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Real Estate
The quarter has witnessed a slew of new launches in the
residential space given high pricing in regions like NCR and
Mumbai. However, strong residential volumes in Gurgaon in
February (50% growth mom) came in as a positive surprise.
We expect volumes to remain flat, even though the interest in
commercial properties seems to be improving. Inventory levels
remained high both in Gurgaon and Mumbai. Rentals seem to
have bottomed out and a material uptick may not become visible
until inventory levels come down. Most banks have refinanced
loans, which gives some respite to developers in a declining
volume scenario.
In our universe of stocks, we expect DLF's revenue to be largely
driven by sale of plotted properties in Gurgaon. HDIL is expected
to report flat growth in Transfer of Development Rights (TDR)
volumes and prices, given low inventory of TDRs left and
indefinite stoppage of the MIAL project. However, HDIL is
expected to continue to book partial revenue from the recent
2msf FSI sale (worth ~`1,400cr) in 4QFY2011. For ARIL, we
expect revenue to be driven by the residential segment and
rental income.
Companies better placed in 2011 than 2008
We believe project visibility, sector leverage and cash flow are
much better placed for real estate companies than they were
in 2008. Most companies have higher project visibility with
significant portion of their land bank under development or
about to be launched. Sector leverage is likely to be below 0.5x
by FY2012E from 1x in FY2009. We believe, operationally, the
sector is better placed than the last slowdown. However, the
funding and pricing pressures could continue for a while.
Nonetheless, the challenges are more cyclical in nature and
appear to be largely priced in.
RBI tightens liquidity to curb speculative demand
In its bid to curb excess liquidity and speculative demand in the
real estate sector, the RBI initiated measures including:
1) capping the LTV ratio to 80% (previously 85%), 2) increasing
risk weight on residential housing loan of above `75lakh and
3) raising standard asset provisioning for teaser loans from
0.4% to 2.0%. We believe these measures will marginally affect
demand and may lead to postponement of buying in the short
term. Also, the debt refinancing requirement is expected to come
under pressure during 1HFY2012, which could lead to prices
cooling off in regions like Central Mumbai and Gurgaon, where
prices have overheated since the last six months.
HDIL - Look beyond MIAL
HDIL has already generated 11mn sq. ft. from the MIAL project
this far, despite more than one-year delay in shifting the families
in Phase 1. Further, the Maharashtra government is likely to
hike FSI from 1.0x to 1.33x in the suburbs, which will affect
TDR prices. Hence, we have factored in lower TDR price of
`2,400/sq. ft. (i.e. 20% discount to current levels of
`3,000/sq. ft.) for arriving at our target price and do not expect
negative impact incrementally. We have assumed 4.5mn sq. ft.
of TDR sale (i.e. 30% decline in TDR sales from FY2010) in
FY2011 and FY2012 to factor in the hike in FSI. It should be
noted that a 10% decline in TDR prices would adversely impact
our NAV by mere 3% and target price by 2.3%. Given the
delay/uncertainty in shifting of families, we have excluded
10mn sq. ft. (potential 65 acres), which HDIL is expected to get
at the airport vicinity as it rehabilitates 85,000 families. Overall,
we expect the share of TDR sales in the company's revenue mix
to fall from 60% in FY2011 to 30% in FY2012.
DLF - Stretched balance sheet remains key concern
In 3QFY2011, the company's net debt increased by ~`800cr
qoq to ~`20,700cr from ~`19,900cr. Thus, DLF's net debt-toequity
now stands increased from 0.75x to 0.79x qoq, which
continues to remain a key overhang on the stock price as debt
repayment of ~`2,910cr is required to be made over the next
15 months (~`210cr in 4QFY2011). Further, clarity on whether
DLF will buy out the promoter's stake in DAL remains
another key concern since it could potentially further dilute
minority shareholders.
Unitech - Minimal overhang due to telecom stalemate
Unitech's equity investment in its telecom venture is ~`650cr
(`2/share). This is based on the key assumption that there will
be no recourse to Unitech's balance sheet for the loans taken
by the telecom venture. We believe Unitech's balance sheet will
be unaffected, as it is common practice to provide loans on
spectrum because telecom is a recognised sector. Even if one
were to subtract the entire debt on Unitech Wireless balance
sheet, value erosion for Unitech would still be only `10/share.
Amidst this scenario, we believe the 44.2% correction in the
stock during FY2011 is unwarranted.
Dipping residential volumes owing to high prices
In Mumbai and Delhi, residential prices are currently ruling
15-30% above the peak levels of 2008, whereas prices in most
other markets are still 10-15% lower than their last peak levels.
This has resulted in tapering of volumes in regions like Mumbai
and NCR. However, strong residential volumes in Gurgaon in
February (50% increase mom) came in as a positive surprise.
As a result, HDFC and the SBI have seen a drop in their mortgage
loan transactions. For instance, HDFC has seen a drop of
15-20% in its mortgage loans in the island city (although
disbursements have been good otherwise), while SBI expects a
downward revision in its growth target for this fiscal from its
earlier target of ~`22,000cr. We believe 2011 will see
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 to flat 5% increase
expected in other markets.
Commercial demand to pick up over the next 12 months
After registering a sharp decline in the past few quarters, capital
values have started to strengthen and registered a marginal
appreciation across most micro markets. Industry participants
have indicated that the surge in leasing enquiries has come on
the back of renewed interest shown by corporates. This has
already been reflected by companies like DLF, which leased out
4.4mn sq. ft. in 9MFY2011, way ahead of its full-year guidance
of 4.0mn sq. ft.
In the IT/ITES sector, we expect net employee addition of 20%
over FY2011-13. Accordingly, we expect demand for office
space to start picking up from 2HCY2011. Cushman and
Wakefield estimates cumulative pan-India demand for office
space during CY2009-13 to be 196mn sq. ft.
Retail segment - Still some pain left
Vacant space in shopping centres increased during
2008-09 primarily on account of high real estate costs and
lower consumption, owing to which many retailers shifted gears
from the rapid expansion mode to the consolidation mode.
Therefore, in the short term, vacant spaces are likely to increase
given the considerable rationalisation in the supply pipeline.
On the other hand, we believe demand is yet to pick up,
especially in tier-II and III cities, which is not the case with metros,
where catchment areas are witnessing high demand. We expect
prices to remain under pressure, as the segment has fragmented
supply dynamics. Initial recovery volumes are likely to be
cornered by experienced players such as Phoenix Mills, and
not necessarily large ones.
Sensex vs. realty stocks
During 4QFY2011, the BSE realty index widely underperformed
the Sensex by 1,299bp on the back of the housing loan scam,
which stoked fears of 1) corporate governance, 2) restricted
credit flow to the sector and 3) the expected increase in cost of
funding for future projects. Moreover, the RBI's measures to
tighten liquidity and curb speculative demand by increasing
LTV and risk weight on teaser loans have further dampened
stock performance. However, we believe the recent correction
gives a good entry opportunity on account of 1) companies
trading at significant discount to our one-year forward NAV,
2) stability in volumes and 3) comfortable balance sheet position
unlike that in 2008. We believe HDIL, Oberoi Realty and ARIL
are best placed in the sector.
Outlook and valuation
India's realty index is currently ruling near the life-time low seen
in 2008. However, things are much better than 2008 with respect
to project visibility, cash flow, net debt-equity and growing
disposable income. Further, refinancing of loans from banking
sector will give some respite to developers in the falling volume
scenario. Having said that, we believe absorption and not price
appreciation will drive residential growth over the next six
quarters. Amidst this scenario, new launches have been more
rewarding for developers who have launched projects at
10-15% discount to the prevailing market rates. Further, high
inventory is still hampering commercial recovery, though there
has been an uptick in the absorption levels. We expect rentals
to remain firm at current levels with uptick likely over the next
12 months. We believe that stock performances are related to
macro factors interspersed with company-specific issues such
as the DLF-DAL merger translating into higher debt and
2G-related scam for Unitech. We are positive on the long-term
outlook of the realty sector, with growing disposable income,
shortage of 25mn houses in India and reasonable affordability.
Given the current scenario, we expect stability in residential prices
with the exception of certain micro markets, where prices have
overheated, and expect an uptick in the commercial segment
over the next 12 months.
We prefer companies with visibility in cash flow, low leverage
and strong project pipeline with attractive valuations. Our top
picks are HDIL and ARIL, which are trading at 49% and 56%
discount to their NAVs, respectively. We maintain our Neutral
view on DLF, owing to concerns of weak operating cash flow,
increasing gearing and just 4% discount to our one-year
forward NAV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Real Estate
The quarter has witnessed a slew of new launches in the
residential space given high pricing in regions like NCR and
Mumbai. However, strong residential volumes in Gurgaon in
February (50% growth mom) came in as a positive surprise.
We expect volumes to remain flat, even though the interest in
commercial properties seems to be improving. Inventory levels
remained high both in Gurgaon and Mumbai. Rentals seem to
have bottomed out and a material uptick may not become visible
until inventory levels come down. Most banks have refinanced
loans, which gives some respite to developers in a declining
volume scenario.
In our universe of stocks, we expect DLF's revenue to be largely
driven by sale of plotted properties in Gurgaon. HDIL is expected
to report flat growth in Transfer of Development Rights (TDR)
volumes and prices, given low inventory of TDRs left and
indefinite stoppage of the MIAL project. However, HDIL is
expected to continue to book partial revenue from the recent
2msf FSI sale (worth ~`1,400cr) in 4QFY2011. For ARIL, we
expect revenue to be driven by the residential segment and
rental income.
Companies better placed in 2011 than 2008
We believe project visibility, sector leverage and cash flow are
much better placed for real estate companies than they were
in 2008. Most companies have higher project visibility with
significant portion of their land bank under development or
about to be launched. Sector leverage is likely to be below 0.5x
by FY2012E from 1x in FY2009. We believe, operationally, the
sector is better placed than the last slowdown. However, the
funding and pricing pressures could continue for a while.
Nonetheless, the challenges are more cyclical in nature and
appear to be largely priced in.
RBI tightens liquidity to curb speculative demand
In its bid to curb excess liquidity and speculative demand in the
real estate sector, the RBI initiated measures including:
1) capping the LTV ratio to 80% (previously 85%), 2) increasing
risk weight on residential housing loan of above `75lakh and
3) raising standard asset provisioning for teaser loans from
0.4% to 2.0%. We believe these measures will marginally affect
demand and may lead to postponement of buying in the short
term. Also, the debt refinancing requirement is expected to come
under pressure during 1HFY2012, which could lead to prices
cooling off in regions like Central Mumbai and Gurgaon, where
prices have overheated since the last six months.
HDIL - Look beyond MIAL
HDIL has already generated 11mn sq. ft. from the MIAL project
this far, despite more than one-year delay in shifting the families
in Phase 1. Further, the Maharashtra government is likely to
hike FSI from 1.0x to 1.33x in the suburbs, which will affect
TDR prices. Hence, we have factored in lower TDR price of
`2,400/sq. ft. (i.e. 20% discount to current levels of
`3,000/sq. ft.) for arriving at our target price and do not expect
negative impact incrementally. We have assumed 4.5mn sq. ft.
of TDR sale (i.e. 30% decline in TDR sales from FY2010) in
FY2011 and FY2012 to factor in the hike in FSI. It should be
noted that a 10% decline in TDR prices would adversely impact
our NAV by mere 3% and target price by 2.3%. Given the
delay/uncertainty in shifting of families, we have excluded
10mn sq. ft. (potential 65 acres), which HDIL is expected to get
at the airport vicinity as it rehabilitates 85,000 families. Overall,
we expect the share of TDR sales in the company's revenue mix
to fall from 60% in FY2011 to 30% in FY2012.
DLF - Stretched balance sheet remains key concern
In 3QFY2011, the company's net debt increased by ~`800cr
qoq to ~`20,700cr from ~`19,900cr. Thus, DLF's net debt-toequity
now stands increased from 0.75x to 0.79x qoq, which
continues to remain a key overhang on the stock price as debt
repayment of ~`2,910cr is required to be made over the next
15 months (~`210cr in 4QFY2011). Further, clarity on whether
DLF will buy out the promoter's stake in DAL remains
another key concern since it could potentially further dilute
minority shareholders.
Unitech - Minimal overhang due to telecom stalemate
Unitech's equity investment in its telecom venture is ~`650cr
(`2/share). This is based on the key assumption that there will
be no recourse to Unitech's balance sheet for the loans taken
by the telecom venture. We believe Unitech's balance sheet will
be unaffected, as it is common practice to provide loans on
spectrum because telecom is a recognised sector. Even if one
were to subtract the entire debt on Unitech Wireless balance
sheet, value erosion for Unitech would still be only `10/share.
Amidst this scenario, we believe the 44.2% correction in the
stock during FY2011 is unwarranted.
Dipping residential volumes owing to high prices
In Mumbai and Delhi, residential prices are currently ruling
15-30% above the peak levels of 2008, whereas prices in most
other markets are still 10-15% lower than their last peak levels.
This has resulted in tapering of volumes in regions like Mumbai
and NCR. However, strong residential volumes in Gurgaon in
February (50% increase mom) came in as a positive surprise.
As a result, HDFC and the SBI have seen a drop in their mortgage
loan transactions. For instance, HDFC has seen a drop of
15-20% in its mortgage loans in the island city (although
disbursements have been good otherwise), while SBI expects a
downward revision in its growth target for this fiscal from its
earlier target of ~`22,000cr. We believe 2011 will see
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 to flat 5% increase
expected in other markets.
Commercial demand to pick up over the next 12 months
After registering a sharp decline in the past few quarters, capital
values have started to strengthen and registered a marginal
appreciation across most micro markets. Industry participants
have indicated that the surge in leasing enquiries has come on
the back of renewed interest shown by corporates. This has
already been reflected by companies like DLF, which leased out
4.4mn sq. ft. in 9MFY2011, way ahead of its full-year guidance
of 4.0mn sq. ft.
In the IT/ITES sector, we expect net employee addition of 20%
over FY2011-13. Accordingly, we expect demand for office
space to start picking up from 2HCY2011. Cushman and
Wakefield estimates cumulative pan-India demand for office
space during CY2009-13 to be 196mn sq. ft.
Retail segment - Still some pain left
Vacant space in shopping centres increased during
2008-09 primarily on account of high real estate costs and
lower consumption, owing to which many retailers shifted gears
from the rapid expansion mode to the consolidation mode.
Therefore, in the short term, vacant spaces are likely to increase
given the considerable rationalisation in the supply pipeline.
On the other hand, we believe demand is yet to pick up,
especially in tier-II and III cities, which is not the case with metros,
where catchment areas are witnessing high demand. We expect
prices to remain under pressure, as the segment has fragmented
supply dynamics. Initial recovery volumes are likely to be
cornered by experienced players such as Phoenix Mills, and
not necessarily large ones.
Sensex vs. realty stocks
During 4QFY2011, the BSE realty index widely underperformed
the Sensex by 1,299bp on the back of the housing loan scam,
which stoked fears of 1) corporate governance, 2) restricted
credit flow to the sector and 3) the expected increase in cost of
funding for future projects. Moreover, the RBI's measures to
tighten liquidity and curb speculative demand by increasing
LTV and risk weight on teaser loans have further dampened
stock performance. However, we believe the recent correction
gives a good entry opportunity on account of 1) companies
trading at significant discount to our one-year forward NAV,
2) stability in volumes and 3) comfortable balance sheet position
unlike that in 2008. We believe HDIL, Oberoi Realty and ARIL
are best placed in the sector.
Outlook and valuation
India's realty index is currently ruling near the life-time low seen
in 2008. However, things are much better than 2008 with respect
to project visibility, cash flow, net debt-equity and growing
disposable income. Further, refinancing of loans from banking
sector will give some respite to developers in the falling volume
scenario. Having said that, we believe absorption and not price
appreciation will drive residential growth over the next six
quarters. Amidst this scenario, new launches have been more
rewarding for developers who have launched projects at
10-15% discount to the prevailing market rates. Further, high
inventory is still hampering commercial recovery, though there
has been an uptick in the absorption levels. We expect rentals
to remain firm at current levels with uptick likely over the next
12 months. We believe that stock performances are related to
macro factors interspersed with company-specific issues such
as the DLF-DAL merger translating into higher debt and
2G-related scam for Unitech. We are positive on the long-term
outlook of the realty sector, with growing disposable income,
shortage of 25mn houses in India and reasonable affordability.
Given the current scenario, we expect stability in residential prices
with the exception of certain micro markets, where prices have
overheated, and expect an uptick in the commercial segment
over the next 12 months.
We prefer companies with visibility in cash flow, low leverage
and strong project pipeline with attractive valuations. Our top
picks are HDIL and ARIL, which are trading at 49% and 56%
discount to their NAVs, respectively. We maintain our Neutral
view on DLF, owing to concerns of weak operating cash flow,
increasing gearing and just 4% discount to our one-year
forward NAV.
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