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Investment view - Looking through risk-reward: Indian property developer stock
prices have de-rated almost 55% Y/Y due to a confluence of tightening credit,
deteriorating macro and rising regulatory/political risks. The sector in general
has now traded back to Lehman levels in terms of valuations. Against this
backdrop, our preference is for companies that offer very high absolute valuation
upside with lower concomitant regulatory/credit risks. Within this framework,
Phoenix comes out as our top pick, followed by DLF. Our high-beta pick is
IBREL, which is the cheapest (0.2x P/BV adj. for power business) stock in our
coverage and a potential multi-bagger hereon.
Physical market fundamentals:
Residential: Sales volume in 2Q11 was 10% lower than in 2Q10 with Mumbai
and Noida/G-Noida being the worst performers, while Bangalore/Gurgaon
(though moderating at the margin) fared reasonably well. Absorption is likely to
remain weak until the end of September, given the onset of the “inauspicious”
home-buying period. Launch activity has been slow in Mumbai/Gurgaon, while
Bangalore has seen a meaningful pick up, primarily in the affordable segment.
Mortgage rates at 11.25-11.5% are now close to the previous cycle peak.
although upside risk (50bp) remains. Lenders have now started offering products
with fixed rates for 1-3 years, implying more increases might be difficult to pass
on. Initial signs of price discounting have started to come through in Mumbai;
however, these are not meaningful as yet. Any volume recovery, in our view, is
unlikely to happen until October at the earliest, which marks the beginning of
festive season and would necessitate meaningful price cuts.
Office absorption remains surprisingly healthy: 2Q absorption across key
cities (at 11msf, +26% Q/Q, +30% vs. CY10 levels) bounced back to its peak
level after a breather in 1Q. Bangalore was best performing market, registering
its highest absorption over the past four years. JLL expects the absorption to
remain buoyant and is projecting a take-up of 36msf in CY11 (vs. 30.5msf in
CY10). Completions have been getting deferred given the tight funding
environment, aiding the demand-supply balance. Avg. rentals appreciated by 1-
3% Q/Q with Bangalore/Mumbai leading the recovery (+5-10% from bottom).
Retail segment witnessing increased activity as seen in increasing occupancies
in existing malls and healthy pre-leasing momentum across upcoming projects.
Overall mall absorption is likely to strengthen to 12msf in CY11 (vs. 4msf in
CY10) on the back of higher completions. Of the total, 5msf was absorbed in 1H
and additional 4.2msf of pre leases are in place. Rentals in CBD/Off CBD and
high street locations have started to appreciate as a result of the above.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment view - Looking through risk-reward: Indian property developer stock
prices have de-rated almost 55% Y/Y due to a confluence of tightening credit,
deteriorating macro and rising regulatory/political risks. The sector in general
has now traded back to Lehman levels in terms of valuations. Against this
backdrop, our preference is for companies that offer very high absolute valuation
upside with lower concomitant regulatory/credit risks. Within this framework,
Phoenix comes out as our top pick, followed by DLF. Our high-beta pick is
IBREL, which is the cheapest (0.2x P/BV adj. for power business) stock in our
coverage and a potential multi-bagger hereon.
Physical market fundamentals:
Residential: Sales volume in 2Q11 was 10% lower than in 2Q10 with Mumbai
and Noida/G-Noida being the worst performers, while Bangalore/Gurgaon
(though moderating at the margin) fared reasonably well. Absorption is likely to
remain weak until the end of September, given the onset of the “inauspicious”
home-buying period. Launch activity has been slow in Mumbai/Gurgaon, while
Bangalore has seen a meaningful pick up, primarily in the affordable segment.
Mortgage rates at 11.25-11.5% are now close to the previous cycle peak.
although upside risk (50bp) remains. Lenders have now started offering products
with fixed rates for 1-3 years, implying more increases might be difficult to pass
on. Initial signs of price discounting have started to come through in Mumbai;
however, these are not meaningful as yet. Any volume recovery, in our view, is
unlikely to happen until October at the earliest, which marks the beginning of
festive season and would necessitate meaningful price cuts.
Office absorption remains surprisingly healthy: 2Q absorption across key
cities (at 11msf, +26% Q/Q, +30% vs. CY10 levels) bounced back to its peak
level after a breather in 1Q. Bangalore was best performing market, registering
its highest absorption over the past four years. JLL expects the absorption to
remain buoyant and is projecting a take-up of 36msf in CY11 (vs. 30.5msf in
CY10). Completions have been getting deferred given the tight funding
environment, aiding the demand-supply balance. Avg. rentals appreciated by 1-
3% Q/Q with Bangalore/Mumbai leading the recovery (+5-10% from bottom).
Retail segment witnessing increased activity as seen in increasing occupancies
in existing malls and healthy pre-leasing momentum across upcoming projects.
Overall mall absorption is likely to strengthen to 12msf in CY11 (vs. 4msf in
CY10) on the back of higher completions. Of the total, 5msf was absorbed in 1H
and additional 4.2msf of pre leases are in place. Rentals in CBD/Off CBD and
high street locations have started to appreciate as a result of the above.
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