[T.S.R:16742] India Real Estate: Higher Volumes Needed To Justify Building Up Land Bank (Nomura)

We hosted a dialogue session with Jones Lang LaSalle to discuss the Indian property sector and JLL's outlook for CY11. The key takeaways were office space supply will be relentless but demand will increase; residential demand will be dampened at current price points and Mumbai and Delhi could see price corrections; and stronger retail mall demand will keep rents stable as supply rises.

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Catalysts

The market will focus on free cashflow generation

through and increase in sales volumes and improved execution, in our view.

Anchor themes

CY11-12 will be a crucial period for developers, as they need to sell higher volumes not only to deleverage themselves, but also to justify the large landbanks they hold. If volumes are not substantially higher from here by CY12, then we think developers may not be able to get full value for their large land holdings.

 

Jones Lang LaSalle's View

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Residential demand to moderate over next few months

Given the current affordability issues in cities like Mumbai and Delhi, along with high mortgage rates, JLL sees residential demand coming down over the next few months, although it does not expect a 2008-like collapse given increasing incomes and good job security. It expects prices in Mumbai to correct by 15% but believes that Bangalore, Chennai and Gurgaon can continue to do well, given better affordability and an increasing number of jobs. Launches of low-priced projects in the outskirts of cities may increase while launches of premium projects slowdown.

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Office rents will start increasing only post mid-CY11

In CY11, office space demand at 36mn sqft is likely to be the best ever, according to JLL, as demand across sectors picks up. At the same time, it believes supply is also likely to be very high at 66mn sqft, although we expect it to be much lower at 45mn sqft. Despite vacancies increasing from the current level of 18%, JLL sees rents to start rising from mid-CY11 onwards as supply in CY12 will be lower while demand could increase further if the economy continues to grow at 8%. CY11 may see non-IT/ITeS sectors also leasing greater amounts of office space, while demand from IT/ITeS companies itself will likely be robust.

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Retail demand to touch new highs in CY11; so will supply

Given increasing consumption in India, retail leasing demand has bounced back smartly, although retailers are now choosy about the asset quality and location, JLL noted. Revenue sharing agreements are now quite prevalent and expected to continue. Vacancy rates at 24% currently have kept a firm lid on rents and JLL expects this could continue into CY11 as supply may remain higher than demand.

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No distress expected for developers

JLL does not expect a 2008-like situation for developers and to date has not seen any distress in developers. It believes higher cost non-bank and private equity funding will replace bank funding in the next few months.

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