Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mumbai realty: Opportunities seen post sell out
Mumbai realty: Be conservative, stick to quality
We see opportunities emerging post a sharp sell out since Nov 2010, particularly
in Mumbai-based developers. We initiate coverage on Oberoi with a Buy rating
and PO of Rs290 – least impacted by residential prices with a liquid balance
sheet. We reiterate our Buy on Indiabulls Real Estate Ltd (IBREL) with a PO of
Rs142, as the stock looks compelling from a risk-return perspective. We have
downgraded HDIL to Neutral with a PO of Rs175 given our expectation of delays in
redevelopment projects and unexciting cashflow in FY12.
Residential: A sense of déjà vu; 15-20% correction ahead
We expect a challenging six months with low volumes followed by a 15-20%
correction in prices. We are unlikely to see a steeper correction, which the stocks
are already factoring in, as the economy continues to do well while developers in
general are in better financial health unlike in 2008-09. A 15% correction in Mumbai
will bring the rise in property prices of the last six years in line with income growth.
Commercial: Recovery well entrenched
In Mumbai, we expect the commercial sector to outperform the residential in 2011
given the strong demand for office assets from financial and IT/ITeS sectors. Since
rentals in most micro markets in Mumbai continue to be at the lows of 2009 (25-
30% lower than the peak) the downside risk is also factored in. We believe supply
concerns are overdone and expect further delay in completions, due to a tighter
liquidity environment, to reduce vacancies to 10% (15% currently) by FY13.
Higher regulatory oversight to delay projects
The recent incidents of corruption in India have led to higher regulatory oversight,
leading to delays in approvals with the real estate sector bearing the brunt of it.
We believe the state government will be extra cautious in approving projects
which may look to favor any particular developer. HDIL is likely to be the worst
impacted due to delays in its flagship rehabilitation project at the airport.
Oberoi Realty: Best placed to benefit from slowdown
Oberoi’s top-notch corporate governance and strong NAV visibility make it a
benchmark developer to gain exposure to Mumbai real estate. Oberoi’s balanced
mix of assets with just 34% NAV contribution from residential makes it least
sensitive to residential prices. The correction in prices will offer Oberoi great
opportunity to deploy its Rs16bn of cash in land assets at reasonable valuation.
Risks: High inflation and interest rates, sub 7% GDP
The persistent high inflation leading to mortgage rates higher than 12% and sub
7 % GDP growth could lead to sharper than expected cut in residential prices.
Mumbai Resi: Poor affordability
We expect the residential segment to perform poorly over the next six months in
Mumbai given the high prices and general expectation among end-users of a
correction leading to deferment of purchases. Due to rising interest rates,
investors have also moved out of the market. But, we remain bullish on volume
post a 15-20% correction in the next six months because this would bring the
prices in most micro markets back to the peak of 2008, implying flattish prices for
the last four years. The prices then would have recorded 15% CAGR since 2005,
very much in line with income growth.
Dearth of ready supply
The dearth of supply has allowed developers to raise residential prices sharply in
Mumbai. The drop in price in 2009 led to absorption of most of the underconstruction
units. The new launches since 2H09 will be ready for delivery only by
2012-13 and even these projects saw very good absorption due to relatively
cheaper prices. Therefore most developers have very limited units available in
their under-construction projects coming up for delivery over the next 2-3 years.
So currently they are not hard pressed to cut prices to offload the inventory.
High land prices, limited supply
The limited supply of land in Mumbai is further putting pressure on prices. Thus,
land prices have consistently increased in the last 18 months as developers
flushed with funds from strong pre-sale were scouting for land. Most of the land
auctions have been fiercely contested in recent times. Also, most of the developers
in Mumbai have landbanks which will not last more than 3-4 years, while cost of
new land is substantially high, with limited supply. Oberoi, Peninsula, Indiabulls
have all struggled to ink good land deals though they were sitting on large funds.
Developers not overstretched like in 2008
Developers’ balance sheet is not stretched like in 2008, since not many
developers have invested extensively in land or commercial assets in the last 24
months. Also the short cycle of 18 months implied that developers have not yet
invested substantial capital in the construction of launched residential projects. As
far as restructured loans are concerned, the developers have managed to repay a
good amount of the same by raising fresh construction debt on new projects
launched in 2010.
Redevelopment: Gaining ground
Redevelopment projects have gained pace in the last 12 months as developers
look to redevelop old residential projects to get access to the otherwise scarce
land resource in Mumbai. The government’s push to redevelop older housing
societies by providing higher FSI has also helped the cause. The recent
relaxation of Coastal Regulation norms will further add to the pace of
redevelopment projects. But we believe we are still in the initial phases, and the
projects require 4-6 years to develop, with substantial initial investments.
Which micro markets are more vulnerable?
South Mumbai: The dearth of supply in the micro market will continue to keep
property prices high, though central Mumbai/Worli is trying to compete by offering
developments with best-in-class amenities at prices which are 30-40% lower. But
we believe South Mumbai will continue to remain the most-sought-after property
market in India for the next 4-5 years at least (Central Mumbai could pose a
challenge if the announced projects are delivered and infrastructure improves)
Central Mumbai – Lower Parel: The influx of oversized luxury apartments is a
bigger issue than the price itself in the micro market. While the market is abuzz
with supply, it has more to do with launch and not ready supply. Therefore, the
ready apartments will continue to command high prices while the underconstruction
projects will come under pressure. We expect prices to drop to
Rs20,000/sq ft from the current Rs25,000/sq ft and above in the near term.
Execution of the announced projects over the next 2-3 years would be a key
differentiator and determine the success of the project.
Western Suburbs: We expect the western suburbs to see a correction of around
10-20% as the region has seen a sharp increase in prices since 2009 while
supply remains adequate. The region is much preferred by the middle class and,
thus, demand is very strong. Any correction is expected to bring back volumes
strongly. We are bullish on the region given the improving infrastructure, availability
of better and larger office space, and residential complexes offering good facilities.
Central Suburbs: The central suburbs compete with the western suburbs but
have lagged behind in the past due to poor connectivity to South Mumbai and
poor infrastructure. But we expect the upcoming infrastructure in next 3-4 years
will lead to higher demand in the region. We there fore expects lower correction of
5-15% though supply particularly along the LBS Marg – Bhandup, Mulund, etc
remain high.
Mumbai outskirts: Locations like Panvel, Dombivili, and Virar are investordriven
markets and tend to perform well only when houses in the mainland
become unaffordable. Therefore, while currently these markets are doing well on
volume, we expect a sharper correction in these markets in the next 6-9 months
as investors’ focus shifts back to established markets.
Mumbai Office: Turning around
Office demand has steadily improved in the last 12 months across India, and
particularly in Mumbai, due to a revival in financial and IT/ ITeS businesses. But
due to strong supply matching the improving demand, the rentals and capital
values remain at the bottom in most of the micro markets. We expect demand to
remain strong over the next 12 months but new supply and current vacancies
would be sufficient to meet the rising demand. Therefore, rentals would continue
to remain stable at current levels, almost 25-30% lower than the peak of 2007.
We expect the demand-supply equation to change from 2012 in Mumbai with
demand expected to be higher than supply, leading to an increase in rentals in
some micro markets. (Bangalore should see the inflection this year itself due to a
shorter supply pipeline).
Supply being deferred but still sufficient
The expected office supply of about 30mn sq ft in Mumbai over the next three
years will take it past Bangalore in terms of total office stock. Even though
developers have continuously deferred new supply and delayed construction, the
supply continues to match growing demand, leading to persistent high vacancy
rates. The under-construction office space in Mumbai is ahead of even Bangalore
and the National Capital Region (NCR). Hence, we expect rental recovery in
Mumbai office to lag these markets. But the current tight liquidity and rising
interest rates would impact supply as developers further cut down cashflow
allocation to construction of commercial space.
Also the under-construction pipeline is getting shorter as developers have not been
launching new office projects in the last two years. We believe this will lead to
stabilization of rentals and capital values at current levels for the next 12-15 months,
except certain micro markets with limited supply which could see appreciation of 5-
15% – ie, the Central Business District (CBD) and Bandra Kurla Complex (BKC).
Rising demand on good economic growth
The demand for office space from financial institutions, IT/ITeS and small
entrepreneurs continue to rise on the back of strong economic growth. The
absorption is expected to average about 9-10mn sq ft annually over the next two
years, ahead of other cities like Bangalore/ NCR, to match the supply. Around
35% of the supply is expected in the outskirts – Navi Mumbai/Thane belt, catering
to IT/ITeS demand, which is expected to remain very strong as current rentals are
very competitive (rentals in Navi Mumbai/Thane belt is similar to rentals in Pune.
Thus companies prefer to be located in Mumbai rather than setting up in Pune).
Rentals: Unlikely to attain past glory
We believe the office segment is unlikely to attain the past glory in a hurry when
capital values for offices used to be 10-15% higher than residential. Residential is
expected to trade at a premium to office for another couple of years in most of the
micro markets due to the expected strong office-supply pipeline. The 10-30%
discount to residential prices is discouraging developers from committing to new
office development. In the last 12 months, all the new land purchases have been
earmarked for residential development, and this we believe will bode well for the
appreciation of office rentals from 2012-13.
Micro market analysis
Nariman Point: The CBD, with no significant supply and lack of Grade A facility,
is losing its previous sheen as large financial institutions are shifting their base to
BKC/ Lower Parel and other suburban locations for want of better facilities and
cost savings. But rentals are expected to increase by 5-6% due to very low supply
and improved demand from existing tenants.
Central Mumbai - Lower Parel: The location will continue to see oversupply for
the next two years and the rentals are expected to remain at Rs150-170/sq ft.
Even after many developers converted their planned office projects into
residential, the under-construction projects will almost double the office stock in
the next three years. Also, the vacancy levels are expected to increase from
around 20% currently to over 25% in 2011. Some of the key projects in advance
stages of construction include those by Indiabulls Real Estate, Peninsula
Developers, Marathon, Kohinoor and Lodha.
Bandra Kurla Complex: The micro market has been the favorite among
financial institutions, offering among the best infrastructure and connectivity in
Mumbai. Due to low vacancy and limited supply, we expect BKC to see the
highest rental appreciation in Mumbai office space, of 7-10%, in 2011.
Suburbs: The suburban locations include Andheri, Malad, Goregaon, Powai and
Kurla primarily. The suburbs offer a cheaper alternative to CBDs and have rentals
ranging from Rs60-120/sq ft and are mostly preferred by financial institutions like
banks and insurance companies, SMEs and companies related to other sectors
like telecom, and consumer. These areas continue to see good supply but
selectively have started seeing appreciation in rentals in locations around
Andheri-Kurla Road while other locations have seen good leasing.
Navi Mumbai/Thane: The Navi Mumbai/ Thane micro market primarily caters to
the IT/ITeS industry and with rentals at Rs30-35/sq ft gives good competition to
the Pune office market. These micro markets have a strongest pipeline of 10mn
sq ft of supply, though we believe the supply will be mostly dependent on demand
and unlikely to put pressure on rentals. Therefore, even though demand for
IT/ITeS space has moved up sharply, rentals are expected to remain at the
current levels of Rs30-33/sq ft/month.
Mumbai Retail: Rational growth
Mumbai has a large presence of malls and is second only to NCR in terms of mall
development. Some of the most successful malls in India are located in the city –
Phoenix Mills, Lower Parel, Inorbit and Oberoi Mall in Goregaon. The demand for
retail space has been very buoyant and has steadily grown in 2010, but retailers
have been more rational and selective in their expansion plans unlike 2006-07.
Natural correction in supply underway
We expect the under-construction supply to be phased out over next 3-4 years,
with 2-3mn sq ft of deliveries annually. Developers have slowed construction
wherever demand for leasing is low. Most of the developers have stretched the
construction period for the malls from 3-4 years to over five years. Only those
malls which have seen leasing upwards of 65-70% are being commissioned while
no new malls have been launched by any developer since the last two years.
Some of the large malls from reputed developers, like DLF, Indiabulls, DB Realty,
have been converted to residential in South Mumbai – leading to limited choices
for retailers in South Mumbai.
Rentals to increase selectively
But the upcoming supply may not necessary imply stable rentals. We expect
successful malls will continue to see appreciation in rentals of 7-10% annually,
especially for the vanilla stores. Some of these malls became operational in the last
two years at rock-bottom rentals and, thus, would see appreciation once the leases
come up for renewals in the next 12-24 months. We expect average rentals for
successful operational malls to be upwards of 15-20% over the next two years.
The new malls may take another couple of years to stabilize and, therefore, would
continue to see soft rentals – especially from anchor tenants in particular, since
only a limited number of large-format retailers operate in India currently.
Physical market outlook
In consolidation phase
In the next couple pages, we present our views and outlook on the movement in
property prices and rents in India. We include all major product types (residential,
commercial, and retail) in this section. We have covered the 10 most important
geographical clusters, which help to convey a comprehensive view on the
physical real estate market in India.
The commentary on observed trends and our outlook are based on a
comprehensive investigation, which includes multiple site visits and discussions
with property consultants and agents, brokers, and company sales personnel.
The key takeaways are as follows.
Residential property: Heading for some rough weather
We expect residential property to face some rough weather heading into 2011,
due to the high residential prices (Mumbai and Gurgaon) while rising mortgage
rates will also deter the decision to buy property.
In 2010, we saw sharp increase in property prices in Mumbai and NCR (Gurgaon
in particular), surpassing the previous peaks reached in 2007-08. This has led to
a slowdown in sales volume, particularly in Mumbai. Also, 2010 saw a clear shift
of focus among developers from the high-volume low-margin mid-income
segment to low-volume high-margin luxury housing. Also the Reserve Bank of
India’s (RBI) clampdown on teaser-rate loans and the higher provisioning for
large ticket loans has led to an increase in mortgage rates from the low of 8% to
9.5-10%. All the above factors have led to slowdown in offtake of residential units
in two of the large markets – Mumbai and NCR.
We believe 2011 will see a consolidation with residential prices remaining soft in
Mumbai and Gurgaon (could see a correction of 15-20% in some overheated
micro markets) with a modest flat to 5% increase expected in other markets –
Bangalore, Noida. The demand for housing remains strong on the back of strong
GDP growth and rising income levels. We believe any correction in prices will see
a sharp rebound in volume in Mumbai in particular.
In our view, Bangalore and Noida will outperform other markets in terms of volume
and price as both have seen a modest increases in 2010 and residential prices are
very affordable. Also, the strong IT/ITeS sector augers well for both markets.
Commercial property: Revival underway
The IT/ITeS sector accounts for 70-75% of commercial property demand.
Financial services in Mumbai and Delhi make up the bulk of the rest. Rents fell
dramatically from late 2007 to 1H09, driven by the broader economic downturn,
specifically in the financial services and IT/ITeS sectors.
Our channel checks suggest continued strong hiring in major cities such as
Mumbai, Delhi/ NCR and Bangalore. We believe the expectation of strong GDP
and IT/ITeS sector growth will lead to a record leasing of office space in 2011 of
over 35-38mn sq ft, and growth of over 20-25% compared to 2010. Though
supply of upcoming/half-finished commercial buildings is likely to cap rents for the
next 6-9 months, these may start inching up by the end of 2011, particularly in
Bangalore. Some of the CBD locations have already seen a modest rental
increase of 3-7% in the last three months and we expect the trend to gain
strength through 2011.
While supply remains a concern, the pipeline is getting shorter as incremental
launches are lower. This would imply a strong rebound in rentals in 2012,
provided that IT/ITeS growth continues to remain strong.
Retail property: Some rays of hope
Massive store roll-out plans by domestic and foreign retailers led to a flurry of
supply in 2005-07. However, it also led to skyrocketing of rentals till supply
actually hit the market. The market, therefore, saw rents fall dramatically, driven
by a high-base effect, oversupply, and the downturn in the economy. As retailers
move back into expansion mode, we are seeing volumes pick up in some areas
such as Mumbai and select micro markets.
Rents have stabilized in most of the markets with some of the large malls lined up
to open in 2011. The well-designed and managed malls are running on very low
vacancies and may even start seeing an increase in rentals for new leases that
come up for renewals. We expect a large supply of malls in cities other than
Mumbai and NCR where there are still few malls. The performance of these malls
will lay the stepping stone for further expansion and demand for retail malls,
particularly in locations other than Mumbai and NCR which account for over 70%
of the mall space in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mumbai realty: Opportunities seen post sell out
Mumbai realty: Be conservative, stick to quality
We see opportunities emerging post a sharp sell out since Nov 2010, particularly
in Mumbai-based developers. We initiate coverage on Oberoi with a Buy rating
and PO of Rs290 – least impacted by residential prices with a liquid balance
sheet. We reiterate our Buy on Indiabulls Real Estate Ltd (IBREL) with a PO of
Rs142, as the stock looks compelling from a risk-return perspective. We have
downgraded HDIL to Neutral with a PO of Rs175 given our expectation of delays in
redevelopment projects and unexciting cashflow in FY12.
Residential: A sense of déjà vu; 15-20% correction ahead
We expect a challenging six months with low volumes followed by a 15-20%
correction in prices. We are unlikely to see a steeper correction, which the stocks
are already factoring in, as the economy continues to do well while developers in
general are in better financial health unlike in 2008-09. A 15% correction in Mumbai
will bring the rise in property prices of the last six years in line with income growth.
Commercial: Recovery well entrenched
In Mumbai, we expect the commercial sector to outperform the residential in 2011
given the strong demand for office assets from financial and IT/ITeS sectors. Since
rentals in most micro markets in Mumbai continue to be at the lows of 2009 (25-
30% lower than the peak) the downside risk is also factored in. We believe supply
concerns are overdone and expect further delay in completions, due to a tighter
liquidity environment, to reduce vacancies to 10% (15% currently) by FY13.
Higher regulatory oversight to delay projects
The recent incidents of corruption in India have led to higher regulatory oversight,
leading to delays in approvals with the real estate sector bearing the brunt of it.
We believe the state government will be extra cautious in approving projects
which may look to favor any particular developer. HDIL is likely to be the worst
impacted due to delays in its flagship rehabilitation project at the airport.
Oberoi Realty: Best placed to benefit from slowdown
Oberoi’s top-notch corporate governance and strong NAV visibility make it a
benchmark developer to gain exposure to Mumbai real estate. Oberoi’s balanced
mix of assets with just 34% NAV contribution from residential makes it least
sensitive to residential prices. The correction in prices will offer Oberoi great
opportunity to deploy its Rs16bn of cash in land assets at reasonable valuation.
Risks: High inflation and interest rates, sub 7% GDP
The persistent high inflation leading to mortgage rates higher than 12% and sub
7 % GDP growth could lead to sharper than expected cut in residential prices.
Mumbai Resi: Poor affordability
We expect the residential segment to perform poorly over the next six months in
Mumbai given the high prices and general expectation among end-users of a
correction leading to deferment of purchases. Due to rising interest rates,
investors have also moved out of the market. But, we remain bullish on volume
post a 15-20% correction in the next six months because this would bring the
prices in most micro markets back to the peak of 2008, implying flattish prices for
the last four years. The prices then would have recorded 15% CAGR since 2005,
very much in line with income growth.
Dearth of ready supply
The dearth of supply has allowed developers to raise residential prices sharply in
Mumbai. The drop in price in 2009 led to absorption of most of the underconstruction
units. The new launches since 2H09 will be ready for delivery only by
2012-13 and even these projects saw very good absorption due to relatively
cheaper prices. Therefore most developers have very limited units available in
their under-construction projects coming up for delivery over the next 2-3 years.
So currently they are not hard pressed to cut prices to offload the inventory.
High land prices, limited supply
The limited supply of land in Mumbai is further putting pressure on prices. Thus,
land prices have consistently increased in the last 18 months as developers
flushed with funds from strong pre-sale were scouting for land. Most of the land
auctions have been fiercely contested in recent times. Also, most of the developers
in Mumbai have landbanks which will not last more than 3-4 years, while cost of
new land is substantially high, with limited supply. Oberoi, Peninsula, Indiabulls
have all struggled to ink good land deals though they were sitting on large funds.
Developers not overstretched like in 2008
Developers’ balance sheet is not stretched like in 2008, since not many
developers have invested extensively in land or commercial assets in the last 24
months. Also the short cycle of 18 months implied that developers have not yet
invested substantial capital in the construction of launched residential projects. As
far as restructured loans are concerned, the developers have managed to repay a
good amount of the same by raising fresh construction debt on new projects
launched in 2010.
Redevelopment: Gaining ground
Redevelopment projects have gained pace in the last 12 months as developers
look to redevelop old residential projects to get access to the otherwise scarce
land resource in Mumbai. The government’s push to redevelop older housing
societies by providing higher FSI has also helped the cause. The recent
relaxation of Coastal Regulation norms will further add to the pace of
redevelopment projects. But we believe we are still in the initial phases, and the
projects require 4-6 years to develop, with substantial initial investments.
Which micro markets are more vulnerable?
South Mumbai: The dearth of supply in the micro market will continue to keep
property prices high, though central Mumbai/Worli is trying to compete by offering
developments with best-in-class amenities at prices which are 30-40% lower. But
we believe South Mumbai will continue to remain the most-sought-after property
market in India for the next 4-5 years at least (Central Mumbai could pose a
challenge if the announced projects are delivered and infrastructure improves)
Central Mumbai – Lower Parel: The influx of oversized luxury apartments is a
bigger issue than the price itself in the micro market. While the market is abuzz
with supply, it has more to do with launch and not ready supply. Therefore, the
ready apartments will continue to command high prices while the underconstruction
projects will come under pressure. We expect prices to drop to
Rs20,000/sq ft from the current Rs25,000/sq ft and above in the near term.
Execution of the announced projects over the next 2-3 years would be a key
differentiator and determine the success of the project.
Western Suburbs: We expect the western suburbs to see a correction of around
10-20% as the region has seen a sharp increase in prices since 2009 while
supply remains adequate. The region is much preferred by the middle class and,
thus, demand is very strong. Any correction is expected to bring back volumes
strongly. We are bullish on the region given the improving infrastructure, availability
of better and larger office space, and residential complexes offering good facilities.
Central Suburbs: The central suburbs compete with the western suburbs but
have lagged behind in the past due to poor connectivity to South Mumbai and
poor infrastructure. But we expect the upcoming infrastructure in next 3-4 years
will lead to higher demand in the region. We there fore expects lower correction of
5-15% though supply particularly along the LBS Marg – Bhandup, Mulund, etc
remain high.
Mumbai outskirts: Locations like Panvel, Dombivili, and Virar are investordriven
markets and tend to perform well only when houses in the mainland
become unaffordable. Therefore, while currently these markets are doing well on
volume, we expect a sharper correction in these markets in the next 6-9 months
as investors’ focus shifts back to established markets.
Mumbai Office: Turning around
Office demand has steadily improved in the last 12 months across India, and
particularly in Mumbai, due to a revival in financial and IT/ ITeS businesses. But
due to strong supply matching the improving demand, the rentals and capital
values remain at the bottom in most of the micro markets. We expect demand to
remain strong over the next 12 months but new supply and current vacancies
would be sufficient to meet the rising demand. Therefore, rentals would continue
to remain stable at current levels, almost 25-30% lower than the peak of 2007.
We expect the demand-supply equation to change from 2012 in Mumbai with
demand expected to be higher than supply, leading to an increase in rentals in
some micro markets. (Bangalore should see the inflection this year itself due to a
shorter supply pipeline).
Supply being deferred but still sufficient
The expected office supply of about 30mn sq ft in Mumbai over the next three
years will take it past Bangalore in terms of total office stock. Even though
developers have continuously deferred new supply and delayed construction, the
supply continues to match growing demand, leading to persistent high vacancy
rates. The under-construction office space in Mumbai is ahead of even Bangalore
and the National Capital Region (NCR). Hence, we expect rental recovery in
Mumbai office to lag these markets. But the current tight liquidity and rising
interest rates would impact supply as developers further cut down cashflow
allocation to construction of commercial space.
Also the under-construction pipeline is getting shorter as developers have not been
launching new office projects in the last two years. We believe this will lead to
stabilization of rentals and capital values at current levels for the next 12-15 months,
except certain micro markets with limited supply which could see appreciation of 5-
15% – ie, the Central Business District (CBD) and Bandra Kurla Complex (BKC).
Rising demand on good economic growth
The demand for office space from financial institutions, IT/ITeS and small
entrepreneurs continue to rise on the back of strong economic growth. The
absorption is expected to average about 9-10mn sq ft annually over the next two
years, ahead of other cities like Bangalore/ NCR, to match the supply. Around
35% of the supply is expected in the outskirts – Navi Mumbai/Thane belt, catering
to IT/ITeS demand, which is expected to remain very strong as current rentals are
very competitive (rentals in Navi Mumbai/Thane belt is similar to rentals in Pune.
Thus companies prefer to be located in Mumbai rather than setting up in Pune).
Rentals: Unlikely to attain past glory
We believe the office segment is unlikely to attain the past glory in a hurry when
capital values for offices used to be 10-15% higher than residential. Residential is
expected to trade at a premium to office for another couple of years in most of the
micro markets due to the expected strong office-supply pipeline. The 10-30%
discount to residential prices is discouraging developers from committing to new
office development. In the last 12 months, all the new land purchases have been
earmarked for residential development, and this we believe will bode well for the
appreciation of office rentals from 2012-13.
Micro market analysis
Nariman Point: The CBD, with no significant supply and lack of Grade A facility,
is losing its previous sheen as large financial institutions are shifting their base to
BKC/ Lower Parel and other suburban locations for want of better facilities and
cost savings. But rentals are expected to increase by 5-6% due to very low supply
and improved demand from existing tenants.
Central Mumbai - Lower Parel: The location will continue to see oversupply for
the next two years and the rentals are expected to remain at Rs150-170/sq ft.
Even after many developers converted their planned office projects into
residential, the under-construction projects will almost double the office stock in
the next three years. Also, the vacancy levels are expected to increase from
around 20% currently to over 25% in 2011. Some of the key projects in advance
stages of construction include those by Indiabulls Real Estate, Peninsula
Developers, Marathon, Kohinoor and Lodha.
Bandra Kurla Complex: The micro market has been the favorite among
financial institutions, offering among the best infrastructure and connectivity in
Mumbai. Due to low vacancy and limited supply, we expect BKC to see the
highest rental appreciation in Mumbai office space, of 7-10%, in 2011.
Suburbs: The suburban locations include Andheri, Malad, Goregaon, Powai and
Kurla primarily. The suburbs offer a cheaper alternative to CBDs and have rentals
ranging from Rs60-120/sq ft and are mostly preferred by financial institutions like
banks and insurance companies, SMEs and companies related to other sectors
like telecom, and consumer. These areas continue to see good supply but
selectively have started seeing appreciation in rentals in locations around
Andheri-Kurla Road while other locations have seen good leasing.
Navi Mumbai/Thane: The Navi Mumbai/ Thane micro market primarily caters to
the IT/ITeS industry and with rentals at Rs30-35/sq ft gives good competition to
the Pune office market. These micro markets have a strongest pipeline of 10mn
sq ft of supply, though we believe the supply will be mostly dependent on demand
and unlikely to put pressure on rentals. Therefore, even though demand for
IT/ITeS space has moved up sharply, rentals are expected to remain at the
current levels of Rs30-33/sq ft/month.
Mumbai Retail: Rational growth
Mumbai has a large presence of malls and is second only to NCR in terms of mall
development. Some of the most successful malls in India are located in the city –
Phoenix Mills, Lower Parel, Inorbit and Oberoi Mall in Goregaon. The demand for
retail space has been very buoyant and has steadily grown in 2010, but retailers
have been more rational and selective in their expansion plans unlike 2006-07.
Natural correction in supply underway
We expect the under-construction supply to be phased out over next 3-4 years,
with 2-3mn sq ft of deliveries annually. Developers have slowed construction
wherever demand for leasing is low. Most of the developers have stretched the
construction period for the malls from 3-4 years to over five years. Only those
malls which have seen leasing upwards of 65-70% are being commissioned while
no new malls have been launched by any developer since the last two years.
Some of the large malls from reputed developers, like DLF, Indiabulls, DB Realty,
have been converted to residential in South Mumbai – leading to limited choices
for retailers in South Mumbai.
Rentals to increase selectively
But the upcoming supply may not necessary imply stable rentals. We expect
successful malls will continue to see appreciation in rentals of 7-10% annually,
especially for the vanilla stores. Some of these malls became operational in the last
two years at rock-bottom rentals and, thus, would see appreciation once the leases
come up for renewals in the next 12-24 months. We expect average rentals for
successful operational malls to be upwards of 15-20% over the next two years.
The new malls may take another couple of years to stabilize and, therefore, would
continue to see soft rentals – especially from anchor tenants in particular, since
only a limited number of large-format retailers operate in India currently.
Physical market outlook
In consolidation phase
In the next couple pages, we present our views and outlook on the movement in
property prices and rents in India. We include all major product types (residential,
commercial, and retail) in this section. We have covered the 10 most important
geographical clusters, which help to convey a comprehensive view on the
physical real estate market in India.
The commentary on observed trends and our outlook are based on a
comprehensive investigation, which includes multiple site visits and discussions
with property consultants and agents, brokers, and company sales personnel.
The key takeaways are as follows.
Residential property: Heading for some rough weather
We expect residential property to face some rough weather heading into 2011,
due to the high residential prices (Mumbai and Gurgaon) while rising mortgage
rates will also deter the decision to buy property.
In 2010, we saw sharp increase in property prices in Mumbai and NCR (Gurgaon
in particular), surpassing the previous peaks reached in 2007-08. This has led to
a slowdown in sales volume, particularly in Mumbai. Also, 2010 saw a clear shift
of focus among developers from the high-volume low-margin mid-income
segment to low-volume high-margin luxury housing. Also the Reserve Bank of
India’s (RBI) clampdown on teaser-rate loans and the higher provisioning for
large ticket loans has led to an increase in mortgage rates from the low of 8% to
9.5-10%. All the above factors have led to slowdown in offtake of residential units
in two of the large markets – Mumbai and NCR.
We believe 2011 will see a consolidation with residential prices remaining soft in
Mumbai and Gurgaon (could see a correction of 15-20% in some overheated
micro markets) with a modest flat to 5% increase expected in other markets –
Bangalore, Noida. The demand for housing remains strong on the back of strong
GDP growth and rising income levels. We believe any correction in prices will see
a sharp rebound in volume in Mumbai in particular.
In our view, Bangalore and Noida will outperform other markets in terms of volume
and price as both have seen a modest increases in 2010 and residential prices are
very affordable. Also, the strong IT/ITeS sector augers well for both markets.
Commercial property: Revival underway
The IT/ITeS sector accounts for 70-75% of commercial property demand.
Financial services in Mumbai and Delhi make up the bulk of the rest. Rents fell
dramatically from late 2007 to 1H09, driven by the broader economic downturn,
specifically in the financial services and IT/ITeS sectors.
Our channel checks suggest continued strong hiring in major cities such as
Mumbai, Delhi/ NCR and Bangalore. We believe the expectation of strong GDP
and IT/ITeS sector growth will lead to a record leasing of office space in 2011 of
over 35-38mn sq ft, and growth of over 20-25% compared to 2010. Though
supply of upcoming/half-finished commercial buildings is likely to cap rents for the
next 6-9 months, these may start inching up by the end of 2011, particularly in
Bangalore. Some of the CBD locations have already seen a modest rental
increase of 3-7% in the last three months and we expect the trend to gain
strength through 2011.
While supply remains a concern, the pipeline is getting shorter as incremental
launches are lower. This would imply a strong rebound in rentals in 2012,
provided that IT/ITeS growth continues to remain strong.
Retail property: Some rays of hope
Massive store roll-out plans by domestic and foreign retailers led to a flurry of
supply in 2005-07. However, it also led to skyrocketing of rentals till supply
actually hit the market. The market, therefore, saw rents fall dramatically, driven
by a high-base effect, oversupply, and the downturn in the economy. As retailers
move back into expansion mode, we are seeing volumes pick up in some areas
such as Mumbai and select micro markets.
Rents have stabilized in most of the markets with some of the large malls lined up
to open in 2011. The well-designed and managed malls are running on very low
vacancies and may even start seeing an increase in rentals for new leases that
come up for renewals. We expect a large supply of malls in cities other than
Mumbai and NCR where there are still few malls. The performance of these malls
will lay the stepping stone for further expansion and demand for retail malls,
particularly in locations other than Mumbai and NCR which account for over 70%
of the mall space in India.
No comments:
Post a Comment