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Developers continue to play offence
We visited the property exhibition that was held by the Maharashtra Chamber of Housing Industry (MCHI)
in Mumbai from 6-9 October 2011. It is one of the largest property exhibitions in Mumbai. Key takeaways
from our visit were
Developers continue to be in denial mode; prices have further increased by 5-10%
§ Contrary to our expectations some of the developers (Ackruti – Western Suburb, Neptune – Eastern
Suburb, Ajmera - Central Suburb, Nirmal Lifestyle – Eastern Suburb, etc.) have increased their prices by
about 5-10% over the last six months. Price increases are surprising since the sales volume for last
quarter (2QCY11) is close to March 2009 lows (as per Liases Foras). Further, volumes in Mumbai have
registered a drop of about 5-14% for four continuous quarters.
§ Customer turnout was lower, compared to the last exhibition, since the majority of the projects on offer
were in the luxury segment (greater than INR12m/cUSD0.3m).
Checks indicate grey market borrowing rates are north of 20% for grade A builders
§ Our checks with various industry participants indicate that grey market borrowing rates for even grade
A builders is north of 20%.
§ In fact some of the local developers have already started borrowing at 24%+ interest rates.
§ Increase in the cost of debt to 24% from 14% can impact net profit by about 10-16% depending on the
gross profit margin. (Assuming gross profit margin including land costs of 40-50%, ASP of
INR10,000/sqft, D/E of 1:1 and 24% borrowing rate for 1.5 years and 14% for another 1.5 years)
Banks agree that sales momentum is low; mortgage rates up by 100-200bp
§ Our interactions with banks at the exhibition indicate that sales momentum has been much lower. Even
they expressed their concerns on the high property prices.
§ Mortgage rates have increased by 100-200bp over the last six months. At current prices, for an
individual to afford a house in Mumbai – household income needs to be about INR2.6m (assuming an
average apartment value of INR120m, Loan-to-Value ratio of 70% and mortgage rate of 11%).
Liquidity needs to dry up for prices to correct; NBFC’s have recently stepped in to provide liquidity
§ We believe for residential property prices to correct in Mumbai, liquidity for developers needs to dry up.
Private-equity and loan restructuring had provided private developers some short-term liquidity in
1HCY11.
§ Our checks indicate that recently non-banking financial institutions’ (NBFC) and wealth management
firms have stepped in to provide liquidity to developers. Hence, in-spite of a significant drop in volumes,
developers have been able to increase or hold on to prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Developers continue to play offence
We visited the property exhibition that was held by the Maharashtra Chamber of Housing Industry (MCHI)
in Mumbai from 6-9 October 2011. It is one of the largest property exhibitions in Mumbai. Key takeaways
from our visit were
Developers continue to be in denial mode; prices have further increased by 5-10%
§ Contrary to our expectations some of the developers (Ackruti – Western Suburb, Neptune – Eastern
Suburb, Ajmera - Central Suburb, Nirmal Lifestyle – Eastern Suburb, etc.) have increased their prices by
about 5-10% over the last six months. Price increases are surprising since the sales volume for last
quarter (2QCY11) is close to March 2009 lows (as per Liases Foras). Further, volumes in Mumbai have
registered a drop of about 5-14% for four continuous quarters.
§ Customer turnout was lower, compared to the last exhibition, since the majority of the projects on offer
were in the luxury segment (greater than INR12m/cUSD0.3m).
Checks indicate grey market borrowing rates are north of 20% for grade A builders
§ Our checks with various industry participants indicate that grey market borrowing rates for even grade
A builders is north of 20%.
§ In fact some of the local developers have already started borrowing at 24%+ interest rates.
§ Increase in the cost of debt to 24% from 14% can impact net profit by about 10-16% depending on the
gross profit margin. (Assuming gross profit margin including land costs of 40-50%, ASP of
INR10,000/sqft, D/E of 1:1 and 24% borrowing rate for 1.5 years and 14% for another 1.5 years)
Banks agree that sales momentum is low; mortgage rates up by 100-200bp
§ Our interactions with banks at the exhibition indicate that sales momentum has been much lower. Even
they expressed their concerns on the high property prices.
§ Mortgage rates have increased by 100-200bp over the last six months. At current prices, for an
individual to afford a house in Mumbai – household income needs to be about INR2.6m (assuming an
average apartment value of INR120m, Loan-to-Value ratio of 70% and mortgage rate of 11%).
Liquidity needs to dry up for prices to correct; NBFC’s have recently stepped in to provide liquidity
§ We believe for residential property prices to correct in Mumbai, liquidity for developers needs to dry up.
Private-equity and loan restructuring had provided private developers some short-term liquidity in
1HCY11.
§ Our checks indicate that recently non-banking financial institutions’ (NBFC) and wealth management
firms have stepped in to provide liquidity to developers. Hence, in-spite of a significant drop in volumes,
developers have been able to increase or hold on to prices.
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