Given weak demand, general credit tightness and a willingness from developers to sell, one would expect land values to be trending down. However this has NOT been the case and begs the question: why is it so? We think this is partly due to most cash rich developers’ willingness to bet on demand improvement, and
there is a development margin of 25-30% to be had on current rates. More importantly, there is also optionality on potential increases in FSI across most markets (Gurgaon/Noida could benefit on this account. In Mumbai gradual increases are being affected as well).
At these transacted land rate levels we think most developers are sitting on huge MTM gains (5 to 10x) on their land holdings, however business remains cash poor on account of cash drain on legacy projects / weakness in new sales. Correspondingly on a generally low Net D/E (0.5-0.7x) levels most developers are still running tight cash flows. A balance hence needs to be restored; however this could require developers to shed 15-20% of their B/S, and asset sales are likely to continue well into the next 12 months.
Some developers have had success in these transactions and have been able to reduce debt materially. However far more is required especially given uncertain environment around pre-sales in Mumbai / NCR. However we note that most asset sales done even in this environment have been done at valuations which are far above holding cost levels and there are no signs of any decline in land values.
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