HOT PROPERTY SECTOR UPDATE - Sunteck Realty
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India Equity Research Real Estate January 11, 2021
HOT PROPERTY
SECTOR UPDATE
Rising like a phoenix
CY20 was a roller coaster year for India’s property space--while
demand collapsed in Q2CY20 due to the pandemic, the sector ended
Q4CY20 on a high note with a sharp 72% QoQ recovery in housing sales
and 52% QoQ improvement in office leasing. Industry consolidation
continued, aided by funding constraints for tier 2/3 developers.
In our view, the buoyancy will sustain in the near term, leading to
continued strength in realty stocks. Hence, we revise up our sales
assumptions and reduce NAV discount/WACC for our coverage stocks.
Our top picks are DLF and Brigade Enterprises (both ‘BUY’); we
downgrade Godrej Properties to ‘HOLD’ due to rich valuations.
Housing space in CY20: Making sense of an unreal year
The pandemic singed the housing space in Q2CY20 with across-the-board demand
destruction. However, a combination of rising affordability (due to decade low
mortgage rates, stamp duty cut, price rationalisation by developers) and covid-19-
induced factors (demand for bigger units/luxury homes) led to absorption reviving
sharply in Q4CY20 (up 72% QoQ); MMR, in fact, clocked highest-ever property
registrations in December 2020. Changing consumer preferences and funding
constraints for tier 2/3 developers (loan sanctions down 35% YoY in 9mCY20) meant
that market share of listed developers surged to the highest since FY15.
Annuity space: Some recovery, but still some distance to cover
Office space leasing too was hit hard by covid-19; while demand showed signs of
recovery (up 52% QoQ in Q4CY20), it was still down 44% YoY compared to the CY19
peak. The looming shadow of ‘work from home’ means that a return to the halcyon
days of CY19 is sometime way. We believe a full-fledged demand recovery will have
to wait till CY22. Consumption in malls has been picking up and we believe the trend
will gather traction going ahead; this space is ripe for consolidation due to funding
constraints of weaker players.
Outlook: Hope beckons
As argued in our comprehensive sector report, Real Estate - The Charge of the
Consolidating Brigade, consolidation is the driving feature of India’s property
space and covid-19 has only accelerated the process. We believe housing demand
will remain robust in the near term, aided by improving affordability. Office space
absorption will recover fully only in CY22 with full-fledged return of employees to
offices still some time away. Funding crunch for tier 2/3 developers means that
market share gains for organised developers will continue. This, along with benign
interest rates, means that realty stocks will continue to perform well. We believe
the potential for re-rating is higher among developers with strong rental portfolios
and hence prefer DLF (BUY) and Brigade Enterprises (BUY). We downgrade Godrej
Properties to ‘HOLD’ from ‘BUY’ due to rich valuations.
Parvez Qazi Akash Damani
+91 (22) 4063 5405 +91 (22) 4063 5456
Parvez.Qazi@edelweissfin.com Akash.Damani@edelweissfin.com
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Contents
Housing space: Blockbuster end to the year… ……………………………………......................3
Why such a sharp revival in housing demand?……………………………..……………………….5
Covid-19 forces a change in consumer behaviour….………………………….…………………..8
….and further strengthens the trend of industry consolidation ……………..……………..10
Office space: Leasing picks up in Q4CY20….………………………………………………………….11
Retail space: Recovering fast after a hard knock …………………………………………………...14
Funding scenario too aiding consolidation ……………………………………………………………16
Benign interest rates’ helping valuations ………………………………………………………………18
Outlook: A lot to look forward to in CY21……………………………………………………………….19
2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Housing space: Blockbuster end to an year…
The housing space witnessed both ‘famine’ and ‘feast’ in CY20. The pandemic led to
demand and supply crashing in Q2CY20. Activity slowly picked up in Q3CY20 and the
segment eventually ended the year on a bright note with the festive season
witnessing good pick-up in absorption across the board.
Demand: As per Anarock, housing sales in Q4CY20 rose 72% QoQ to 50,900 units
compared with 29,520 units in the previous quarter. YoY, demand was down mere
~14% YoY.
Demand and supply rocketed in Q4CY20
90,000
72,000
54,000
(Units)
36,000
18,000
0
Q1CY18 Q2CY18 Q3CY18 Q4CY18 Q1CY19 Q2CY19 Q3CY19 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20
Supply Demand
Source: Anarock, Edelweiss Research
With a share of 53% in sales, MMR and Pune spearheaded housing demand during
the quarter. This was largely due to Maharashtra government’s decision in August
2020 to cut stamp duty rates.
Property registration volumes surged in Maharashtra
300,000
240,000
180,000
(Units)
120,000
60,000
0
Jun-17
Apr-16
Jun-16
Apr-17
Apr-18
Jun-18
Apr-19
Jun-19
Apr-20
Jun-20
Dec-19
Feb-16
Aug-16
Dec-16
Feb-17
Aug-17
Dec-17
Feb-18
Aug-18
Dec-18
Feb-19
Aug-19
Feb-20
Aug-20
Dec-20
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Number of registrations
Source: Government documents, Edelweiss Research
Mumbai property registrations, in fact, went through the roof during Q4CY20--
registration of ~19,600 units in December 2020--highest ever.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 3HOT PROPERTY
Impact of stamp duty cut - Mumbai property registrations at all-time high in December
25,000
20,000
15,000
(Units)
10,000
5,000
0
Apr-16
Jun-16
Apr-17
Jun-17
Apr-18
Jun-18
Apr-19
Jun-19
Apr-20
Jun-20
Dec-18
Feb-16
Aug-16
Dec-16
Feb-17
Aug-17
Oct-17
Dec-17
Feb-18
Aug-18
Feb-19
Aug-19
Dec-19
Feb-20
Aug-20
Dec-20
Oct-16
Oct-18
Oct-19
Oct-20
Number of registrations
Source: Government documents, Edelweiss Research
Mumbai property sale value in Q4CY20 was 50% higher than that in 9mCY20
350 30
Average ticket size (INR mn)
280 24
Property sale value (INR bn)
210 18
140 12
70 6
0 0
Apr-16
Jun-16
Apr-17
Jun-17
Apr-18
Jun-18
Jun-19
Feb-19
Apr-19
Apr-20
Jun-20
Feb-16
Aug-16
Dec-16
Feb-17
Aug-17
Dec-17
Feb-18
Aug-18
Dec-18
Aug-19
Dec-19
Feb-20
Aug-20
Dec-20
Oct-16
Oct-17
Oct-18
Oct-19
Derived sales value (INR bn) Avg. ticket size (INR mn) (LHS) Oct-20
Source: Government documents, Edelweiss Research
Sales in major South India cities, which are dominated by the technology industry,
also gained momentum. For e.g. Sobha posted its best-ever quarterly sales in
Q3FY21 (refer to, Sobha - Sharp recovery in pre-sales), that too without any major
launches; Bengaluru was a key component of the company’s robust performance.
Launches: Launches also perked up during Q4CY20 after remaining muted during
Q2-Q3CY20. Supply came in at 52,820 units in Q4CY20, up 2% YoY and 62% QoQ.
Mumbai and Pune contributed ~44% to the launches during the quarter.
4 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Unsold inventory continued its downwards trend in CY20
800,000
640,000
480,000
(Units)
320,000
160,000
0
Q1CY18 Q2CY18 Q3CY18 Q4CY18 Q1CY19 Q2CY19 Q3CY19 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20
NCR MMR Bengaluru Pune Hyderabad Chennai Kolkata
Source: Anarock, Edelweiss Research
Unsold inventory declined 2% YoY to ~638k units (flat QoQ).
….which was a difficult one, to say the least
While the strong finish to the year did provide succour to developers, the impact of
a brutal couple of quarters during the middle of the year could not be washed away
completely.
Pandemic lent a heavy blow to the housing sector in CY20
300,000 750,000
240,000 660,000
180,000 570,000
(Units)
(Units)
120,000 480,000
60,000 390,000
0 300,000
CY17 CY18 CY19 CY20
Supply Demand Unsold inventory
Source: Anarock, Edelweiss Research
On annual basis, demand declined 47% YoY in CY20 to ~138k units. Supply, on the
other hand, fell 46% YoY to ~128k units. Consequently, unsold inventory declined by
~10k units YoY to ~638k units.
Nevertheless, we believe CY21 is going to be a much better year for the housing
segment due to demand recovery (reasons discussed in detail below). We believe
absorption will continue to outstrip demand, leading to correction in unsold
inventory levels.
Why such a sharp revival in housing demand?
Only a brave few who looked at the housing sales data in Q2CY20 (a virtual washout)
could have predicted such a sharp recovery by the end of the year. The pace of pick-
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 5HOT PROPERTY
up in housing sales has taken almost everyone by surprise. We attribute the sharp
up move in sales to the following:
Low mortgage rates: The current mortgage rate at ~7% is amongst the lowest
in the past decade. This has boosted housing demand significantly as the gap
between EMIs and rents has shrunk considerably. This has led to many fence
sitters taking the plunge.
SBI Home loan rate
15.0
13.0
11.0
(%)
9.0
7.0
5.0
Jan-07
Jan-18
Jan-05
Jan-06
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-19
Jan-20
Jan-21
SBI Home loan rate
Source: SBI, Edelweiss Research
A combination of lower mortgage rates and stagnant house prices has meant
significantly improved house affordability. There has been a sizeable
improvement in affordability since 2013.
Improving house affordability
7.0
6.0 Declining affordability
House price to income ratio (x)
Steady improvement
5.0 in affordability
4.0
3.0
2.0
1.0
0.0
1999
2017
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2018
2019
2020
House affordability
Source: HDFC, Edelweiss Research
Note: Affordability equals property price divided by annual income based on customer data of a large metro city
The pattern has played out across all cities uniformly. A recent report by Knight
Frank, which tracks affordability (defined as ratio of EMI to income), indicates
that all major cities have witnessed significant improvement in affordability
over the past decade.
6 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Affordability has improved significantly over the past decade
100 93
EMI to income ratio (%)
80
61
60 53 51
48 47 45 46
38 39
40 31 30
28 26 26 24
20
0
Mumbai NCR Bengaluru Pune Chennai Hyderabad Kolkata Ahmedabad
2010 2015 2020
Source: Knight Frank, Edelweiss Research
As per Knight Frank, an EMI/income ratio over 50% makes it difficult to secure
home loans from banks and housing finance companies, making it unaffordable
to purchase a house. Going by this yardstick, Mumbai remains the only major
city where houses are still relatively ‘unaffordable’.
In fact, except Mumbai and NCR, the ratio in all other cities is ~25-30% currently
(compared to 40-50% a decade earlier), indicating the rising attractiveness for
home buyers.
Pent-up demand: Pent-up demand from H1 of the year has materialised now.
Covid-19-induced factors: The pandemic accompanied by work-from-home
(WFH) has led to consumers realising the importance of owning a house rather
than renting one.
Stamp duty cut: One of the biggest reasons behind the surge in sales in Mumbai
and Pune is the decision of the Maharashtra government to reduce stamp duty
from 5% to 2% in these cities till end December 2020; rates will be at 3% from
January-March 2021.
The state government had already reduced stamp duty from 6% to 5% for two
years in Mumbai, MMR, Pune, Pimpri-Chinchwad and Nagpur. This means that
consumers booking houses in Q4CY20 were paying just 2% stamp duty
compared to 6% in Q4CY19. This was a significant sales driver.
In fact, now the state government has slashed construction premiums related
to on-going and new projects by 50% up to December 31, 2021 (refer to, Hot
Property - Cut in premium: Bonanza for developers). We believe this will
further boost housing sales.
Price correction/attractive payment schemes: Spooked by covid-19 and the
resultant crash in sales, many developers finally faced the situation and cut
prices, especially in the luxury segment where unsold inventory levels were
high. In addition, attractive payment schemes like deferred payment plans,
subvention plans, etc., were offered to consumers. This also induced many
homebuyers to take the plunge.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 7HOT PROPERTY
Covid-19 forces a change in consumer behaviour….
By forcing consumers to remain cooped up inside their homes for months, the
pandemic gave a ‘shock therapy’ to many people. This, coupled with WFH led to
people looking at their housing needs in a totally new way. Suddenly, the need to
have a bigger house with a designated ‘work area’, a balcony to unwind and the need
to be around nature started dominating consumer lexicon.
This has led to emergence of the following trends over the past few quarters:
Preference for higher unit sizes: With many couples forced to WFH, the need
for a bigger house was felt acutely. This led to demand for higher ticket sizes.
Multiple reports have confirmed this trend:
o As per Anarock, over the past few months, inquiries for larger homes in
Bengaluru have increased up to 40% with consumers predominantly
scouting for 3BHKs (average 1,800sft built-up area) against the previously-
preferred 2BHKs.
Similarly, in Noida and Ghaziabad, buyers are now looking for 3 or 4BHKs as
opposed to the previously preferred 2BHKs. Those with lower budgets look
for 2BHK + study (2.5) of around 1,200 sft of built-up area.
o Data from PropEquity indicates that the share of houses with lower ticket
sizes (as % of overall sales) has fallen in the current year compared to CY19;
conversely, a higher proportion of larger ticket size houses are being sold.
Higher ticket sizes preferred post covid-19
24.5
Proportion of overall sales (%)
23.1
21.7
20.3
18.9
17.5HOT PROPERTY
Consumers looking at higher ticket sizes post covid-19
100
Proportion of overall sales (%)
80
57
60 51
49
43
40
20
0
< INR 5 mn > INR 5 mn
H2CY19 H2CY20
Source: PropEquity, Edelweiss Research
A Magicbricks report indicated that searches for 4BHK properties doubled due to
the pandemic and WFH. On a micro-level, Gurugram witnessed almost 73%
individuals seeking properties that were 3BHKs or more.
Luxury sales: Not only has the pandemic led to demand for bigger houses,
consumers want more amenities too if they have to spend more time at home.
This has led to higher demand for luxury homes, a segment which has been in
the doldrums for the past few years. Since the segment was struggling with high
unsold inventory, many developers finally took the plunge and cut prices post
covid-19; this also boosted sales of luxury homes.
Luxury unit sales have jumped post the pandemic
10.0
9.0
Proportion of overall sales (%)
8.0
7.0
6.0
5.0
INR 15-30 mn > INR 30 mn
CY19 Jan-Oct 2020
Source: PropEquity, Edelweiss Research
o Anarock indicated that luxury homes worth INR5bn were sold in October
2020 (up 230% YoY) in South-Central Mumbai.
o Sunteck Realty’s sales in the Signia High project in Q2FY21 almost matched
the cumulative sales in the project over FY15-20.
o News reports also indicate that Oberoi Realty sold homes worth INR2.3bn
in the last week of December 2020 (stamp duty rates were set to increase
by 1% from January 2021) in the Worli project. As a matter of comparison,
total bookings in the project in FY20 were of a similar amount.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 9HOT PROPERTY
o The phenomena is not restricted to Mumbai. Media articles indicate that
developers in Bengaluru and in NCR (DLF, Supertech, Central Park and
M3M) have also witnessed greater demand for luxury products.
DLF, in fact, has sold independent floors worth over INR3bn in Gurugram
during the festive season. It had launched 88 residences in the form of
premium independent floors (at a price point of INR37.5-42.5mn each),
spread across 22 plots, in the DLF City Phase 3 in Gurugram and managed
to sell them in a short time.
Shift towards suburbs: While most wanted a home closer to office earlier, the
growing prevalence of WFH and budgetary concerns (due to need for bigger
homes) has led to many consumers being OK at looking houses in the suburbs.
In some way, covid-19 has upended the trend towards reduction in apartment size
and tepid sales in the luxury real estate segment, which was being witnessed for the
past few years. It yet remains to be seen whether these changes are permanent in
nature or will be forgotten once normalcy resumes.
….and further strengthens trend of industry consolidation
Once the pandemic flexed its muscle and lockdown started, most developers were
left scrambling to manage their cash flow situation. While smaller developers found
it difficult to weather the ill effects of the pandemic, strong balance sheets enabled
tier-1 developers to still achieve construction finance and launch projects. This led
to strengthening of the trend of industry consolidation, which has been going on for
the past few years.
Share of organised developers in launches skyrocketed post covid-19
Share of top 10 developers in launches
100
89
80 71
69
60
(%)
44
38
40 31
28 26
16 18
20 13 12
9
6
0
MMR NCR Bengaluru Hyderabad Chennai Pune Kolkata
CY11 CY19 CY20*
Source: PropEquity, Edelweiss Research
Note: * CY20 refers to January-October 2020 period
The share of top-10 developers in launches in January-October 2020 was much
higher compared to CY19. In fact, in NCR, Chennai and Kolkata, more than two-thirds
of the overall launches were from top-10 developers.
Something similar happened on the demand front as well. Concerns about survival
of tier 2/3 players and funding availability meant that consumers flocked to tier
1/organised developers while buying houses.
10 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Organised developers increased their share in demand in CY20
50 47
Share of top 10 developers in
38 39
40 37
absorption (%)
29
30 27 27
22 22 21
20
20 17 17
14
10
0
MMR NCR Bengaluru Hyderabad Chennai Pune Kolkata
CY11 CY19 CY20*
Source: PropEquity, Edelweiss Research
Note: * CY20 refers to January-October 2020 period
As a result, the share of organised developers in demand, which had already been
increasing for the past few years, further rose in the current year.
Market share of nine listed companies highest since FY14
700 18
Average ticket size (INR mn)
Property sale value (INR bn)
560 15
420 12
280 9
140 6
0 3
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
Industry pre-sales Top 9 listed cos market share (RHS)
Source: PropEquity, Company, Edelweiss Research
While the share of nine listed companies in industry pre-sales rose to a high of ~18%
in Q1FY21--highest since FY14—it declined to ~12% in Q2FY21--still second highest
since FY14.
Office space: Leasing picks up in Q4CY20…
The covid-19 pandemic has led to significant uncertainty in the hitherto ‘stable’
office segment. The economic uncertainty due to the pandemic and WFH led to
collapse in office space demand in Q2CY20. Since then, though leasing has been
recovering, it remains far lower than the peak witnessed in CY19.
As per JLL, office demand in Q4CY20 came in at 8.27msf, up 52% QoQ. Except
Bengaluru, all other major cities witnessed improvement in net absorption during
the quarter. While IT/ITeS continued to contribute a lion’s share of leasing, sectors
such as e-commerce, healthcare and FMCG are also driving demand.
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Hyderabad topped the absorption charts during the quarter; the city, along with
Bengaluru, accounted for more than half of the net absorption during the quarter.
Despite the pick up in demand, leasing during the quarter was down 40% YoY.
Office space demand and supply ramped up in Q4CY20
15
12
9
(msf)
6
3
0
Q1CY18 Q2CY18 Q3CY18 Q4CY18 Q1CY19 Q2CY19 Q3CY19 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20
Supply Demand
Source: JLL, Edelweiss Research
As far as supply is concerned, new completions during Q4CY20 came in at 12.8msf,
up 39% QoQ. Tech-dominated cities of Hyderabad, Bengaluru and Chennai
contributed more than 70% of the completions during the quarter. Like demand,
supply too was down 18% YoY during the quarter.
As always, technology sector contributed the largest quantum to office leasing.
Despite headwinds, the co-working segment maintained its share in overall office
leasing. Manufacturing’s share, on the other hand, rose YoY in H2CY20.
H2CY19 demand break down H2CY20 absorption break down
Other BFSI
Other
services 16%
services
22%
18%
BFSI
16%
Co-working
10% Co-working
10%
ITeS
40%
Manufactur
ing
12% Manufactur ITeS
ing 41%
15%
Source: Knight Frank, Edelweiss Research
Source: Knight Frank, Edelweiss Research
…however, much more is needed
India’s office space witnessed leasing of ~26msf in CY20. While this was down 44%
compared to the peak of 46msf in CY19, it was lower by just 19% compared to the
average demand during CY16-18. Considering that Q2CY20 was a virtual washout,
this is not too bad.
12 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
While pandemic landed a hard blow in CY20, not all is lost
55 20
44 16
33 12
Vacancy (%)
(msf)
22 8
11 4
0 0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21E
Supply Demand Vacancy levels (RHS)
Source: JLL, Edelweiss Research
As far as supply is concerned, CY20 chimed in with 36msf, down 30% YoY. This was
about 9% higher than the average supply during the CY16-18, highlighting the
disproportionate impact of covid-19 on demand compared to supply.
With supply outstripping demand, vacancy levels rose for the first time since CY13;
vacancies rose ~120bps YoY to 14% at CY20 end.
The way ahead
We believe office leasing will pick up gradually as employees return to office in a
significant way (likely in H2CY21) and leasing decisions (which have been put on hold
for the past few quarters) are revisited. The impact of WFH and the changed
economic realities are some of the issues that office demand will have to contend
with.
Simultaneously, a part of the upcoming supply has also been deferred as some
developers face funding crunch, while others have reworked their plans due to
economic uncertainties.
JLL estimates ~38-40msf supply and ~32-35msf demand in CY21. This will be at par
or slightly higher than the average annual net absorption during C16-18. Thus, office
supply will continue to eclipse demand in CY21, leading to increase in vacancies
going ahead. The good thing is that the healthy performance during CY14-19 has
ensured that vacancies still remain manageable, especially in tech-dominated cities.
Bengaluru and Pune, for example, still enjoy single digit vacancy levels.
Over the longer run, we believe the negative impact of WFH will be more than
compensated by de-densification and higher demand from industries like
technology, e-commerce, data centres, etc. This, coupled with the high degree of
consolidation in the Indian office space, means that the end of the upcycle is still far
away, in our view.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 13HOT PROPERTY
Retail space: Recovering fast after a hard knock
The retail space was the hardest hit due to covid-19. While office developers
continue to get 95% plus rents despite WFH, closure of malls during the lockdown
dealt a knock-out blow to retailers and retail realty developers alike. The Indian retail
segment is estimated to have suffered a loss of INR900bn during April-June 2020, as
per the Shopping Centres Association of India (SCAI). Mall developers too bore the
brunt as they were forced to give rent waivers/deferments to retailers struggling to
stay afloat.
However, the past couple of months and especially the festive season have
witnessed handsome recovery in consumption. Footfalls have increased significantly
and conversion ratios have surged (90% post-covid-19 versus 20-40% pre-covid-19).
For e.g., for Phoenix Mills (PML), consumption in malls in November 2020 was 65-
99% of the November 2019 figure.
PML--Rising consumption trend a positive
100
80
60
(%)
40
20
0
HSP & PMC Bangalore PMC Pune PMC Mumbai PMC Chennai &
Palladium Palladium
Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Source: Company, Edelweiss Research
Note: Consumption (%) in a particular month is reflected as a proportion of
consumption in the corresponding month in 2019.
Note: November 2020 data reflects first four weeks of the month.
Note: HSP & Palladium were operational for 27 days in August 2020. PMC Bangalore
was open for 23 days and 21 days in June 2020 and July 2020 respectively. PMC Pune
was operational for 27 days in August 2020.
Note: All data on like-to-like basis
PML also reported that consumption across its retail portfolio in Q3FY21 was up
192% QoQ and ~66% YoY of Q3FY20 level. Consumption in December 2020 was flat
MoM and ~70% of December 2019.
We believe rising consumption is definitely a significant positive for retailers and will
bring buoyancy back into the retail space soon.
Pandemic hastens consolidation in retail space
The pandemic has led to significant amount of pain for the retail realty sector as it
has forced many retailers to shut shop. As per Anarock, vacancies at malls in NCR,
Pune, Bengaluru, Chennai and Hyderabad have risen 50-530bps YoY (Mumbai is the
only exception since it has seen malls vacancy decline by 390bps YoY).
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This despite reduction in rentals by mall owners. While many mall developers expect
vacancies to reach pre-covid-19 levels by March 2021, we have our doubts. With
liquidity continuing to be a challenge for upcoming malls, we believe the retail realty
space is set for a significant consolidation with weaker players likely to exit the
market and stronger ones expanding their portfolio through acquisitions.
We have already witnessed significant reduction in supply in the retail space. Prior
to the covid-19-induced lockdown in March, Anarock had estimated addition of ~54
new malls in 2020 spread over nearly 22.2msf. Of this, while the top-7 cities were to
see new supply of nearly 35 malls spread over ~14.6msf, tier 2/3 cities were to
witness new supply of 19 new malls spanning 7.6msf.
Mall completion timelines have been deferred post covid-19
16
13
10
(msf)
6
3
0
CY20E (pre-
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20 (post-covid)
CY21E
covid)
New completions Net absorption
Source: Anarock, Edelweiss Research
Note: Data for top seven cities
However, due to the pandemic, most new completions have been deferred (to 2021
and beyond) and leasing activity delayed by developers. Major Indian cities added
just five new malls spanning 2.75msf in 2020 with malls becoming operational in
Gurugram, Delhi, Lucknow and Bengaluru during the year.
Anarock now expects 14 new malls spanning 5.9msf to be completed by CY21-end;
fit-outs are underway in at least 10 of them. These will include:
Mumbai: Six new malls spanning 1.65msf.
Bengaluru: At least three new malls spanning over 1.4msf.
Lucknow: Launch of two new malls spanning over 1.15msf.
Hyderabad: One new mall covering more than 0.2msf.
Thiruvananthapuram (Kerala): One new mall spread over 1.1msf.
Rourkela (Odisha): One new mall covering almost 0.35msf.
We believe funding constraints will mean that concerns about future supply will
continue to linger. Also, loss of business due to the pandemic and the change in
contractual agreements (with higher contribution from revenue share and less from
minimum guaranteed revenues) mean that some of the existing mall owners will
continue to face difficulties.
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In such a scenario, consolidation in the retail space will accelerate going ahead.
Experienced players like PML are likely to use their strong financial position to take
advantage of the acquisition opportunities available in a stressed environment.
Funding scenario too aiding consolidation
The volatility throughout the year brought a lot of challenges for lenders to realty
developers. From worries about a new set of NPAs and loan moratorium due to the
pandemic to price wars amongst lenders for home loans, 2020 saw it all.
While the year witnessed a few developments that were positive for realty
developers, other developments made their life tough. We take a look at major
developments during the year:
Positive developments:
SBI launched a Residential Builder Finance with Buyer Guarantee (RBBG)
scheme, which will issue a guarantee of completion for select residential
projects to its home loan customers.
Stressed realty fund brings certain projects to completion stage: The fund has
cleared investments worth more than INR132bn for 136 projects, and has
started deploying funds across 36 projects. As per news reports, two such
projects are nearing completion, while seven are likely to reach the milestone
in H2CY21.
RBI permitted the extension of date of commencement of commercial
operations (DCCO) of project loans for commercial real estate, delayed for
reasons beyond promoters’ control, by another year. As per Propstack, this is
likely to have benefited ~USD6bn (INR419bn) of loans whose moratorium
period was coming to an end in 2020.
To counter the ill effects of the pandemic, RBI allowed a moratorium of six
months on payment of instalments in respect of all term loans outstanding as
on March 1, 2020.
The central bank also allowed banks to go for one-time restructuring of loans
that were facing covid-19 stress without classifying them as NPAs.
RBI rationalised risk weights on home loans and linked them to LTV ratios only
for all new housing loans sanctioned up to March 31, 2022.
It allowed banks to restructure loans to realty companies on the basis of the
project and not the developer.
Negative developments:
Loan sanctions to realty developers continue to trend down: The number of
loans sanctioned to realty developers has been declining continuously over the
past few years. The trend continued in CY20 with the number of sanctions
falling 35% YoY in 9mCY20.
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Loan sanctions to RE developers have been falling 35% decline in loan sanctions in 9mCY20
1,700 225
1506 1470 196 198
1,360 180 170
1142 158
1043
1,020 135 117
(x)
(x)
641 91
680 90
366
340 45
0 0
Q1
Q2
Q3
CY15 CY16 CY17 CY18 CY19 9mCY20
Number of loans sanctioned CY19 CY20
Source: Propstack, Edelweiss Research Source: Propstack, Edelweiss Research
Lenders seek higher security, receivables cover for realty developers’ funding:
Despite the positive developments listed above, fund availability to tier 2/3
developers remained tight largely due to the risk perception about the realty
industry.
A Propstack analysis indicated the divergence in treatment of tier 1 and tier 2/3
developers by lenders. For e.g.,
o The security cover for large loans (>INR5bn) is 1.48x, which is at a 20%
discount to average security cover of INR0-500mn loans (which is at 1.79x).
Large loans are typically taken by tier-1 developers and hence attract lower
risk weight.
Higher security cover asked in CY20 Higher security cover for smaller loans
2.0
2.0
1.79
1.8 1.71
1.8 1.63 1.62
1.66 1.6
1.61 1.62 1.48
1.58 1.55
(x)
1.6 1.4
(x)
1.2
1.4
1.0
INR 5 bn plus
INR 0-500mn
INR 500-1000 mn
INR 1.0-2.5 bn
INR 2.5-5.0bn
1.2
1.0
CY16 CY17 CY18 CY19 CY20
Security cover asked by lenders
Security cover asked by lenders
Source: Propstack, Edelweiss Research Source: Propstack, Edelweiss Research
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Higher security cover for loans with higher interest Higher security cover for smaller tenure loans
2.0 2.2 2.1
1.86
1.8 2.0
1.69
1.8 1.68 1.64
(x)
(x)
1.6 1.5
1.44 1.6 1.55
1.4
1.4
1.2 1.2
> 60 months
15%), which are normally charged in the case of
tier 2/3 developers, the security cover is 1.86x, which is at a premium of
30% plus over loans at interest rates ofHOT PROPERTY
Overall interest declined by 60bps in CY20 Interest on term loans declined by 100bps in CY20
15
13.8 15
13 12.6 12.6 12.6
13
11.7 11.6 11.8 11.6 11.6
11.3 11.0
11.0 11
(%)
(%)
11 10.3 9.7
10.2 9.2
9
9
7
7
5
All
Term loan
LRD
Debenture
5
NBFC
All
Bank
HFC
CY19 CY20 CY19 CY20
Source: Propstack, Edelweiss Research Source: Propstack, Edelweiss Research
Historically, P/E multiples of realty companies have had a negative correlation with
interest rates. This is because declining interest rates are not only accompanied by
an improvement in profitability, but also have the potential to fuel higher demand
from end users. In addition, lower cost of capital boosts rental asset valuation. As a
result, a lower interest rate regime historically led to outperformance of realty
stocks.
BSE realty index P/E trajectory with respect to RBI repo rate
50 10.0
40 8.0
30 6.0
(x)
(%)
20 4.0
10 2.0
0 0.0
Jul-20
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-13
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
BSE Realty Index P/E Repo Rate (RHS)
Source: Bloomberg, Edelweiss Research
With interest rates likely to remain soft in the near term, we believe support to
valuations of realty companies will continue.
CY21 outlook: A lot to look forward to
We believe CY21 will a year of growth and gradual improvement for companies in
our coverage. While the housing segment will continue to clock good volumes,
commercial and retail segments will continue to recover and likely reach normalcy
by the year end.
We foresee consolidation in the realty space in favour of organised developers to
gather pace; rising capital intensity of the business, credit crunch and focus on
execution are likely to aid developers with strong balance sheets and established
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brands. Developers with robust balance sheets will also benefit from attractive
business development opportunities. Overall, we expect stronger players to gain
market share going ahead.
Resumption of normalcy leads to revision in target prices
Keeping in mind the anticipated recovery in CY21, we are increasing our pre-sales
growth assumptions for our coverage companies. The overall risk-on in the market
compels us to reduce NAV discount and WACC as well.
We had already increased target price for Sobha when it reported its operational
numbers for Q3FY21. The changes for the rest of the companies are given below:
Target prices revised for coverage stocks
Current valuation framework Proposed valuation framework
TP
Company RECO CMP (INR) Upside
WACC (%) Discount to NAV (%) WACC (%) Discount to NAV (%) (INR)
(%)
DLF BUY 246 12.0 15 11.0 5 310 26.0
Godrej
HOLD 1,472 11.0 0 10.0 0 1,500 1.9
Properties
Oberoi Realty HOLD 585 12.0 15 11.0 5 639 9.2
Sunteck Realty BUY 370 12.0 10 11.0 0 463 24.9
Brigade BUY 269 12.0 20 12.0 15 355 32.1
Source: Edelweiss Research
While the entire realty pack has witnessed a sharp price uptick over the past quarter,
we still believe realty stocks are attractive from a medium-term perspective
considering rising consolidation. With investors getting increasingly confident about
housing sales trajectory, we believe the next leg of re-rating can come when leasing
and consumption normalise in the office and retail space, respectively. Hence, we
prefer DLF and Brigade Enterprises.
We downgrade Godrej Properties from ‘BUY’ to ‘HOLD’ primarily because of its rich
valuations. We continue to like the company’s operating model and believe it will be
amongst the biggest beneficiaries of industry consolidation. Indeed the company has
performed exceedingly well as far as geographical diversification, market share gains
and sales growth are concerned. We believe its success story will continue and
expect healthy pre-sales growth going ahead. However, the recent run-up in the
stock price leaves little on the table as an upside.
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Aditya Narain LIMITED, ou=SERVICE,
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e0c89e548e5001b4f8141cf423fd58c07b02,
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