Real Estate : India Commercial Quarterly Trends – 3QCY14 First signs of recovery:: HDFC Sec

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Executive summary
The Indian office market has been a laggard over the last 6
years (CY08-CY14) with lease rentals having corrected 50%
from the 2008 peak levels and remaining stagnant owing to
supply significantly outpacing demand. At the same time,
residential prices have more than doubled from their 2008
lows and remain sticky. As a result, developers have shied
away from fresh investments in office spaces over CY12-14.
With an expected economic recovery on the cards, we
believe that developers with a ready portfolio of office
assets (especially in Bengaluru), are in a sweet spot with
demand-supply dynamics expected to turn favourable over
the next two-three years. As a result, we reiterate our
positive stance on Prestige Estates (BUY), Oberoi Realty
(BUY) and Brigade Enterprises (Not Rated) as they have
significant ready leased assets in micro-markets that have
limited upcoming supply. Although we like DLF’s office
portfolio, we have a SELL rating owing to corporate
governance concerns and a sluggish Gurgaon residential
market. However, at a pan-India level we expect peripheral
micro-markets across cities to remain under pressure with
high vacancy levels of over 30%.
 Leasing activity up 40% QoQ : Quarterly pan-India net
absorption for 3QCY14 was recorded at 10.1 msf, which is
up 40% QoQ and 95% YoY with Bengaluru continuing to
be the star performer and continues to see healthy
enquiries. This is the first time in thirteen quarters that
pan-India quarterly net absorption across tier I cities has
crossed 10msf (11.1msf in 4QCY11 was the previous
occasion). Bengaluru continues to see healthy enquiries
while the micro market of Madhapur in Hyderabad
continues to see strong pre-leasing commitments.
Although NCR absorption levels appear to be strong on
YoY basis (up 4x YoY), in absolute terms supply continues
to outpace absorption with peripheral markets of
Gurgaon seeing pressure on rentals due to large upcoming
supply coupled with existing high vacancies.
 Bengaluru/MMR markets well placed to ride recovery :
The Bengaluru office market continues to see the lowest
vacancy levels across Indian cities at 12%. Slowdown in
absorption in 1QCY13 with no pre-leasing had emerged
as an area of concern. However, recovery in absorption
levels in 2QCY13-3QCY14 and strong pipeline of enquiries
are major positives. Pre-commitments of 2.3msf in
3QCY14 also remained strong (up 77% QoQ) as
corporates across IT/ITeS and BFSI continue to look for
quality offices in peripheral micro-markets. Vacancy levels
for MMR are close to the national average, but are
skewed on account of huge vacancies in excess of 25% in
peripheral areas. With improved sentiment in capital
markets and corporate activity, there are several deals in
the pipeline that may drive absorption levels upwards
from CY15E.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009988