[T.S.R:18266] India Real Estate-Southern Sirens Call (Credit Suisse)

Assuming coverage of India property: prefer south-based developers.

We assume coverage of the India real estate sector with OUTPERFORM

ratings on Sobha Developers, Oberoi and Prestige Estates. We prefer stocks

with exposure to property markets with lower investor participation (south

India), falling inventory levels in office, and ability to re-lever balance sheets in

the current down-cycle. We recommend looking at through-cycle average

ROEs for the longer term; stocks with lower delta of near-term ROE to longerterm

average (such as Sobha) appear good multiple re-rating candidates.

■

Cyclical indicators suggest fundamentals nearing trough. We develop a

framework to assess developer cash flow cycles; indicators such as liquidity

(rate cycle), gearing and volume (inventory overhang) suggest an impending

price cut in the residential segment, which could positively impact developer

cash flows. Tactically, price cuts, rate cycle and asset sales could serve as

inflection points (sentiment drivers) for sector outperformance.

■

What's new in the report? Analysis of RBI data suggests mortgage

additions in key metros across India have been stagnant since March 2007.

Investors contribute highly to total absorption of properties more than Rs3.5

mn. Avoid investor driven markets as cash flows dry up during tight liquidity.

Office occupancies appear to trough in 2H FY13E and Bengaluru appears

better positioned for a recovery. Rising inventory overhang and tightening

liquidity present a strong case for price cuts, a key inflection point.

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