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While sector fundamentals remain weak, we see limited downside as Property stocks now
trade at 50-60% discount to NAV and at low P/B of 0.4-0.7x (DLF at 1.3x) compared to
historical high of 4-6x. While positive newsflow (wage hikes, hiring, etc) have started, we
await more such triggers to upgrade the sector
While fundamentals remain weak...
In our view, the property sector continues to face headwinds. Sales volumes have been
under pressure due to the rapid rise in property prices (which continue to affect
affordability), rising inflation and higher mortgage rates. Sales volumes in Mumbai
declined 34% yoy during 4QCY10 largely due to 50% increase in property prices. Sales
volume in Gurgaon and Bangalore were also muted during the above period. Our
channel checks suggest that the status quo has prevailed in these three key cities in
CY11 YTD, though prices have started to come off their peak in Mumbai. While the
mortgage rate firming up (175bp increase since Jan 2010) is in line with our expectations
amid tightening monetary policy, affordability has deteriorated as prices have risen more
than annual incomes. Moreover, channel checks and press reports suggest that
developers are finding it difficult to access credit with banks turning cautious towards the
property sector.
...the sector appears to be bottoming out, in our view
We highlight that the BSE Realty Index has underperformed the Sensex by 16% and
34% in the last 3M and 6M respectively. We believe that besides affordability and
tightening liquidity issues, negative newsflow on bribery for loan scam, few developers
getting linked to the Telecom license scam, etc have also proved to be a large dampener.
That said, with stocks trading at 50-60% discounts to NAV (except DLF at 9%) and at P/B
of 0.4-0.7x (DLF at 1.3x) compared to historical high multiples of 4-6x, we see little
downside from current levels.
We await positive triggers to upgrade the sector
We believe that the key positive triggers for the sector are robust and sustainable uptick
in sales led by a reduction in property prices, debt reduction by asset monetization or
equity dilution, favorable Government policy, etc. We highlight that positive catalysts like
surveys expecting salary increments and hiring as well as property price correction in certain
over-heated markets have started. Various surveys peg the expected wage hike this year at
13% as against expected inflation (CPI) average of 9.5%, implying real wage growth of 3.5%.
A recent report by JLL states that Mumbai home prices have declined 20% from their 2010
peak to woo buyers as sales volumes have declined significantly. Thus, while we have started
witnessing postive newsflow of wage hikes (creating surplus post inflationary adjustments),
hiring and decline in property price (not enough though), we await for more such positive
triggers (sales volumes pick-up, mortgage rate cycle reversal, etc) to upgrade the sector.
We maintain Buy on HDIL & IBREL and Sell on DLF
We maintain our Buy rating on HDIL (play on redevelopment in Mumbai and focus on
affordable housing) and IBREL (attractive valuations and low leverage). While Unitech
appears attractive on valuations and we foresee limited downside, possibility of indictment in
the ongoing telecom investigations remains an overhang on the stock. We maintain our Sell
on DLF on low asset churn and high debt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
While sector fundamentals remain weak, we see limited downside as Property stocks now
trade at 50-60% discount to NAV and at low P/B of 0.4-0.7x (DLF at 1.3x) compared to
historical high of 4-6x. While positive newsflow (wage hikes, hiring, etc) have started, we
await more such triggers to upgrade the sector
While fundamentals remain weak...
In our view, the property sector continues to face headwinds. Sales volumes have been
under pressure due to the rapid rise in property prices (which continue to affect
affordability), rising inflation and higher mortgage rates. Sales volumes in Mumbai
declined 34% yoy during 4QCY10 largely due to 50% increase in property prices. Sales
volume in Gurgaon and Bangalore were also muted during the above period. Our
channel checks suggest that the status quo has prevailed in these three key cities in
CY11 YTD, though prices have started to come off their peak in Mumbai. While the
mortgage rate firming up (175bp increase since Jan 2010) is in line with our expectations
amid tightening monetary policy, affordability has deteriorated as prices have risen more
than annual incomes. Moreover, channel checks and press reports suggest that
developers are finding it difficult to access credit with banks turning cautious towards the
property sector.
...the sector appears to be bottoming out, in our view
We highlight that the BSE Realty Index has underperformed the Sensex by 16% and
34% in the last 3M and 6M respectively. We believe that besides affordability and
tightening liquidity issues, negative newsflow on bribery for loan scam, few developers
getting linked to the Telecom license scam, etc have also proved to be a large dampener.
That said, with stocks trading at 50-60% discounts to NAV (except DLF at 9%) and at P/B
of 0.4-0.7x (DLF at 1.3x) compared to historical high multiples of 4-6x, we see little
downside from current levels.
We await positive triggers to upgrade the sector
We believe that the key positive triggers for the sector are robust and sustainable uptick
in sales led by a reduction in property prices, debt reduction by asset monetization or
equity dilution, favorable Government policy, etc. We highlight that positive catalysts like
surveys expecting salary increments and hiring as well as property price correction in certain
over-heated markets have started. Various surveys peg the expected wage hike this year at
13% as against expected inflation (CPI) average of 9.5%, implying real wage growth of 3.5%.
A recent report by JLL states that Mumbai home prices have declined 20% from their 2010
peak to woo buyers as sales volumes have declined significantly. Thus, while we have started
witnessing postive newsflow of wage hikes (creating surplus post inflationary adjustments),
hiring and decline in property price (not enough though), we await for more such positive
triggers (sales volumes pick-up, mortgage rate cycle reversal, etc) to upgrade the sector.
We maintain Buy on HDIL & IBREL and Sell on DLF
We maintain our Buy rating on HDIL (play on redevelopment in Mumbai and focus on
affordable housing) and IBREL (attractive valuations and low leverage). While Unitech
appears attractive on valuations and we foresee limited downside, possibility of indictment in
the ongoing telecom investigations remains an overhang on the stock. We maintain our Sell
on DLF on low asset churn and high debt.
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