Real Estate - festival season a cracker, but Mumbai fails to join: Edelweiss

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n  Robust volumes in festival season; Mumbai the exception

Volumes on a pan-India level were robust across cities in September-October 2010, with the NCR region and South Indian cities of Bengaluru and Chennai continuing to post uptick in volumes. Also, inventory levels remained steady at around seven months in spite of new launches across India. However, Mumbai has been the exception with volumes declining ~40% from peak of May 2009 which is attributable to the fresh round of price hikes of 15-20% since April 2010 effected by developers, which has dampened buyers’ sentiments. We expect volumes to continue to be robust in 2010, with stable prices across India, except Mumbai, where we expect prices to correct ~10% in the near term and revert to April 2010 level.

n  Proposed monetary policy changes may impact premium segment

The Reserve Bank of India (RBI) has proposed capping of loan-to-value (LTV) ratio in housing loans by banks to 80% and increased risk weightage for residential housing loans of INR 7.5 mn and above in its November 2010 Monetary Policy Review. This is expected to dampen overall sentiment in the real estate sector, especially in Mumbai.

n  Commercial/retail leasing steady with marginal rental uptick

In Q3CY10, commercial leasing activity across India continued to remain steady with marginal uptick in rentals of ~5-10% in select micro-markets. Bengaluru is the strongest market with YTD absorption (Jan-Sep 2010) of ~8 msf and is on track to achieve ~10 msf of leasing for CY10, which is on par with area leased in CY07-08. Mumbai and NCR are also witnessing leasing activity in select projects, with other cities such as Kolkata, Chennai and Hyderabad continuing to see high vacancy levels.

n  Outlook: Maintain ‘Overweight’ stance on real estate sector 

After a muted July-August where launches/execution were on the backburner, there is renewed activity from September 2010 in terms of new launches and project execution. We expect improved traction in the coming months backed by a positive hiring outlook and salary hikes while rising input costs and impact of rising borrowing costs are key negative risks. We reiterate our ‘Overweight’ stance on the sector with DLF, Anant Raj Industries, Brigade Enterprises, and Orbit Corporation being our top picks.