Prices continue to be stubborn in Mumbai
Residential prices in Mumbai continue to remain sticky. According to
PropEquity data, 3-month rolling average prices have increased 27% yoy.
Average prices are up by 49% since March 2010, which is higher than the
national average increase of 41%, and are now 1.7X national average. We
believe the price increase was on account of: (1) investor buying; (2)
curtailed supply due to slower approval process.
Strained affordability leading to subdued demand
Sustained higher prices have led to lower affordability and consequently
tepid demand. Volume absorption in March was lower by 25% yoy, while
rolling 3-month average absorption has dropped by 15%. Recent
absorption has fallen by 65% compared to peak level in Nov-2010. We
estimate 15+% price correction is required in Mumbai to drive demand.
15% price correction along with lower interest rates/ marginal salary hike
will improve affordability by 25%. Another possible scenario is price
stability for 3-4 years with gradual improvement in affordability.
Flurry of subvention schemes introduced to propel demand
We have seen several developers offering structured schemes or reducing
size of apartments (thus reducing ticket size) to boost sales. 20:80
subvention schemes are one of the most popular mechanisms to propel
demand, in which the buyer has to make 20% upfront payment and
balance after defined period/possession. Most developers are charging 2%-
3% higher prices on these schemes, but they offer customers an interest
savings of around 15% over a construction period of 3-4 years. While
these schemes can help improve project level volumes, we believe
absolute price correction is required to improve sentiment.
Fine-tune estimates for Oberoi realty and HDIL
We lower our FY14E-FY16E EPS estimates for Oberoi and HDIL by 1%-14%
to reflect slower launches and further delays in regulatory approval. Thus,
we change our 12-m NAV based target price for Oberoi to Rs 290 (from Rs
315) and for HDIL to Rs 50 (from Rs 60). While we await further visibility of
launches (Worli, Mulund and JVLR) before turning more constructive on
Oberoi, we think delay in regulatory approvals will be a key overhang for
HDIL in the near term. Maintain Neutral on both stocks.
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Residential prices in Mumbai continue to remain sticky. According to
PropEquity data, 3-month rolling average prices have increased 27% yoy.
Average prices are up by 49% since March 2010, which is higher than the
national average increase of 41%, and are now 1.7X national average. We
believe the price increase was on account of: (1) investor buying; (2)
curtailed supply due to slower approval process.
Strained affordability leading to subdued demand
Sustained higher prices have led to lower affordability and consequently
tepid demand. Volume absorption in March was lower by 25% yoy, while
rolling 3-month average absorption has dropped by 15%. Recent
absorption has fallen by 65% compared to peak level in Nov-2010. We
estimate 15+% price correction is required in Mumbai to drive demand.
15% price correction along with lower interest rates/ marginal salary hike
will improve affordability by 25%. Another possible scenario is price
stability for 3-4 years with gradual improvement in affordability.
Flurry of subvention schemes introduced to propel demand
We have seen several developers offering structured schemes or reducing
size of apartments (thus reducing ticket size) to boost sales. 20:80
subvention schemes are one of the most popular mechanisms to propel
demand, in which the buyer has to make 20% upfront payment and
balance after defined period/possession. Most developers are charging 2%-
3% higher prices on these schemes, but they offer customers an interest
savings of around 15% over a construction period of 3-4 years. While
these schemes can help improve project level volumes, we believe
absolute price correction is required to improve sentiment.
Fine-tune estimates for Oberoi realty and HDIL
We lower our FY14E-FY16E EPS estimates for Oberoi and HDIL by 1%-14%
to reflect slower launches and further delays in regulatory approval. Thus,
we change our 12-m NAV based target price for Oberoi to Rs 290 (from Rs
315) and for HDIL to Rs 50 (from Rs 60). While we await further visibility of
launches (Worli, Mulund and JVLR) before turning more constructive on
Oberoi, we think delay in regulatory approvals will be a key overhang for
HDIL in the near term. Maintain Neutral on both stocks.
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