Investment
view..!
J.P. Morgan India think Property Developers in
India are slowly coming out of a four
year “execution down-cycle”, which didn’t allow developers to leverage on
physical price increases as low margin legacy inventory dragged cash
generation.
However, that is now changing
as select companies look to start a fresh cycle of launches after having
completed older deliveries. Lower B / S gearing vs. 2008, higher physical
market pricing and lower land banking levels imply cash generation should be
higher hereon.
In
this context, J.P. Morgan India
recommend investors look at companies, which have resolved their erstwhile
deliveries and are starting a fresh cycle of new launches.
DLF,
IBREL and Sobha fit the bill best, on this framework. DLF’s Dev co and IBREL’s
cash flows, in our view, should pick up significantly on luxury launches in
Gurgaon / South Mumbai respectively.
Further, rent co for both these
companies provides an inbuilt growth over the medium term (rent escalation
/incremental leasing). For Sobha, strong pre-sales momentum and
expected pick up in
earnings/cash flows over the next year should provide support to the stock.
Residential
launch activity rising across India. Price points are more
“flexible”
in Mumbai..!
The residential segment has
witnessed a meaningful pick up in new launches across key markets. Response to
some of the recent launches has been impressive viz. L & T in Powai / Sewri
in Mumbai, DLF New Gurgaon projects, Sobha / PVKP's projects in Bangalore.
Registrations for sale transactions in Mumbai have also turned positive over
the last few
months, after declining for the
last 2 + years.
Property prices have seen
further appreciation in Gurgaon/Bangalore. In Mumbai, deferred payment schemes
(20:80 schemes) have become prominent, implying some price softening. Unsold
inventory has remained stable with absorption and supply largely in balance
across markets. Deliveries are expected to see significant scale up over the
next few Qs with large project completions across key cities.
Office
leasing volumes are not picking up. However, rents seem to have
bottomed..!
Leasing activity has been
moderating (CY12 absorption at 28 msf down 21 % Y / Y) with corporates going
slow on expansion. Correspondingly, supply also has been lower (24msf, 50 %
below initial estimates) with developers deferring construction schedule and
holding off new project launches. Bangalore is the only market to witness
stable demand trends;
while other markets were down
15 to 40 % Y / Y.
Rentals have remained largely
stable except for appreciation in few prime locations in Mumbai and Bangalore.
Retail
segment witnessing buoyant absorption trends with the entry of
new retailers, moderate
expansion by domestic retailers and changing retail landscape in southern
cities (from high street to organized retailing).
Supply, however, has been
constrained after an active CY11, thereby pushing average vacancy levels lower
across key cities. Rentals have also started to appreciate after a gap of 3 to
4 years with demand surpassing supply levels.
Encouraged by FDI relaxation,
developers are looking to commence work on new malls; however, this will take 3
to 4 years to come to the market.
Report by J.P. Morgan India
Mr. Saurabh Kumar AC
(91-22) 6157-3590
saurabh.s.kumar@jpmorgan.com
Mr. Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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