India Real Estate Sector - Mixed signals in commercial property ::Macquarie Research,

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India Real Estate Sector
Mixed signals in commercial property
Event
 We attended the „Real estate Investment Forum‟ held in Mumbai last week. In
this note, we focus on the Commercial real estate market. These are based
on views expressed by participants in various panel discussion and one-onone
conversations.
Impact
 IT commercial has been very strong: This was primarily driven by the
pickup in hiring momentum by IT/ ITeS firms since late 2009. The primary
beneficiaries have been the usual suspects: Bangalore and Gurgaon. There is
no physical evidence yet of a slowdown. Notably, one consultant confirmed
that just under 50% of commercial property leasing across India is driven by
the firms eventually linked to the US. As a result, consultants and brokers are
worried about the effects in case outsourcing from the US slows down.
 Developers and IT companies are bullish: Interestingly, consultants'
concerns are in contrast to the bullish view of developers and IT companies.
Developers have a tendency to (and an interest in) being bullish. IT
companies however appear to be putting their money where their mouth is. All
participants confirmed that IT companies are looking at a strong (maybe
record) year of hiring in 2012. This is in line with channel checks by our tech
analyst, Nitin Mohta (refer to Back to school- Channel checks on campus
hiring dated 28 September 2011).
 Non IT commercial – still under pressure: Leasing in the non IT
commercial market has picked up. Rents however remain under pressure due
to over-supply issues. Leasing by financial firms has slowed as expansion
plans have been put on hold (as we all know and are experiencing). This has
impacted demand in Mumbai.
 Physical market investors shying away: We spoke to a few investors,
consultants and advisors during and around the conference. The encouraging
aspect is that there are a few funds that have undeployed capital. This was
raised in India and abroad in 2009-2011. However they are finding it tough to
invest. Their calculations suggest that IRR calculations on new projects are
fluctuating within a range that is too wide to be acceptable. This elevated risk
profile is due to the fluid scenario of regulations and “policy inaction”. One
important issue has also been the lack of vehicles to exit and constant change
in policy from investments made in 2005-2008.
Outlook
 Bangalore and Gurgaon stand out in IT/ ITeS: Prestige, DLF and Ascendas
India Trust look best placed. However, as discussed above, concerns of a
slowdown in the US are emerging, albeit without any anecdotal evidence.
 Occupied property faces least threat – as in 2008: As mentioned in our 30
Sep note (Debt stress rises), “rental income has been the only resilient source of
income. Developers with occupied yielding assets and good quality tenants are
in a good position”. Prestige, followed by DLF stand out. In case of Prestige,
FY12 lease income alone is more than the interest cost. Pre leasing trends
suggest this cover will rise in FY13.