[T.S.R:18232] Real Estate-A Recovery Rather Than The End (Nomura)

Nomura

India Real Estate-A Recovery Rather Than The End

A sign of recovery is a slight softening in residential home prices, accompanied by rate cuts running right into the middle of FY13 which will raise demand for real estate quantumfold, improving cash flows of realtors. Commercial property too is beginning to firm up-high street properties like the 7 Star Oberoi, Gurgaon have been concluded at Rs 750/sq feet in recent deals with Jimmy Choo, Hermes and the like. 

 

The residential segment witnessed a poor period in CY11, with volumes in Mumbai falling 30% YoY, while remaining flat at best in most other cities,

driven by the lack of affordability. In CY12, with supply increasing due to approvals for new launches in Mumbai, we expect prices in the city to

correct by 15% in the next 6-9 months. This price correction and also a possible decline in interest rates could renew buying interest and boost

volumes in 2HCY12. NCR could witness increased investor interest if interest rates fall, while Bangalore and Chennai are likely to witness steady

volumes with an increased focus on mid-income housing. On the whole, we expect 2HCY12 to show growth in sale volumes.

 

Office space – No demand growth expected; rentals can increase

 

CY11 was a very good year for the office market with demand at ~35.5mn sq ft, outstripping fresh supply, driven primarily by Bangalore. In CY12, we

expect leasing demand to remain flat at best, as slower growth in the economy reduces the need for office space expansion. Supply at ~30mn

sq ft in CY11 is likely to continue moderating as developers strapped for cash avoid investing in office developments. We expect to see rentals

growing in Bangalore and Chennai, and remaining flat in other cities.

 

Developers to focus on asset sales and deleveraging

 

With cash flow from regular sales not enough to make even a dent in developers' leverage over the past two years, the focus is shifting towards

selling assets and land as the pressure to repay debt increases. With too many sellers and not enough buyers in the market, we fear that developers

may have to sell asset at lower valuations in CY12F.

 

What to do with the sector and stocks?

 

Stocks in the sector are trading at a 35-70% discount to NAV, as concerns on slowing volumes, leveraged balance sheets, high interest rates and

corporate governance continue. We expect the stocks to bottom at current levels as we believe the interest rate cycle has peaked, volumes can

bounce back in six months time while asset sales can reduce leverage.

 

We remain positive on DLF (a deleveraging play), Prestige Estates (a play on Bangalore's steady volumes and rental increases) and Oberoi Realty

(Mumbai recovery and good corporate governance).

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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