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UBS Investment Research
Asia On The Ground: India Property
Realty is slow, but not in recession
„ We met with developers & brokers in NCR, Mumbai & Bangalore
We met with the managements of listed and unlisted developers in NCR, Mumbai
and Bangalore. In addition, also met with local property brokers and consultants
like DTZ, Cushman & Wakefield and PropEquity in these regions.
„ Key objectives: Assess physical market situation amid rising rates, costs
We wanted to understand 1) how physical property market - residential & office
leasing doing, 2) impact of recent rate and property price hikes on residential presales; 3) visibility on outlook for FY12, 4) developers’ strategy to address tight
liquidity, rising rates and costs; and 5) likely impact on EBITDA margins ahead.
„ Findings: Housing is slow, leasing steady; debts not as in recession
1) Pre-sales has slowed in 1QFY12 despite seasonality - but Gurgaon, Chennai
doing best; 2) good leasing momentum across markets; 3) Pickup likely in Q3 led
by new launches; but sharp price correction unlikely, 4) encouraging progress on
construction; 5) Near-term EBITDA pressures, tight liquidity, high rates worry
most developers, but loan/interest re-payments in FY12 manageable and not as bad
as’08-09 crisis; 6) Focus on cash flows, keep debt levels and land buying in check
„ UBS view and action
We believe the physical property market is slow but not in recessionary times.
While news and muted earnings may remain a near-term overhang; we think easing
liquidity/rates, sustained pre-sales and leasing with trough valuations will trigger
outperformance. Our top picks – 1) DLF - large growing annuity, efforts to cut
debt, 2) Phoenix – quality retail mall asset play and 3) Prestige best proxy to the
Bangalore market.
Meetings with developers and brokers
We met with the managements of DLF, Unitech, Anant Raj, Phoenix Mills,
IBREL, Prestige, Sobha and Puravankara and other large unlisted developers
across the National Capital Region (NCR – Delhi, Gurgaon, Noida, Greater
Noida), Mumbai and Bangalore over the last two weeks. We also met with local
property brokers and property consultancy firms like DTZ, Cushman &
Wakefield and PropEquity in these regions. In addition, we conducted site visits
of some of the developers’ key projects to get better visibility on execution
progress and timelines. A few key highlights of individual meetings are in the
latter part of this note.
The objective: Assess physical property market
& funding situation; and developer strategy
The sector’s strong correction of 50% over the last 9 months seems to have been
driven by concerns on - 1) higher inflation driving interest rates further by
100bps, 2) rising property prices in key markets of NCR, Mumbai, Bangalore;
3) funding crunch leading to loan/interest default risks; and 4) corporate
governance issues in general amidst current fluid political environment. We met
co-founders, senior management and property brokers/consultancy firms to get
an all-round industry perspective on following key issues amid current
challenging sector environment compared to the last crisis of 2008-09.
Q How physical property market - residential & office leasing performing
across key markets; as news flow in media worsens post the recent interest
rate hikes of 75bps over May-Jun’2011.
Q The impact of rising property prices across key markets and mortgage rates
of 11% on 1) pre-sales absorption of new launches, 2) supply trends, 3)
overall residential demand.
Q Developer strategy to address potential physical market slowdown,
tightening liquidity, challenges of rising material/labour costs and land
acquisition outlook
Q Outlook on sector, EBITDA and financials for FY12.
Our findings: Physical markets a little slow, but
not worrisome as last crisis of 08-09
We believe the physical property market is a little slow; but don’t foresee it in
recessionary times as witnessed in the last crisis of 2008-09. Our key findings
suggest - 1) Pre-sales have slowed in 1QFY12 despite seasonality - more
pronounced in Mumbai, Noida, Gr.Noida, a little in Bangalore; but Gurgaon,
Chennai doing best; pickup likely in Q2-Q3 led by new housing launches; 2)
sharp price correction seems unlikely in residential markets given firm land
prices and rising costs; 3) good leasing momentum across markets with some
witnessing higher rentals; 4) we saw/heard encouraging progress on construction
across markets; 5) near-term EBITDA pressures remain due to rising costs,
attractive pricing on new launches; 6) tight liquidity and interest rates worry
most developers, but most claim debt, interest re-payments in FY12,
manageable and not as bad as the 2008-09 crisis; 7) Developers focusing on
construction/completion, fast pre-sales launches, debt levels to remain in check,
no plans to add land; and believe 1H FY12 earnings will stay muted.
UBS view and action
Q We believe the physical property market performance is not as bad as the
newsflow suggests on 1) residential market pre-sales across most markets,
barring Mumbai where slowdown is more pronounced; 2) progress on
construction activity; and 3) risk of debt, interest re-payment defaults
Q We don’t foresee a significant price correction across markets; expect in a
few pockets in Mumbai, NCR. With rising construction costs, firm land
prices and delays of supply and infrastructure roll-out in most cities, we
expect prices to be stagnant and shift to mid-income projects lower average
realizations for developers.
Q We believe EBITDA margin and higher interest cost pressures will continue
to remain. We expect this to dampen 1HFY12 profitability.
Q Funding has tightened for the sector, but liquidity is not as bad as the ‘08-09
crises when leverage was higher. Focus on execution, pre-sales from new
launches, growing rental annuity will be positive key for cashflows. Based
on our discussion with most developers, we believe debt, interest repayments are manageable.
Q We continue to believe steady commercial recovery will trigger renewed
residential demand across markets. We expect developers with quality rental
portfolios – DLF, Phoenix Mills, Prestige, and IBREL will be key
beneficiaries of a sustained leasing recovery.
Q While news flow may remain a near-term overhang; we see more upside
potential than downside with sector trading at trough levels of deep disc to
NAV (close to crisis levels), and 1.4x P/B. Expect trigger to be initially
macro led by easing liquidity/rates, good pre-sale responses, steady leasing.
Q We are positive on sector with top-down macro approach, and see the sharp
correction of ~50% over last 9mths as a good opportunity. Our top picks –
— DLF, a proxy to commercial recovery with large growing annuity, focus
on cash flows to cut peak debt levels
— Phoenix Mills, a quality retail asset play with strong rental annuity and
visibility on key Phoenix Market City launches of Pune, Bangalore, Kurla
and its premium Shangri-la hotel, Mumbai in FY12.
— Prestige as best proxy to Bangalore given its robust residential launch
pipeline in 1H12 and growing commercial rental stream.
Key takeaways from the ground
Residential pre-sales have slowed in 1Q
Developers highlighted Pre-sales have slowed in 1QFY12 despite the
seasonality, cyclicality and compared to Q411; especially in Mumbai, Noida-
Greater Noida and Bangalore to a certain extent. However, Gurgaon, Chennai,
and Pune remain robust with healthy absorption trends. Property price increases
of 10-20% across key markets and mortgage rates having risen from 9% a year
ago to 11% have impacted absorption. Most developers anticipate buyer
sentiment will improve in Q2/Q3 and plan to launch projects towards the festive
season Diwali. Though developers are making aggressive ongoing efforts to
market existing inventory, we believe Q1 pre-sales will likely be muted given
the hike in mortgage rates, no price correction and a decline in consumer
sentiment. We expect pre-sales momentum to pickup in Q2/Q3FY12 on the back
of higher launches planned, likely improvement in buyer sentiment and more
visibility on stabilizing inflation and mortgage environment
Commercial recovery gaining momentum
Developers with commercial portfolios indicated they are witnessing healthy
demand for commercial space. Our on the ground meetings brokers, consultancy
firms suggest leasing at quality projects in key locations (DLF Cyber City,
Gurgaon, Prestige’s Exora in Outer Ring Road etx.) remains robust with rentals
showing signs of growth across portfolios. Gurgaon and Bangalore are
witnessing healthy leasing and rental trends largely while other markets also
remain healthy though not as robust. The govt’s decision to extend deadline for
SEZs to FY14 has led to developers speeding up construction and corporates
signing leases to capture oncoming supply early. Developers and tenants are
ramping up construction and leasing requirements to capture However,
commercial supply continues to remain high in all 3 markets which we believe
could keep rental growth in check. We expect leasing momentum to continue to
remain healthy in FY12 as corporate continue to expand and supply gets
tempered during the year.
Execution picking up but margins under pressure
Developers across property markets highlighted their focus on execution has
picked up; and our conversation with brokers and site visits underscore this.
Execution momentum is strong for most projects (excluding Mumbai), not
marked by approval delays, particularly those having completed plinth stage.
That said, most developers expect EBITDA margins to remain under pressure
given rising commodity prices, labour and cost of funding. Outlook will be
depend on product mix, and pricing of new launches in FY12, which is fluid for
now and dependent on sentiments.
Funding constraints tightening in the sector
Developers highlighted funding remains the biggest challenge with banks
cautious towards the sector despite higher borrowing costs. Some developers are
resorting to short-term expensive alternatives such as PE funding at 25% cost of
capital to meet cashflow needs. Construction input cost volatility, muted presales and rising interest costs are pressurizing cashflows. Despite the
challenging liquidity environment, we believe funding is not as bad as the last
crisis in '08-09 when repayment default risk was high and cashflow needs and
leverage was higher. Further, we believe developers are moderating land
acquisition budgets and taking a more cautious outlook on cash deployment on
land given land costs have risen sharply over last 2 years. With quite a few
developers having acquired land in FY11, most land acquisition targets have
been met. We therefore expect debt levels and land acquisitions to remain in
check for in FY12; though we believe overall liquidity will remain a challenge
in FY12
Mid-income the most impacted by rate hikes
Our meetings indicate mid-income housing segment has shown a higher
sensitivity to rate hikes and price rises especially in Bangalore and NCR. On the
other hand, premium housing remains relatively insulated especially in
Bangalore, as this remains the least sensitive to mortgage rate hikes though
volumes are not as robust as a year ago when appetite was higher. However,
going forward, most developers indicated the focus would be on affordable/midincome housing as they expect demand to return following a stabilization in rate
environment, and some attractive pricing of new launches over next 6 months.
Key takeaways from developer meetings
Key comments Key challenges
DLF Expects strong pre-sales to plot launches; like recent Gurgaon launch High debt levels with rising cost of funding
Steady leasing & construction activity; rentals firming up Approval delays, pushing back new launch time lines
thrust on non-core asset sale in 2H2011 Inflationary cost pressures on EBITDA margins
Unitech Aggressively launching mid-income projects in Gurgaon, Chennai, Bang Rising costs, change in product mix to impact FY12 earnings
Construction underway across projects; focus on cash flows Ongoing telecom issues
Debt levels in check; no large bullet repayments in FY12 Pledge levels high, but not worried
Anant Raj Kirti Nagar Mall operational to boost rentals in FY12 (see photos) Slow leasing for Manesar, other tier-II properties
New residential launches on anvil; hopeful for Delhi approvals shortly Debt levels may rise in short-term; but not significantly
Would be largest beneficiary of Delhi master planning
IBREL Steady leasing momentum in IPIT assets Pre-sales, new launches have slowed given dampened sentiments
Construction activity improving across projects Property debt in check, but consol may increase due to power sub
Power sub value unlocking progressing as planned
Phoenix Mills Pune Market City operational, ramp-up of retailers in 2mths (see snaps) pushback in opening of Kurla, Shangri-La most critical
Bangalore, Kurla opening in next 6-mths (see recent photos) Debt levels likely to rise on consol basis with new malls operational
High Street Phoenix footfalls/rentals strong; anchor revision in discussion
Sobha Aggressively launch pipeline; confident of meeting guidance of 3.5msf Cost pressure to be a recurring phenomenon for the entire sector
Good order book for contractual business; no pressures being cost-plus Entry in new markets of NCR, Chennai critical
Comfortable with debt levels; no land sales targets
Prestige Mid-income launches bunched in Q2-Q3; expects good pre-sales Approval delays, could push back new launch timelines
Leasing momentum strong; sees rentals grow 15-20% by FY12
Ongoing sales of luxury/completed project to absorb cost pressures
Puravankara Believes Bangalore market is much better poised than last crisis Rising costs, change in product mix to impact FY12 earnings
Focus on affordable housing, execution and delivery High land prices, a challenge for its affordable housing; targeting Jt-dev.
Aggressive plans on Bangalore market with strong launch pipeline
Source: Company reports, UB
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia On The Ground: India Property
Realty is slow, but not in recession
„ We met with developers & brokers in NCR, Mumbai & Bangalore
We met with the managements of listed and unlisted developers in NCR, Mumbai
and Bangalore. In addition, also met with local property brokers and consultants
like DTZ, Cushman & Wakefield and PropEquity in these regions.
„ Key objectives: Assess physical market situation amid rising rates, costs
We wanted to understand 1) how physical property market - residential & office
leasing doing, 2) impact of recent rate and property price hikes on residential presales; 3) visibility on outlook for FY12, 4) developers’ strategy to address tight
liquidity, rising rates and costs; and 5) likely impact on EBITDA margins ahead.
„ Findings: Housing is slow, leasing steady; debts not as in recession
1) Pre-sales has slowed in 1QFY12 despite seasonality - but Gurgaon, Chennai
doing best; 2) good leasing momentum across markets; 3) Pickup likely in Q3 led
by new launches; but sharp price correction unlikely, 4) encouraging progress on
construction; 5) Near-term EBITDA pressures, tight liquidity, high rates worry
most developers, but loan/interest re-payments in FY12 manageable and not as bad
as’08-09 crisis; 6) Focus on cash flows, keep debt levels and land buying in check
„ UBS view and action
We believe the physical property market is slow but not in recessionary times.
While news and muted earnings may remain a near-term overhang; we think easing
liquidity/rates, sustained pre-sales and leasing with trough valuations will trigger
outperformance. Our top picks – 1) DLF - large growing annuity, efforts to cut
debt, 2) Phoenix – quality retail mall asset play and 3) Prestige best proxy to the
Bangalore market.
Meetings with developers and brokers
We met with the managements of DLF, Unitech, Anant Raj, Phoenix Mills,
IBREL, Prestige, Sobha and Puravankara and other large unlisted developers
across the National Capital Region (NCR – Delhi, Gurgaon, Noida, Greater
Noida), Mumbai and Bangalore over the last two weeks. We also met with local
property brokers and property consultancy firms like DTZ, Cushman &
Wakefield and PropEquity in these regions. In addition, we conducted site visits
of some of the developers’ key projects to get better visibility on execution
progress and timelines. A few key highlights of individual meetings are in the
latter part of this note.
The objective: Assess physical property market
& funding situation; and developer strategy
The sector’s strong correction of 50% over the last 9 months seems to have been
driven by concerns on - 1) higher inflation driving interest rates further by
100bps, 2) rising property prices in key markets of NCR, Mumbai, Bangalore;
3) funding crunch leading to loan/interest default risks; and 4) corporate
governance issues in general amidst current fluid political environment. We met
co-founders, senior management and property brokers/consultancy firms to get
an all-round industry perspective on following key issues amid current
challenging sector environment compared to the last crisis of 2008-09.
Q How physical property market - residential & office leasing performing
across key markets; as news flow in media worsens post the recent interest
rate hikes of 75bps over May-Jun’2011.
Q The impact of rising property prices across key markets and mortgage rates
of 11% on 1) pre-sales absorption of new launches, 2) supply trends, 3)
overall residential demand.
Q Developer strategy to address potential physical market slowdown,
tightening liquidity, challenges of rising material/labour costs and land
acquisition outlook
Q Outlook on sector, EBITDA and financials for FY12.
Our findings: Physical markets a little slow, but
not worrisome as last crisis of 08-09
We believe the physical property market is a little slow; but don’t foresee it in
recessionary times as witnessed in the last crisis of 2008-09. Our key findings
suggest - 1) Pre-sales have slowed in 1QFY12 despite seasonality - more
pronounced in Mumbai, Noida, Gr.Noida, a little in Bangalore; but Gurgaon,
Chennai doing best; pickup likely in Q2-Q3 led by new housing launches; 2)
sharp price correction seems unlikely in residential markets given firm land
prices and rising costs; 3) good leasing momentum across markets with some
witnessing higher rentals; 4) we saw/heard encouraging progress on construction
across markets; 5) near-term EBITDA pressures remain due to rising costs,
attractive pricing on new launches; 6) tight liquidity and interest rates worry
most developers, but most claim debt, interest re-payments in FY12,
manageable and not as bad as the 2008-09 crisis; 7) Developers focusing on
construction/completion, fast pre-sales launches, debt levels to remain in check,
no plans to add land; and believe 1H FY12 earnings will stay muted.
UBS view and action
Q We believe the physical property market performance is not as bad as the
newsflow suggests on 1) residential market pre-sales across most markets,
barring Mumbai where slowdown is more pronounced; 2) progress on
construction activity; and 3) risk of debt, interest re-payment defaults
Q We don’t foresee a significant price correction across markets; expect in a
few pockets in Mumbai, NCR. With rising construction costs, firm land
prices and delays of supply and infrastructure roll-out in most cities, we
expect prices to be stagnant and shift to mid-income projects lower average
realizations for developers.
Q We believe EBITDA margin and higher interest cost pressures will continue
to remain. We expect this to dampen 1HFY12 profitability.
Q Funding has tightened for the sector, but liquidity is not as bad as the ‘08-09
crises when leverage was higher. Focus on execution, pre-sales from new
launches, growing rental annuity will be positive key for cashflows. Based
on our discussion with most developers, we believe debt, interest repayments are manageable.
Q We continue to believe steady commercial recovery will trigger renewed
residential demand across markets. We expect developers with quality rental
portfolios – DLF, Phoenix Mills, Prestige, and IBREL will be key
beneficiaries of a sustained leasing recovery.
Q While news flow may remain a near-term overhang; we see more upside
potential than downside with sector trading at trough levels of deep disc to
NAV (close to crisis levels), and 1.4x P/B. Expect trigger to be initially
macro led by easing liquidity/rates, good pre-sale responses, steady leasing.
Q We are positive on sector with top-down macro approach, and see the sharp
correction of ~50% over last 9mths as a good opportunity. Our top picks –
— DLF, a proxy to commercial recovery with large growing annuity, focus
on cash flows to cut peak debt levels
— Phoenix Mills, a quality retail asset play with strong rental annuity and
visibility on key Phoenix Market City launches of Pune, Bangalore, Kurla
and its premium Shangri-la hotel, Mumbai in FY12.
— Prestige as best proxy to Bangalore given its robust residential launch
pipeline in 1H12 and growing commercial rental stream.
Key takeaways from the ground
Residential pre-sales have slowed in 1Q
Developers highlighted Pre-sales have slowed in 1QFY12 despite the
seasonality, cyclicality and compared to Q411; especially in Mumbai, Noida-
Greater Noida and Bangalore to a certain extent. However, Gurgaon, Chennai,
and Pune remain robust with healthy absorption trends. Property price increases
of 10-20% across key markets and mortgage rates having risen from 9% a year
ago to 11% have impacted absorption. Most developers anticipate buyer
sentiment will improve in Q2/Q3 and plan to launch projects towards the festive
season Diwali. Though developers are making aggressive ongoing efforts to
market existing inventory, we believe Q1 pre-sales will likely be muted given
the hike in mortgage rates, no price correction and a decline in consumer
sentiment. We expect pre-sales momentum to pickup in Q2/Q3FY12 on the back
of higher launches planned, likely improvement in buyer sentiment and more
visibility on stabilizing inflation and mortgage environment
Commercial recovery gaining momentum
Developers with commercial portfolios indicated they are witnessing healthy
demand for commercial space. Our on the ground meetings brokers, consultancy
firms suggest leasing at quality projects in key locations (DLF Cyber City,
Gurgaon, Prestige’s Exora in Outer Ring Road etx.) remains robust with rentals
showing signs of growth across portfolios. Gurgaon and Bangalore are
witnessing healthy leasing and rental trends largely while other markets also
remain healthy though not as robust. The govt’s decision to extend deadline for
SEZs to FY14 has led to developers speeding up construction and corporates
signing leases to capture oncoming supply early. Developers and tenants are
ramping up construction and leasing requirements to capture However,
commercial supply continues to remain high in all 3 markets which we believe
could keep rental growth in check. We expect leasing momentum to continue to
remain healthy in FY12 as corporate continue to expand and supply gets
tempered during the year.
Execution picking up but margins under pressure
Developers across property markets highlighted their focus on execution has
picked up; and our conversation with brokers and site visits underscore this.
Execution momentum is strong for most projects (excluding Mumbai), not
marked by approval delays, particularly those having completed plinth stage.
That said, most developers expect EBITDA margins to remain under pressure
given rising commodity prices, labour and cost of funding. Outlook will be
depend on product mix, and pricing of new launches in FY12, which is fluid for
now and dependent on sentiments.
Funding constraints tightening in the sector
Developers highlighted funding remains the biggest challenge with banks
cautious towards the sector despite higher borrowing costs. Some developers are
resorting to short-term expensive alternatives such as PE funding at 25% cost of
capital to meet cashflow needs. Construction input cost volatility, muted presales and rising interest costs are pressurizing cashflows. Despite the
challenging liquidity environment, we believe funding is not as bad as the last
crisis in '08-09 when repayment default risk was high and cashflow needs and
leverage was higher. Further, we believe developers are moderating land
acquisition budgets and taking a more cautious outlook on cash deployment on
land given land costs have risen sharply over last 2 years. With quite a few
developers having acquired land in FY11, most land acquisition targets have
been met. We therefore expect debt levels and land acquisitions to remain in
check for in FY12; though we believe overall liquidity will remain a challenge
in FY12
Mid-income the most impacted by rate hikes
Our meetings indicate mid-income housing segment has shown a higher
sensitivity to rate hikes and price rises especially in Bangalore and NCR. On the
other hand, premium housing remains relatively insulated especially in
Bangalore, as this remains the least sensitive to mortgage rate hikes though
volumes are not as robust as a year ago when appetite was higher. However,
going forward, most developers indicated the focus would be on affordable/midincome housing as they expect demand to return following a stabilization in rate
environment, and some attractive pricing of new launches over next 6 months.
Key takeaways from developer meetings
Key comments Key challenges
DLF Expects strong pre-sales to plot launches; like recent Gurgaon launch High debt levels with rising cost of funding
Steady leasing & construction activity; rentals firming up Approval delays, pushing back new launch time lines
thrust on non-core asset sale in 2H2011 Inflationary cost pressures on EBITDA margins
Unitech Aggressively launching mid-income projects in Gurgaon, Chennai, Bang Rising costs, change in product mix to impact FY12 earnings
Construction underway across projects; focus on cash flows Ongoing telecom issues
Debt levels in check; no large bullet repayments in FY12 Pledge levels high, but not worried
Anant Raj Kirti Nagar Mall operational to boost rentals in FY12 (see photos) Slow leasing for Manesar, other tier-II properties
New residential launches on anvil; hopeful for Delhi approvals shortly Debt levels may rise in short-term; but not significantly
Would be largest beneficiary of Delhi master planning
IBREL Steady leasing momentum in IPIT assets Pre-sales, new launches have slowed given dampened sentiments
Construction activity improving across projects Property debt in check, but consol may increase due to power sub
Power sub value unlocking progressing as planned
Phoenix Mills Pune Market City operational, ramp-up of retailers in 2mths (see snaps) pushback in opening of Kurla, Shangri-La most critical
Bangalore, Kurla opening in next 6-mths (see recent photos) Debt levels likely to rise on consol basis with new malls operational
High Street Phoenix footfalls/rentals strong; anchor revision in discussion
Sobha Aggressively launch pipeline; confident of meeting guidance of 3.5msf Cost pressure to be a recurring phenomenon for the entire sector
Good order book for contractual business; no pressures being cost-plus Entry in new markets of NCR, Chennai critical
Comfortable with debt levels; no land sales targets
Prestige Mid-income launches bunched in Q2-Q3; expects good pre-sales Approval delays, could push back new launch timelines
Leasing momentum strong; sees rentals grow 15-20% by FY12
Ongoing sales of luxury/completed project to absorb cost pressures
Puravankara Believes Bangalore market is much better poised than last crisis Rising costs, change in product mix to impact FY12 earnings
Focus on affordable housing, execution and delivery High land prices, a challenge for its affordable housing; targeting Jt-dev.
Aggressive plans on Bangalore market with strong launch pipeline
Source: Company reports, UB
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