Launches in Bangalore bounced back to 10,000-11,000 units/qtr after a slowdown in 4Q CY13, aided by faster approvals. Our recent meetings with Puravankara and Nitesh had highlighted the same. Absorption remains strong in the affordable category (Rs7.5- 15mn/unit, +8% YoY). Inventory levels remain steady around 8 qtrs of sales. Sobha has already reported 25% growth (QoQ) in Bangalore volumes as it had new launches in 1QCY14. While Prestige has not reported its operational update, we expect its presales number to be healthy too
Gurgaon – low demand is keeping developers away from new launches: In 1QCY14, demand was weakest since 1Q CY10 (-63% YoY). Low demand and high inventory (9.4qtrs of sales) is keeping developers away from new launches (-71% YoY, lowest since 2Q CY10). DLF and Unitech have seen
poor sales in 9MFY14 and we expect 4QFY14 to be low too.
Launches in Mumbai increased to ~12,700 units (from avg of 8,000 units/ qtr in CY13). This was driven by launches in certain micro markets of eastern suburbs and Navi Mumbai. Inventory levels remain high at
~10 qtrs of sales as high prices and an uncertain macro-economic environment are keeping buyers away (absorption down 7% to ~7,100 units).
Friday, April 25, 2014
Monday, April 21, 2014
Decoding private equity in Real Estate
The Big four large real estate funds (together managing over US$5 bn of India-focused money) and present in India since foreign direct investment was permitted first in 2005, along with an MNC bank (estimated real estate book of around US$3 bn) and an infrastructure finance company (estimated investments in real estate about 15% of the `400 bn book). Around US$4 bn was raised by PEs in the past two years for investments in real estate in India. Key highlights of the discussion were
Investors partly accepted some decisions with their first investments, mainly on (1) appreciating development timelines of larger projects, (2) dependence on government approvals and (3) execution risks and scalability of developers, missed/erred in estimations in the past. But for most investors, better realizations (restricting to metros) have helped garner returns.
The difference between expectations on equity and debt returns should increase going forward (currently only 200-300 bps) with an improving market and better learning for both developers and investors from the earlier investments. We expect equity investments to grow in select developers over the next 12-18 months.
Although real estate growth is visible in tier-2/3 towns as well (along with the metros and tier-1 towns), their scale is much lower. Larger investors are now looking to invest only in the top 3-6 markets of India, unlike in the 33 cities invested by the PEs since 2005-06.
Investors partly accepted some decisions with their first investments, mainly on (1) appreciating development timelines of larger projects, (2) dependence on government approvals and (3) execution risks and scalability of developers, missed/erred in estimations in the past. But for most investors, better realizations (restricting to metros) have helped garner returns.
The difference between expectations on equity and debt returns should increase going forward (currently only 200-300 bps) with an improving market and better learning for both developers and investors from the earlier investments. We expect equity investments to grow in select developers over the next 12-18 months.
Although real estate growth is visible in tier-2/3 towns as well (along with the metros and tier-1 towns), their scale is much lower. Larger investors are now looking to invest only in the top 3-6 markets of India, unlike in the 33 cities invested by the PEs since 2005-06.
Tide of change - perception or reality
More maturity in place. Developers argued about more maturity over the past few years. (1) Operations are more organized, scalability and execution capabilities understood and utilization and deployment of capital thoughtful unlike during the bull run of 2003-07, while (2) expectation on institutional requirement has fallen in place on parameters of returns, governance and control.
Indian high net-worth investors (HNIs) are among the smartest set of real-estate investors in the past with better returns from direct (even unstructured/unorganized) investments with developers/in real estate projects. With markets maturing, most investors are seeking the organized route with participation through funds
The key issues for investment in Indian real estate remain (1) cost and (2) options. Asset allocation to real estate in global market remains high (around US$530 bn in CY2013, of which around US$130 bn was allotted to Asia), but lack of quality supply has restricted investments in India (around US$1 bn).
There were mixed views on developers getting listed given the performance of listed developers since 2008 and expectations on valuations from unlisted developers planning to raise money through listing in the bourses.
Indian high net-worth investors (HNIs) are among the smartest set of real-estate investors in the past with better returns from direct (even unstructured/unorganized) investments with developers/in real estate projects. With markets maturing, most investors are seeking the organized route with participation through funds
The key issues for investment in Indian real estate remain (1) cost and (2) options. Asset allocation to real estate in global market remains high (around US$530 bn in CY2013, of which around US$130 bn was allotted to Asia), but lack of quality supply has restricted investments in India (around US$1 bn).
There were mixed views on developers getting listed given the performance of listed developers since 2008 and expectations on valuations from unlisted developers planning to raise money through listing in the bourses.
Monday, April 07, 2014
Noida: Affordability is key to flattish sales
Absorption rate has remained choppy since the last 7-8 quarters. We foresee this trend to continue given contrasting market forces. On the one hand, Noida offers amazing infrastructure, connectivity and affordability; whereas on the other, the city struggles with poor migration, commercial leasing, project delays and high unsold inventory. A clear trend has emerged in Noida over 2011-13 wherein new sales have remained primarily limited to sectors within Noida city and sectors with direct access to Noida Expressway.
The rise in unsold inventory levels has been relentless approaching 100k units. Given current sales run-rate, Noida will require 7-8 quarters to clear this unsold inventory. We maintain our negative view on Noida except for sub-markets of Noida city and areas under sector 110. Extensive project delays and political
problems have restricted investor interest to locals only. We would recommend end-users to prefer ready-to-move-in units compared to new launches.
Noida Office Market
The rising rentals and lack of supply in prime micro-markets of Gurgaon has made Noida attractive for prospective clients. In the past 6-9 months, we have seen a notable increase in absorption in Noida along the Noida-Greater Noida Expressway. We expect the trend to continue given good quality supply of IT SEZ
office space at a 30% discount to Gurgaon and better infrastructure in Noida. However, the rental recovery in Noida might take more time.
The rise in unsold inventory levels has been relentless approaching 100k units. Given current sales run-rate, Noida will require 7-8 quarters to clear this unsold inventory. We maintain our negative view on Noida except for sub-markets of Noida city and areas under sector 110. Extensive project delays and political
problems have restricted investor interest to locals only. We would recommend end-users to prefer ready-to-move-in units compared to new launches.
Noida Office Market
The rising rentals and lack of supply in prime micro-markets of Gurgaon has made Noida attractive for prospective clients. In the past 6-9 months, we have seen a notable increase in absorption in Noida along the Noida-Greater Noida Expressway. We expect the trend to continue given good quality supply of IT SEZ
office space at a 30% discount to Gurgaon and better infrastructure in Noida. However, the rental recovery in Noida might take more time.
Saturday, April 05, 2014
Gurgaon: Oct-Dec sales dipped to 2009 levels
The Gurgaon market continues to show stiffness on the demand side despite launches by top developers during the festive season in the Oct-Dec quarter. We attribute this weak poor trend in demand to 1) poor affordability; 2) high investor unsold inventory exerting pressure on primary markets; 3) slowdown in migration causing significant drop in commercial leasing, thereby denting end-user demand; and 4) notable shift in end-user interest from a primary market to secondary market (de-risk strategy given tough macro-economic conditions).
Although we continue to believe Gurgaon is a robust market, current market dynamics confirm the key risks are playing out. We have been highlighting two risks for Gurgaon market – 1) rising prices amid slowing income growth and 2) stock dump by investors in projects nearing completion (launched in 2009-10).
Absorption rate fell further to 11.5% in 4QCY13. We worry that the absorption rate might touch singledigits if ongoing trends sustain. If absorption does not improve soon, we foresee a notable drop in new launches and price cuts in primary markets to resurrect sales and cash flows.
Although we continue to believe Gurgaon is a robust market, current market dynamics confirm the key risks are playing out. We have been highlighting two risks for Gurgaon market – 1) rising prices amid slowing income growth and 2) stock dump by investors in projects nearing completion (launched in 2009-10).
Absorption rate fell further to 11.5% in 4QCY13. We worry that the absorption rate might touch singledigits if ongoing trends sustain. If absorption does not improve soon, we foresee a notable drop in new launches and price cuts in primary markets to resurrect sales and cash flows.
Bangalore: Highest # of launches (39k) in CY13
CY13 emerged as the best year for Bangalore residential markets across most measurable parameters – highest new launches (c 39,000 units), highest sales (c30,000 units) and the arrest in rise of unsold inventory. Bangalore witnessed new launches by top developers such as Prestige, Brigade and Puravankara. We
foresee CY14 to see quality launches (similar to 2013) at discounted prices of up to 5-7% to sustain the current healthy absorption run-rate of 14-15% (the highest since 2010).
We continue to reiterate our belief the robustness of the Bangalore residential marketis primarily due to its affordability attracting end-users and investors. Significant areas in Bangalore are priced at c Rs4,500-5,500 per sq ft equating to US$100-130k per unit. We strongly reiterate our view that residential products
within the sweet spot of US$75-200k sell the most in India.
foresee CY14 to see quality launches (similar to 2013) at discounted prices of up to 5-7% to sustain the current healthy absorption run-rate of 14-15% (the highest since 2010).
We continue to reiterate our belief the robustness of the Bangalore residential marketis primarily due to its affordability attracting end-users and investors. Significant areas in Bangalore are priced at c Rs4,500-5,500 per sq ft equating to US$100-130k per unit. We strongly reiterate our view that residential products
within the sweet spot of US$75-200k sell the most in India.
Mumbai, NCR, Bangalore - Account for 70% of Indian real estate market space
The three Tier I cities in India, namely Mumbai, Delhi-NCR, and Bangalore, together represent about 70% of the real estate market (calculated across the top seven metro cities). About 70% of annual new residential unit launches and sales in the past 4-5 years have been in these three cities. Similar is the case with the retail sector, where the three cities represent about 71% of total retail mall stock and annual transactions.
Residential prices in the three key cities have largely remained flattish to single digit correction in FY14whereasthey increased by up to 30-50% since the previous cycle in 2009. We expect prices in Mumbai to correct by up to 5-10% in the next 2-3 quarters followed by time correction over the next year. Whereas Gurgaon primary market is expected to correct up to 5% in the same time frame. On the other hand, we expect prices in Bangalore and Noida to stay firm given their increase was limited to inflation+ levels. Price correction will primarily be driven by the need to trigger sales volume recovery, generate cash flows and curb rising unsold inventory.
Residential prices in the three key cities have largely remained flattish to single digit correction in FY14whereasthey increased by up to 30-50% since the previous cycle in 2009. We expect prices in Mumbai to correct by up to 5-10% in the next 2-3 quarters followed by time correction over the next year. Whereas Gurgaon primary market is expected to correct up to 5% in the same time frame. On the other hand, we expect prices in Bangalore and Noida to stay firm given their increase was limited to inflation+ levels. Price correction will primarily be driven by the need to trigger sales volume recovery, generate cash flows and curb rising unsold inventory.
Tuesday, April 01, 2014
Latest Land Prices in Mumbai MMRDA Region
The land parcel being sold by Tata Steel is located in Borivali (a western suburb of Mumbai). The total land size is 25 acres with a development potential of 2.5-4msf depending on the availability of public car parking. If the bidding settles at the current price of Rs11.55bn, and assuming a selling price of Rs12,000/sf, cost of construction of Rs4,000/sf and sales cycle of 5 years, we estimate IRRs for the project to be 12% (if saleable area is 2.5msf) or 23% (if saleable area is 4msf).
Paucity of clean title land in Mumbai has been keeping bidding prices high. Even in this deal, six developers like Tata Housing, Indiabulls, Lodha, Kalpataru, Peninsula Land and Oberoi have been participating. The last few land deals in Mumbai (details on pg2) indicate that land prices continue to rise across the city. The physical market in Mumbai continues to remain weak due to high prices and uncertain macroeconomic environment.
Map showing Mumbai residential property prices at various locations
The Land Prices are Benchmarked Against the Prices in South Mumbai's Commercial Business Disctrict - Price = US$1700/sq ft. USD to INR In Our Calculation is at Rs 60 / $.
In Parel the Ruling Land Prices are Price = US$500/sq ft, distance from CBD = 15km
In Bandra, Land Price = US$500/sq ft, distance from CBD = 20km
In Ghatkopar, Land Price = US$250/sq ft, distance from CBD = 25km
In Andheri Land Price = US$350/sq ft, distance from CBD = 25km
In Goregaon, Land Price = US$250/sq ft, distance from CBD = 32km
In Thane, Land Price = US$180/sq ft, distance from CBD = 40km
In Borivili, Land Price = US$200/sq ft, distance from CBD= 40km
In Kalyan, Land Price = US$90/sq ft, Distance from CBD = 70km
Paucity of clean title land in Mumbai has been keeping bidding prices high. Even in this deal, six developers like Tata Housing, Indiabulls, Lodha, Kalpataru, Peninsula Land and Oberoi have been participating. The last few land deals in Mumbai (details on pg2) indicate that land prices continue to rise across the city. The physical market in Mumbai continues to remain weak due to high prices and uncertain macroeconomic environment.
Map showing Mumbai residential property prices at various locations
In Parel the Ruling Land Prices are Price = US$500/sq ft, distance from CBD = 15km
In Bandra, Land Price = US$500/sq ft, distance from CBD = 20km
In Ghatkopar, Land Price = US$250/sq ft, distance from CBD = 25km
In Andheri Land Price = US$350/sq ft, distance from CBD = 25km
In Goregaon, Land Price = US$250/sq ft, distance from CBD = 32km
In Thane, Land Price = US$180/sq ft, distance from CBD = 40km
In Borivili, Land Price = US$200/sq ft, distance from CBD= 40km
In Kalyan, Land Price = US$90/sq ft, Distance from CBD = 70km
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