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India: Real Estate Developers
Equity Research
Feet on the Street: No respite from price hikes in Mumbai
Moderate price rises over the last six months
We visited the bi-annual property exhibition showcasing the properties of
more than 50 developers. Key takeaways on pricing include: (1) Marginal
price hikes of 5%-10% over the past six months, (2) largest price increases
have taken place in eastern suburbs (Thane, Mulund, Ghatkopar), (3) the
western suburbs and South Mumbai have seen flat pricing on increased
launches, and (4) on average, Mumbai pricing is about 15% above the highs
reached in early CY08, with higher price appreciation in the suburbs. We see
these price increases as unsustainable and expect reduced demand at these
prices. Rising prices have led to a sharp decline in affordability (Exhibit 3)
and we believe price cuts of as much as 15% are needed to drive demand.
Large number of planned launches being showcased
We see various pressures that should lead to a price correction. (1) Most
developers are showcasing planned products to be launched for
construction over next 12 months. Most of these developers were offering
the option of large upfront payments with an implied IRR discount of over
20%, indicating funding pressure (Exhibit 4). (2) Most developers offering
ready flats indicated difficulty in selling completed apartments at current
prices, but unlike in 2008, were unwilling to negotiate terms meaningfully.
Increased aggression by mortgage providers
We saw strong competition from mortgage providers, as indicated by all
top six exhibition partners being mortgage providers. Most were offering
mortgage rates of 9.5% for loans less than Rs7.5 mn and 9.75% for higher
loans. HDFC was offering loans at 25 bp higher rates while LIC Housing
Finance was offering various home loan structures. Mortgagers were
willing to double as property agents in order to facilitate loans.
We prefer developers who are willing to push volumes
We believe that developers quoting 10%-15% lower pricing will be the key
beneficiaries of the current pricing environment. Rational pricing would
help generate volumes and help gain market share while the overall high
pricing environment should result in healthy margins. We like the strategy
of HDIL selling various projects at 10%-20% discounts and Oberoi realty
launching Phase-II of an ongoing project (Exquisite) at a 13% discount. We
are modeling FY12E pricing at a 10%-20% discount to current prevalent
pricing. Our estimates for Oberoi realty and HDIL are unchanged.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Real Estate Developers
Equity Research
Feet on the Street: No respite from price hikes in Mumbai
Moderate price rises over the last six months
We visited the bi-annual property exhibition showcasing the properties of
more than 50 developers. Key takeaways on pricing include: (1) Marginal
price hikes of 5%-10% over the past six months, (2) largest price increases
have taken place in eastern suburbs (Thane, Mulund, Ghatkopar), (3) the
western suburbs and South Mumbai have seen flat pricing on increased
launches, and (4) on average, Mumbai pricing is about 15% above the highs
reached in early CY08, with higher price appreciation in the suburbs. We see
these price increases as unsustainable and expect reduced demand at these
prices. Rising prices have led to a sharp decline in affordability (Exhibit 3)
and we believe price cuts of as much as 15% are needed to drive demand.
Large number of planned launches being showcased
We see various pressures that should lead to a price correction. (1) Most
developers are showcasing planned products to be launched for
construction over next 12 months. Most of these developers were offering
the option of large upfront payments with an implied IRR discount of over
20%, indicating funding pressure (Exhibit 4). (2) Most developers offering
ready flats indicated difficulty in selling completed apartments at current
prices, but unlike in 2008, were unwilling to negotiate terms meaningfully.
Increased aggression by mortgage providers
We saw strong competition from mortgage providers, as indicated by all
top six exhibition partners being mortgage providers. Most were offering
mortgage rates of 9.5% for loans less than Rs7.5 mn and 9.75% for higher
loans. HDFC was offering loans at 25 bp higher rates while LIC Housing
Finance was offering various home loan structures. Mortgagers were
willing to double as property agents in order to facilitate loans.
We prefer developers who are willing to push volumes
We believe that developers quoting 10%-15% lower pricing will be the key
beneficiaries of the current pricing environment. Rational pricing would
help generate volumes and help gain market share while the overall high
pricing environment should result in healthy margins. We like the strategy
of HDIL selling various projects at 10%-20% discounts and Oberoi realty
launching Phase-II of an ongoing project (Exquisite) at a 13% discount. We
are modeling FY12E pricing at a 10%-20% discount to current prevalent
pricing. Our estimates for Oberoi realty and HDIL are unchanged.
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