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PropEquity data suggests a recovery in sales volumes in CY11 ytd. But our channel checks
suggest this is speculator driven and not sustainable as home buyer sentiment remains weak.
Developers are resorting to costly NCDs from NBFCs as banks are restricting funding. This could
add to pressure on earnings.
PropEquity data suggests recovery in property sales volumes…
Data from PropEquity (which collates data through primary and secondary research) suggests
that property demand saw a strong revival in January-February 2011 (1Q11 qtd). The Gurgaon
property market stood out with impressive average monthly sales of 3,135 units in 1Q11 qtd (58%
yoy) and a rise in the average absorption rate (units sold/units available) to 12% compared to
average 11% for CY10. The average sales volume in Bangalore increased 24% yoy to about
2,400 units driven by steady demand from the IT/ITES sectors and flat property prices. The
absorption rate in Mumbai declined by 1ppt to 8% qoq during 1Q CY11, but sales volume grew
15% yoy due to a low base. Also, the new launch volumes across these cities declined 27-82%
qoq, which supported property prices.
… but channel checks points to speculators: developer funding still concerns us
We are surprised with the reported sales volume uptick as property prices remain close to
historical peaks and mortgage rates are increasing. Our channel checks suggest that rising
speculative demand (encouraged by the low down payments), especially in tier-2 cities, such as
Gurgaon, could be boosting sales volumes which we believe is not sustainable. We believe that
the sentiment of genuine home buyers remains weak and are holding back on purchases in
anticipation of a 15-20% price correction. Access to bank credit for the scam-hit property sector
remains a concern with channel checks suggesting that developers are accessing costlier (16-
20% pa) funds from non-banking financial companies (NBFC) and by resorting to structured
private equity deals. Thus, while we do not foresee bankruptcy risks, we expect high debt costs to
depress real estate sector earnings.
False optimism – we remain cautious on the sector: Sell DLF
We remain cautious and consider the recent share-price rally (with the BSE Realty Index up 24%
vs the Sensex up 8% over the past month) as a false positive given our view that buyer sentiment
remains weak (and is thus not converting into sales volumes) and developers are resorting to
costly funds with banks unwilling to provide further funds. On our estimates, the stocks in our
coverage trade at 37-47% discounts (Table 9) to their NAVs (except DLF, which trades at a 10%
premium) similar to the 42% discount for their Chinese peers under RBS coverage (Table 8). We
maintain our Buy ratings on HDIL (which we see as a play on redevelopment in Mumbai) and
IBREL (which we find attractive for its valuations and low leverage). We maintain our Sell on DLF,
given its low asset churn and high debt levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PropEquity data suggests a recovery in sales volumes in CY11 ytd. But our channel checks
suggest this is speculator driven and not sustainable as home buyer sentiment remains weak.
Developers are resorting to costly NCDs from NBFCs as banks are restricting funding. This could
add to pressure on earnings.
PropEquity data suggests recovery in property sales volumes…
Data from PropEquity (which collates data through primary and secondary research) suggests
that property demand saw a strong revival in January-February 2011 (1Q11 qtd). The Gurgaon
property market stood out with impressive average monthly sales of 3,135 units in 1Q11 qtd (58%
yoy) and a rise in the average absorption rate (units sold/units available) to 12% compared to
average 11% for CY10. The average sales volume in Bangalore increased 24% yoy to about
2,400 units driven by steady demand from the IT/ITES sectors and flat property prices. The
absorption rate in Mumbai declined by 1ppt to 8% qoq during 1Q CY11, but sales volume grew
15% yoy due to a low base. Also, the new launch volumes across these cities declined 27-82%
qoq, which supported property prices.
… but channel checks points to speculators: developer funding still concerns us
We are surprised with the reported sales volume uptick as property prices remain close to
historical peaks and mortgage rates are increasing. Our channel checks suggest that rising
speculative demand (encouraged by the low down payments), especially in tier-2 cities, such as
Gurgaon, could be boosting sales volumes which we believe is not sustainable. We believe that
the sentiment of genuine home buyers remains weak and are holding back on purchases in
anticipation of a 15-20% price correction. Access to bank credit for the scam-hit property sector
remains a concern with channel checks suggesting that developers are accessing costlier (16-
20% pa) funds from non-banking financial companies (NBFC) and by resorting to structured
private equity deals. Thus, while we do not foresee bankruptcy risks, we expect high debt costs to
depress real estate sector earnings.
False optimism – we remain cautious on the sector: Sell DLF
We remain cautious and consider the recent share-price rally (with the BSE Realty Index up 24%
vs the Sensex up 8% over the past month) as a false positive given our view that buyer sentiment
remains weak (and is thus not converting into sales volumes) and developers are resorting to
costly funds with banks unwilling to provide further funds. On our estimates, the stocks in our
coverage trade at 37-47% discounts (Table 9) to their NAVs (except DLF, which trades at a 10%
premium) similar to the 42% discount for their Chinese peers under RBS coverage (Table 8). We
maintain our Buy ratings on HDIL (which we see as a play on redevelopment in Mumbai) and
IBREL (which we find attractive for its valuations and low leverage). We maintain our Sell on DLF,
given its low asset churn and high debt levels.
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