Real Estate MCHI Exhibition: Pricing at peak levels:: Religare

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Real Estate
MCHI Exhibition: Pricing at peak levels
We visited the semi-annual MCHI Exhibition held in Mumbai during October
21-24. The key takeaways include: a) Property prices have increased by up to
33% since the last exhibition (held six months ago). b) Limited discount/freebies
are on offer. c) While footfalls were good, potential buyers were shying away as
most of the projects were unaffordable. d) Builders have a strong pipeline of new
launches amidst lower unsold inventory. Here onwards, we believe that even
though new launches may continue (offering limited discounts or price relief),
volumes may plunge (by 20-30%) because of lower affordability (already
touching FY06-FY07 levels). This in turn may stop further price escalation (we
estimate a 10% YoY increase in our valuation). Thus, we see downside risks to
our price assumptions and recommend stocks wherein lower demand is unlikely
to impact cash flows. Our top picks include Indiabulls Real Estate, Sobha
Developers, Phoenix Mills and Anant Raj Industries.
Mumbai property prices scale 2008 highs: From our conversation with
developers at the MCHI Exhibition, we find that prices in Mumbai have not only
risen sharply since April ’10 but have also moved beyond their pre-downturn
(2008) peaks. Prices have increased by up to 33% from their April ’10 levels
particularly in areas like Kandivali, Borivali, Malad, Andheri, Vile Parle,
Chembur, Parel, Thane, Dahisar, Mira Road and Wadala.
We believe absorption at these prices could decline if pricing continues to heat up.
At the same time, we do not expect prices to fall in the short term as developer
inventories remain low (Fig 1).
New projects in the offing: We observed that almost all developers who had
launched residential properties in the last 2–3 months have also planned new
launches in the western suburbs (Goregaon, Kandivali, Borivali, Andheri), central
line (Thane, Kalyan) and in peripheral areas (Mira Road, Bhayandar, Vasai, Virar,
Boisar). These launches are in line with our expectations though the steep pricing
of these properties will keep buyers away. However, we noticed higher interest
in areas like Panvel and Virar where the price rise hasn’t been so sharp; this
demand should primarily be investor-led, in our view. Surprisingly, we also
found some commercial office launches on offer at reasonable prices (outright
sale and lease). Such projects generated a high degree of enquiries, a feature that
was missing in the last MCHI Exhibition held six months ago.
Limited discount keeping volume subdued: Our discussions with developers,
their marketing personnel, and housing finance companies revealed that limited
discounts are being offered to ‘interested’ buyers in various forms: off-price and
reference discounts, cheaper parking lots, and lucky draws. Though the enquiry
rates have increased, these discounts are doing little to drive sales volumes in the
primary market. We also noted that most of these discounts are not publicised, as
builders prefer to disclose these only to interested clients.
Teaser home loan rates available for few more months: Teaser home loan rates
for a few banks continue, but are available only for a limited period. With rising
inflation, home loan rates are likely to harden further in the coming months. This
together with spiralling property prices is likely to dampen volume growth in the
residential segment.