winter session in Dec ’10 gave inprinciple
clearance to increased FSI in suburban Mumbai, from 1 to 1.33.
At the same time, it kept the cap of 2 on total development. Although, the
official regulation paper has yet to come, this reduces demand for TDR
(assuming same construction) by 0.33x.
In addition to dependence on construction activity in Mumbai, prices of
TDR would depend on the premium charged on FSI in micro-markets.
We await clarity on this.
Developers affected: HDIL, DB Realty
Rethinking on public parking schemes - DCR 33(24)
The government is also rethinking the higher FSI given in lieu of
providing public parking to MCGM (Municipal Corporation of Greater
Mumbai) free of cost. This re-consideration takes into account the
infrastructure bottlenecks in south-central Mumbai, where most such
schemes were cleared. Although projects in the approval stage are likely to
be cleared, the area cleared and FSI awarded could change.
Tax exemption for FSI sales, post-rehabilitation
As per an amendment to Finance Bill 2010, slum-rehab projects cleared
before Mar ’08 and post-rehab FSI sales falling under Sec 80 I(B) would
get complete tax benefits. Developers who could avail of such benefits are
HDIL and Ackruti City.
Construction costs: underestimated
We re-visit our construction-cost estimates for high-rises planned in
the city. Our interaction with architects, consultants, contractors and
developers lead us to believe that most present project costs have
been under-estimated by developers and are likely to be raised, as in
the past. Plan changes during execution, labor issues, equipment
shortages and lack of experience in high-rise constructions are the
key reasons for rise in construction costs. Our NAVs for Mumbai
developers, therefore, drop 7-12%.
Evaluating cost pressures
Looking at construction-cost hikes by developers recently and in the past
two years, we met contractors, consultants, architects and developer teams
to evaluate construction timelines and costs for proposed high-rises
planned or to be constructed in the next few years. We believe developers
today have under-estimated construction costs, which would need to be
increased 40-90% in coming years.
Fig 3 – Increase in construction costs as one goes higher
No of Floors Const Cost (`/ sqft)
30 3,000
50 4,750
70 6,500
90 8,250
110 10,000
130 11,750
Source: Industry, Anand Rathi Research
Key reasons for increase in costs
Regulatory approvals are the biggest hindrance to starting construction.
Equally, the time to finalize plans also leads to delays in construction and
rise in prices. Lately, most large developers in Mumbai, particularly those
with land parcels in South and South-Central Mumbai, have aimed at
developing high-rises (towers of 60 floors and more). These require larger
plots and an additional set of clearances. With limited space but higher FSI
from other schemes, developers are planning higher developable area and
high-rises. Although sellable area is likely to go up, costs of construction
would also be higher.
According to our interactions, key variables to construction are:
Consultancy. For high-rise construction, architects and consultants
charge more, given the other issues such as wind-funnel tests, lifts,
infrastructure needs (fire-fighting, water treatment etc) that come into
play.
Labor. Experienced and equipped labor is required but is scarce.
Developers attract ex-pat workers, but these work on a single-project
basis.
Contractors. Since most developers outsource construction, given the
more-than-a-dozen new projects, execution capacity of contractors
has to be ramped up, notwithstanding capability. A few developers
plan to secure foreign contractors.
Equipment/technology. Although new processes are being
introduced to replace traditional structural work, their greater
efficiency has yet to be proven. This would raise cost effectiveness.
With the greater amount of work, such techniques are cheaper.
Sales order-book high, but
acquisitions to tighten purse
In the past six quarters, the top 4 Mumbai-based listed developers
have sold stock worth +`140bn, with receivables of +`38bn. These
developers have big-ticket land/project acquisition plans, which are
likely to lead to acute cash-flow management. The current RBI
stance to increase the cost of debt and risk weights on commercial
realty would lessen liquidity. Higher selling prices have hit volumes,
and corrections (15-20% in certain micro-markets) are imminent.
Sales order book – In comfortable zone
With the uptake in the market and lower prices in 1QFY10, most launched
projects then were readily absorbed in the suburbs, with absorption in the
island city being investor-led. Across markets, developers have been able
to sell projects with higher level of investors in South-Central Mumbai
than in Mumbai suburbs.
Although we reiterate that there is little ready inventory in South-Central
Mumbai at present and for the next two years, given the numerous highticket
launches offering more units, we estimate prices in the region to
correct the most vs. other sub-regions of the city. Although the western
and central suburbs have also seen high price increases, the correction
could be less, given differences in ticket size, and shifting of commercial
activity towards the suburbs.
Fig 6 – Blended average price rises across Mumbai micro-markets
Area (Mumbai) Price rise from March'09 to Dec'10
South 15%
South- Central 33%
Western Suburbs 21%
Central Suburbs 29%
Source: Anand Rathi Research
Although the breakeven of Mumbai developers comes earlier than others
(given low land costs), most developers are into land/project acquisitions.
With credit becoming harder to come by, developers are likely to correct
prices/arrest price hikes.
Comfortable balance sheets – At least till 2QFY11
With the equity raised in the past few quarters, and with good sales
recoverables, the balance sheets of most Mumbai developers have been
light, till recently. With the recent bribery issue naming property
companies, the RBI’s stance on raising weights on commercial loans and
rates, credit to developers could be difficult. Also, disbursements for
sanctioned loans could be delayed.
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