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Commercial real estate cycle bottoming as supply declines
Key trends in commercial RE- low bank funding, consolidation
We analyze trends in commercial real estate and observe downward trends
in vacancy rates although they remain high at around 20%. Vacancy rates
in NCR and Bangalore have seen some reduction while Mumbai continues
to witness many completions. Given uncertain demand, we expect bank
funding to remain tight for new commercial starts and available only to a
few developers with land in the right locations. This will likely lead to
consolidation and we expect existing established companies like DLF,
Oberoi realty and Prestige Estates to benefit from this trend.
Vacancy stabilizing as new launches have seen sharp deceleration
Buoyed by robust IT demand, we saw significant new launches in CY2006-
08. Since then, new launches have fallen sharply and are currently well
below incremental demand. This will likely lead to minimal completions
after mid-CY13. We observe that over the past six quarters incremental
absorption has exceeded project completion in NCR and Bangalore, while
there have been large number of completions in Mumbai and Pune. Going
forward, we expect incremental absorption to stay ahead of completions
thus reducing vacancy rates. This trend will likely become stronger post
mid-CY12 unless there is a demand freeze as was seen in late-2008.
Pricing stability on stable vacancy rates; sharply lower than peak
Rentals have seen marginal uptick in Gurgaon and as incremental
absorption has exceeded completions. Overall, current prices remain
sharply below peak level with commercial index being 16% below 1QCY08
rentals and 31% below adjusted for inflation. We do not expect a sharp
uptick given current vacancy rates and uncertain demand environment.
However, any spike in demand will reduce vacancy rates sharply and will
likely be met with spike in pricing as was seen in CY2007.
DLF to benefit from consolidation, exposure to Gurgaon
Our preference order based on current market conditions is Bangalore, NCR,
Chennai, Mumbai and Pune. We expect DLF to benefit as pricing cycle turns
over the next few quarters and demand becomes stable. Commercial real
estate contributes 36% to DLF’s NAV with contribution from Gurgaon being
20%. Other stocks having large commercial exposure include Oberoi realty
(Mumbai), INRL (Mumbai) and Prestige Estates (Bangalore)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Commercial real estate cycle bottoming as supply declines
Key trends in commercial RE- low bank funding, consolidation
We analyze trends in commercial real estate and observe downward trends
in vacancy rates although they remain high at around 20%. Vacancy rates
in NCR and Bangalore have seen some reduction while Mumbai continues
to witness many completions. Given uncertain demand, we expect bank
funding to remain tight for new commercial starts and available only to a
few developers with land in the right locations. This will likely lead to
consolidation and we expect existing established companies like DLF,
Oberoi realty and Prestige Estates to benefit from this trend.
Vacancy stabilizing as new launches have seen sharp deceleration
Buoyed by robust IT demand, we saw significant new launches in CY2006-
08. Since then, new launches have fallen sharply and are currently well
below incremental demand. This will likely lead to minimal completions
after mid-CY13. We observe that over the past six quarters incremental
absorption has exceeded project completion in NCR and Bangalore, while
there have been large number of completions in Mumbai and Pune. Going
forward, we expect incremental absorption to stay ahead of completions
thus reducing vacancy rates. This trend will likely become stronger post
mid-CY12 unless there is a demand freeze as was seen in late-2008.
Pricing stability on stable vacancy rates; sharply lower than peak
Rentals have seen marginal uptick in Gurgaon and as incremental
absorption has exceeded completions. Overall, current prices remain
sharply below peak level with commercial index being 16% below 1QCY08
rentals and 31% below adjusted for inflation. We do not expect a sharp
uptick given current vacancy rates and uncertain demand environment.
However, any spike in demand will reduce vacancy rates sharply and will
likely be met with spike in pricing as was seen in CY2007.
DLF to benefit from consolidation, exposure to Gurgaon
Our preference order based on current market conditions is Bangalore, NCR,
Chennai, Mumbai and Pune. We expect DLF to benefit as pricing cycle turns
over the next few quarters and demand becomes stable. Commercial real
estate contributes 36% to DLF’s NAV with contribution from Gurgaon being
20%. Other stocks having large commercial exposure include Oberoi realty
(Mumbai), INRL (Mumbai) and Prestige Estates (Bangalore)
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