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Bangalore real estate sector
Facing the onslaught of newsflow
Event
Bangalore property stocks have fallen sharply in the last five months. Sobha
and Prestige fell ~30% and ~45% from the recent peaks. This was after 18
months of outperformance. Interestingly, there is no evident slowdown in the
physical market. We conducted a stress test on our NAV and free cash yield
estimates and found that a pessimistic scenario seems to be priced in.
Impact
US slowdown worries - the key reason: The recent US debt downgrade has
raised concerns regarding a 2008-style downturn in the IT sector. Commercial
leasing volumes in Bangalore were down around 45% YoY in 2008 while the
residential volume run rate was down over 50% in the second half of 2008.
No impact on physical market - Outlook is key: Our channel checks
suggest that commercial leasing is on track to deliver a robust year – with
over 7m sqf of pre-leasing in 2011E. Residential volumes remain strong, as
exemplified by the recent high-end and mid-income launches in Bangalore.
IT sector showing no signs of a slowdown in hiring: Importantly, IT sector
companies are showing no signs of a slowdown in hiring at college placement
processes which are currently underway. This was confirmed in conversations
with ten listed and unlisted IT companies by our tech analyst Nitin Mohta. This
is a leading indicator of strong commercial leasing in 2012 (and subsequent
residential purchases) in Bangalore.
Stress test confirms over-reaction: We run three stress tests on our
financial models for Sobha and Prestige. Our analysis suggests that:
Scenario-1: Two-year downturn – 20% lower residential volumes; 30% lower
commercial volumes; flat prices and rents. Sobha offers 36% potential upside;
Prestige offers 80% potential upside from current market price.
Scenario-2: Two-year downturn – 35% lower residential volumes; 50% lower
commercial volumes; prices/rents down to crisis levels. Sobha offers 18%
potential upside; Prestige offers 39% potential upside from current market price.
Scenario-3: Two-year downturn – 50% lower residential volumes; zero
commercial leasing; prices/rents down to crisis levels. Sobha offers 12%
potential downside; Prestige offers 10% potential downside from current
market price
Outlook
Our stress test shows that stocks are pricing in a pessimistic scenario.
Stock volatility caused by global newsflow appears to be keeping short-term
investors away. In such an environment, stocks can overshoot on the
downside, as they have started to do now (as in 2008). We see this as a
buying opportunity for longer-term investors. We reiterate that Prestige and
Sobha tick all boxes we consider when we pick stocks by elimination
(Selection via elimination, 13 May 2011). In our view, they have strong and
improving balance sheets, trade at attractive free cash yields, have limited
newsflow risk and provide strong disclosures. For investors who find it difficult
to invest due to stock liquidity constraints, we recommend a market capweighted
basket.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bangalore real estate sector
Facing the onslaught of newsflow
Event
Bangalore property stocks have fallen sharply in the last five months. Sobha
and Prestige fell ~30% and ~45% from the recent peaks. This was after 18
months of outperformance. Interestingly, there is no evident slowdown in the
physical market. We conducted a stress test on our NAV and free cash yield
estimates and found that a pessimistic scenario seems to be priced in.
Impact
US slowdown worries - the key reason: The recent US debt downgrade has
raised concerns regarding a 2008-style downturn in the IT sector. Commercial
leasing volumes in Bangalore were down around 45% YoY in 2008 while the
residential volume run rate was down over 50% in the second half of 2008.
No impact on physical market - Outlook is key: Our channel checks
suggest that commercial leasing is on track to deliver a robust year – with
over 7m sqf of pre-leasing in 2011E. Residential volumes remain strong, as
exemplified by the recent high-end and mid-income launches in Bangalore.
IT sector showing no signs of a slowdown in hiring: Importantly, IT sector
companies are showing no signs of a slowdown in hiring at college placement
processes which are currently underway. This was confirmed in conversations
with ten listed and unlisted IT companies by our tech analyst Nitin Mohta. This
is a leading indicator of strong commercial leasing in 2012 (and subsequent
residential purchases) in Bangalore.
Stress test confirms over-reaction: We run three stress tests on our
financial models for Sobha and Prestige. Our analysis suggests that:
Scenario-1: Two-year downturn – 20% lower residential volumes; 30% lower
commercial volumes; flat prices and rents. Sobha offers 36% potential upside;
Prestige offers 80% potential upside from current market price.
Scenario-2: Two-year downturn – 35% lower residential volumes; 50% lower
commercial volumes; prices/rents down to crisis levels. Sobha offers 18%
potential upside; Prestige offers 39% potential upside from current market price.
Scenario-3: Two-year downturn – 50% lower residential volumes; zero
commercial leasing; prices/rents down to crisis levels. Sobha offers 12%
potential downside; Prestige offers 10% potential downside from current
market price
Outlook
Our stress test shows that stocks are pricing in a pessimistic scenario.
Stock volatility caused by global newsflow appears to be keeping short-term
investors away. In such an environment, stocks can overshoot on the
downside, as they have started to do now (as in 2008). We see this as a
buying opportunity for longer-term investors. We reiterate that Prestige and
Sobha tick all boxes we consider when we pick stocks by elimination
(Selection via elimination, 13 May 2011). In our view, they have strong and
improving balance sheets, trade at attractive free cash yields, have limited
newsflow risk and provide strong disclosures. For investors who find it difficult
to invest due to stock liquidity constraints, we recommend a market capweighted
basket.
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