New Residential Launch, Push Up Sales

All cities except Gurgaon saw an increase in new launches in 1QCY15 leading to a QoQ increase in sales (demand). We question sustenance here as we believe (from historic property cycle experiences) that developers use new launches at attractive prices as one of their strategies to push up sales and cash flows in periods of market weakness. Gurgaon clearly witnessed this play out in CY14 with little success.

Mumbai - 1QCY15 witnessed a pick-up in sales velocity led by launches at attractive pricing by well-known developers timed with local New Year in March. However, we maintain our view that Mumbai housing market remains tough evidenced by CY14 annual absorption rate flat at 24% compared to CY13. We reiterate our belief that projects by developers with good brand-value and execution track record will see better sales velocity. 10 key project launches (mainly in eastern & western suburbs) accounted for 33% of total new sales in 1QCY15.

Bangalore - 1QCY15 was the 2nd consecutive quarter to witness new project launches greater than 13,000 units (14,000 units in 4QCY14). Led by aggressive launches, 1QCY15 clocked new sales (demand) of more than 8,000 units (only the 2nd occurrence in last 7 years). As unsold inventory continues to rise above 70,000 units or above 10 quarters, we believe these are early signs of weakness. Also, mere 4% increase in overall housing price in CY14 supports our hypothesis

Noida - CY14 strategy of controlling new launches (supply) worked well in containing rising unsold inventory. We believe Noida’s unsold inventory has peaked at 100,000 units. However, given recent absorption rate, Noida will require 14 qtrs to exhaust this unsold inventory. 1QCY15 witnessed new sales of ~4,800 units which is the lowest in last six years. Absorption rate at 4.5% is lowest ever as investors who held the market in the past seemed to have deserted the market given poor visibility on timely delivery, price appreciation and exit to end-user.

Gurgaon - We believe the key reasons for drop in absorption rate are – 1) poor affordability as housing prices rose amidst slowing income growth, 2) pace of development of physical and social infrastructure much slower than housing development and 3) stock dump by investors in projects nearing completion (launched in 2009-10). We foresee following events to occur before any meaningful resurrection in sales and cash flows – 1) notable rise in new launches with freebies and discount schemes and 2) reduction in investor inventory in secondary market.