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Realty Check India
Share price correction + improving 2H outlook= Buying opportunity?
•Investment view– We had turned a cautious on the property sector in
early Oct purely on valuations (Please refer to note on Oct 6, Realty
Check: Recent rally has been sharp, time to take a breather). Recent
corporate loan scam and not so encouraging Sep-Q have triggered a sharper
than expected correction, and BSE Realty has come off by 24% from its
Nov-10 peak. This correction, in our view, provides an entry opportunity
into the space given overall healthy trends in the physical market. DLF
remains our top pick. We believe that company’s net debt levels have
peaked out and incrementally cash flows should be strong over the next 2
quarters in part aided by plotted sales in Gurgaon. Outlook on office leasing
is improving as well. Among the mid caps – we prefer Phoenix Mills
(recently initiated) given healthy pre-lease commitments across its
upcoming developments and improving retailer sales trends.
•Physical market- What’s performing / what’s not:
o Gurgaon residential volumes perk up in Oct aided by festive
demand. Mumbai absorption stabilizing at the margin - Absorption
across key Indian cities after declining by 9% Q/Q in Sep-Q has now
started to reverse with the onset of festive season in Oct/Nov and surge
in new launches (+56% Q/Q). While Gurgaon posted an impressive
45% M/M increase in volumes in Oct post a 23% decline in Sep-Q;
Mumbai absorption too seems to be stabilizing at the margin albeit at
discounted prices (10-15% esp. in Central Mumbai). Other cities
continue to register healthy volume growth with Chennai being the key
out-performer (+79% M/M). Prices too have started to inch up in most
of these markets.
o Office recovery on a strong foothold with YTD CY10 leasing run rate
recovering to 7-7.5msf per quarter as against ~4msf in 2009. Sep-Q
recorded the highest leasing over the last two years (7.7msf) with
NCR/Bangalore registering a remarkable 38%/21% Q/Q increase. More
importantly, rentals have started to inch up over Sep-Q given robust
leasing trends and deferment of new supply (down 36% Q/Q). 2010 is
expected to witness a supply of 41msf (revised down from 52msf) as
against estimated absorption of 26msf.
o Retail demand showing signs of life, with most retailers reporting
positive sales trends and looking favorably at space expansion.
However even while leasing and enquiries have picked up; rentals have
largely remained stable Q/Q and the trend is likely to continue given
the huge supply overhang (2010 supply of 9msf vs. 5msf absorption)
and high vacancy across existing operational malls.
Residential: Festive demand and new launches aid volume
pick up in Oct
Absorption run rate across key Indian cities (Mumbai, Gurgaon, Bangalore and
Chennai) after slowing down by 9% Q/Q has now started to reverse with the onset of
festive season over Oct/Nov. Absorption has seen a marked pick up in Oct esp. in
Gurgaon (up 45% M/M) and Chennai (+79% M/M) aided by festive demand and
new launches (+56% M/M).
On YTD basis, CY10 absorption run rate is running 2% below CY09 run rate. This is
primarily attributable to slowdown in Mumbai market (down 17% Y/Y); while rest
of the markets have witnessed healthy volume growth (up 1-37%).
Unsold inventory has largely remained stable at lows of 7-9 months in
Mumbai/Gurgaon; but it is consistently coming down in Bangalore/Chennai given
the healthy absorption trends.
In terms of pricing, South Central Mumbai is witnessing 10-15% correction via
direct/indirect discounts and prices in Gurgaon remained largely stable.
Bangalore/Chennai have started to see meaningful price appreciation coming back to
the market (10-15%) after a lull of almost two years.
In terms of various markets-
1. Gurgaon – After posting a 23% decline in Sep-Q; volumes have started to pick
up meaningfully at the margin. Gurgaon posted a 45% increase in absorption in
Oct aided by festive demand (Navratri) and surge in new launches (up 77% vs.
Sep-Q). Months of unsold inventory has remained largely stable at lows of 6-7
months (based on 3 months of sales) over the Sep-Q thereby keeping the prices
firm (up 5-10% Q/Q).
2. MMR posted a 17% decline over the Sep-Q given the seasonal weakness, muted
launch activity and sharp price increases. While launches have picked up
meaningfully over the last two months; absorption too seems to be stabilizing at
the margin. While the quoted prices have largely remained stable over Sep-Q;
transacted prices have now started to come off by 10-15% (direct/indirect
discounts) esp. in South Central Mumbai. Unsold inventory has increased
marginally over the last few months with volumes stabilizing and launches
picking up.
3. Bangalore and Chennai posted a healthy 13%/21% increase in volumes over
the Sep-Q despite Jul/Aug being seasonally weak. Absorption across these
markets has continued to remain strong over Oct/Nov as well esp. in Chennai
(+79% M/M). Unsold inventory continued to decline in these markets (10-12
months of average absorption) given the healthy absorption trends and lack of
big launches. Prices have started to inch up with few developers taking 5-10%
increases over the Sep-Q given steady uptick in absorption trends.
4. Other markets ex Hyderabad too are witnessing healthy pick up in absorption
(up 5-30%). While Kolkata and Pune were the key outperformers posting 20-
30% Q/Q increase in volumes; Hyderabad fared the worst as volumes continue
to decline (-3% Q/Q, -26% Y/Y). Unsold inventory in most cities is declining
and is currently at 10-12 months; Hyderabad however has almost two years of
unsold inventory
Policy getting counter-cyclical
Early last month, RBI in a surprising move hiked provisioning norms for housing
loans and capped the LTV for housing loans at 80%. These norms, in our view, aims
to cool off pricing specifically at the higher end of the market. While pricing in South
Central Mumbai have already started to come off by 10-15%; pricing in Gurgaon has
remained firm as yet. In our view, RBI is just being countercyclical in order to
prevent excesses in certain pockets. This is not necessarily bad and is indeed good in
our view.
Further, rate hike of 50bps is unlikely to materially de rail affordability dynamics
currently as the confidence in job prospects/wage remains high. We estimate that
wages would need to rise by 3% to keep affordability at current levels. Underlying
wage growth in India is expected to be at a double-digit level, and this should easily
provide an offset.
Affordability remains healthy across markets ex Mumbai
Residential prices in Mumbai have increased by 30-50% over the last few quarters
and are now even above their peak levels of 2007-08. This has started to constrain
the affordability thereby adversely impacting the volumes in the market. Prices in
Gurgaon too have increased meaningfully over the last few months. However,
affordability in most cities (ex Mumbai) remains sound given prices in these markets
have remained flat or have witnessed marginal increase of 5-10%.
Office recovery gaining ground.....however rental recovery
unlikely in the near term
Leasing activity remained healthy at 7.7msf in Sep-Q (+12% Q/Q) as against
6.8msf/7.2msf in Jun-Q/Mar-Q. YTD2010 absorption run rate of 7-7.5msf per
quarter is quite encouraging when compared to 2009 levels of ~4msf of leases per
quarter. New supply at 5.9msf (-36% Q/Q) seems to have been pushed further
resulting in declining vacancy rates across most markets.
Even while the absorption is gaining momentum; rental values are unlikely to pick
up in the near term given the huge supply overhang and existing high vacancy levels
across most markets. Overall for 2010, JLL expects office supply of 42msf against
the estimated absorption of 26msf. This is expected to push the vacancy levels higher
to >20% by 2010 end from ~18% currently. CBDs however will be an exception to
this trend given limited supply addition in these micro markets.
Capital values, however, might start to increase given the decline in yields.
Investment yields across markets have declined by 80-100 over the last year and the
trend is expected to continue on the back improving demand environment and
reduced risk aversion.
There has been a noticeable shift in lease enquiries towards SEZ projects vs. IT parks
over the last quarter as STPI tax benefits are set to expire by Mar-11. However,
proposal to bring the SEZs under the MAT ambit under the recently tabled DTC code
could affect the demand in the near term. Further, tax benefits would be available
only to the units notified before Mar-12 and operational before Mar-14
In terms of various markets,
1. NCR continues to register steady increase in office absorption (+38% Q/Q).
Overall 1.4msf was leased in Sep-Q (Gurgaon – 0.3msf; Noida – 0.94msf)
as against 1msf in Jun/Mar-Q. Surprisingly, Noida accounted for over 65%
of the total absorption contrary to usual trend when Gurgaon accounts for
majority of the take up. This was on account of few large leasing deals in a
SEZ in Noida. Overall vacancy levels remain high at >30% primarily due to
huge vacant space in Noida (>40%). Rentals have started to inch up esp in
prime Delhi/Gurgaon on the back of improving absorption.
2. Mumbai continues to register healthy leasing run rate with 1.9msf of leases
being concluded in Sep-Q (flat Q/Q) which is almost double of 2009
absorption run rate. Similar to NCR, SEZs accounted for majority of
absorption in Sep-Q. Vacancy levels (at 21.5%) as well as rentals remained
largely stable Q/Q. While the absorption has been fairly strong YTD;
enquiries have started to slowdown thereby indicating a possible moderation
in absorption run rate going ahead as most of the pent up demand appears to
be satiated.
3. Bangalore recorded the highest absorption across all key markets and is the
only market witnessing meaningful recovery in rental values. Sep-Q leasing
at 2.2msf was up 21% Q/Q and was evenly distributed across markets
(Whitefield & ORR). More importantly, demand has started to come back
for under construction properties as well. With market witnessing negligible
supply during Sep-Q (on account of project delays); vacancy levels came
down to 22.6% from 25.8% in Jun-Q. Rentals appreciated by ~10%
primarily in CBD and SBD markets; while Whitefield and Electronic CIty
remained stable Q/Q (given high existing vacancy rates ~>40%).
4. Chennai witnessed a highest take up (0.8msf vs. 0.4msf in Jun-Q) in Sep-Q
over the last 18 months. While the improvement in absorption and enquiries
is an encouraging sign; the market continues to witness huge supply
additions (4.2msf in 9M10) and high vacancy levels (~34%). This has kept
the rentals under pressure and the trend is likely to continue.
5. Other markets (Hyderabad, Pune, Kolkata) with the exception of
Kolkata too continue to register robust leasing trends. Rentals and vacancy
levels have largely remained stable Q/Q given high supply additions and
high vacancy levels across markets
Retail – Signs of life coming back as sales trends have
started to improve
Retail segment has witnessed a meaningful improvement in lease enquiries over the
last year as developers become more accommodative in terms of their asking rents
and lease terms in order to ensure higher occupancy. Rentals across markets have
corrected by 30-40% from their peak levels. Minimum guarantee coupled with
revenue sharing has emerged as a favored model amongst the retailers.
Most retailers (Pantaloons, Shoppers Stop) have reported healthy sales trends over
the last 6 months driven by improved consumer spending and now seem to have
resumed back their expansion plans. While there has been a meaningful pick up in
enquiries, actual leasing activity is yet to gain momentum.
Even while the leasing and enquiries have picked up; rentals have largely remained
stable Q/Q and the trend is likely to continue given the huge supply overhang and
high vacancy across existing operational malls.
Mall supply has been deferred further to adjust to the absorption trends. Overall 2010
is expected to witness completions of 9.4msf (vs. 14msf earlier estimate) as against
an estimated absorption of 4.9msf (vs. 7msf earlier estimate). Majority (>80%) of the
supply expected over 2010/11 is at advanced stage of construction and is therefore
certain to become operational by 2010 end. This would keep the vacancy levels
elevated and rentals under check.
In terms of various markets
1. NCR witnessed supply of 1.3msf in 3Q primarily in South Delhi market.
Leasing has picked up meaningfully with most new brands/retailers looking
to establish their presence in the mall capital of India (Delhi-NCR). Rentals
remained largely stable with the exception of Noida which witnessed 9%
correction on account of limited leasing activity and high vacancy levels.
2. Mumbai witnessed fresh mall supply of 1.4msf in Sep-Q. Leasing activity
remained buoyant in the city on the back of improving retailer sentiment.
While overall rents remained largely stable, few micro markets like
Goregaon and Vashi have started to see some upward pressure on rentals.
3. Bangalore and Chennai did not witness any new supply addition during
3Q. Lack of new supply coupled with low vacancy levels in existing
operational malls has kept the leasing activity muted in the market. Rentals
remained stable Q/Q across both markets. With new project additions over
the next 2Qs and increasing enquiries, leasing should pick up going ahead.
These cities continue to witness considerable activity on the high streets.
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