Mumbai real estate sector - Stalemate continues:: Macquarie Research,

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Mumbai real estate sector
Stalemate continues
Event
 We spoke to seven brokers (two from the organised sector and five from the
unorganised sector) in Mumbai over the last week. The stalemate in Mumbai
residential real estate, with very low volumes and high prices, continues. Some
cracks are appearing. We remain negative on Mumbai residential. We would
look for signs of price cutting to spur volume growth before we turn positive.
Impact
 Brokers ‘twiddling their thumbs’: Volumes in Mumbai residential are down
to a trickle. The run rate is down 80% from the best period in the post-crisis
era (June–December 2009). Inventory levels remain high at around 25%. We
also believe there is another 10–15% ‘shadow inventory’ with speculators.
Sky-high prices (20% above the 2008 peak) are driving buyers out of the
market. Even enquiries (not just transactions) have fallen sharply. In fact,
three of the brokers we spoke to have started alternate businesses (gift shop,
sales of insurance policies, and even a toy store).
 Speculator sales at the crux of the problem: One of the key reasons for the
stalemate is that many developers (especially unlisted ones) used discounted
pre-sales to speculators, to raise construction finance. Speculators got a
discount in a ‘soft launch’ and an assured return. Developers are finding it
difficult to cut prices as a cut would lead them to miss the assured return. (For
a more detailed discussion on this phenomenon, refer to: Mumbai property
sector: US$1 million and nothing to buy?!, dated 16 June 2011). This is also
what constitutes the ‘shadow inventory’.
 Can prices remain high with no volumes? Some developers and brokers
definitely think so. They highlight that the state government has handed out
very few construction and other approvals in the last year. This has
constrained supply. It is our view, however, (effective) prices have to come
down at least 10–15% before buyers become active. The brokers confirmed
that only a few developers (with HDIL and Oberoi at the forefront) have priced
their product for driving sales.
 Some cracks are appearing: We found that there are at least six projects in
which speculators (who must have entered in 2007–09) are willing to sell at a
discount to the developers’ quoted price. We think this is the first sign that
prices will correct. Brokers also confirmed that developers are talking about
offering discounts in the festive season (starting early October). We will wait
and watch out for any signs of price action and a consequent pick-up in sales
volumes. That would be a trigger to buy, we believe.
Outlook
 Remain negative – HDIL is the best Mumbai play, relatively: We would
stick to developers willing to cut prices to drive asset turnover and generate
free cash yields in excess of 8%. All stocks are trading at over 50% discounts
to NAV. However, investors are unlikely to be attracted to pure land/asset
value plays in the near term. In Mumbai, HDIL fits the bill, while IBREL does
not. We would wait for a turnaround in volumes to turn positive.