Real Estate Sector Update - Macro stress unabated ::Prabhudas Lilladher,

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Real Estate

Sector Update - Macro stress unabated

n  Sales registrations down 25% YoY at 4,633

n  RBI indicating a pause in monetary tightening, however, monetary easing in our view is still some time away  

n  Group buying website listings indicate a ~10-15% price correction across micro markets mainly in projects that are 3-4 years from completion

n  Lease registrations down 3% MoM to 8,106   

Sales continue to languish; macro stress continues

Sales registrations for the month of October 2011 are down 25% YoY, to 4,633 levels. However on a MoM basis, registrations are up 12% on account of Shraadh falling in the month of Sept (13-27 Sept). Sales registrations have continued to languish at ~4500 levels for the last few months on the back of a worsening macro-economic environment for the real estate sector. Although RBI has indicated a pause in monetary tightening at its latest monetary policy announcement in October, we believe resumption of monetary easing is still some time away. Especially considering the sticky nature of inflation we are currently witnessing.

Our channel checks indicate that the festive season has received a tepid response contrary to builder’s expectations of a revival in sales. Thus, a stretched balance sheet, tight liquidity environment and a sharp slowdown in sales are proving to be a triple whammy for developers in the current environment. 

Also, we are not seeing many deals on the Private Equity front, despite PE being one of the few remaining sources of finance for the sector. This is mainly on account of the high 20-30% IRRs demanded by these funds. In a recent deal, Redfort capital has invested Rs250 cr in Omkar realtor’s slum rehab project in Malad. On the pricing front although we are still not seeing a meaningful reduction in prices, some of the listings on group buying websites are indicating a ~10-15% correction in prices across micro markets. However, these price reductions mainly pertain to projects that are at least 3-4 years from completion.

In terms of lease transactions October number stood at 8,106, a growth of 23% YoY, however flat (-3%) on a MoM basis. Lease registrations too have slowed down to ~8000 levels from the 9500+ levels seen in Mar-July 2011.