Published on 9/03/2017 3:41:03 PM | Source: Emkay Global Financial Services Ltd
India Real Estate - Annuity plays the preferred bet - Emkay
* The Indian property market is currently in the midst of a perfect storm with twin impact of demonetization and imminent introduction of the Real Estate Regulator (RERA) leading to falling demand on the back of an expected price correction in residential property prices, deferment of supply by developers and residential inventory levels of 30-48 months across Tier I cities.
* At the same time, falling mortgage rates and the Indian Central Government’s affordable housing initiatives announced in December 2016 and in the 2017 Union Budget presents a case for a bounce back in residential volumes from H2FY18 onwards (October 2017 onwards) as buyers eventually return to the market with prices remaining stable.
* In our view, while we expect residential volumes to bounce back gradually over the next 2-3 quarters, this recovery would be limited to the South Indian markets of Bengaluru, Chennai and Hyderabad and the city of Pune where prices hover between ~Rs5,000-6,000/psf. We expect the NCR market to see continued pain in the medium term as investor/speculator demand continues to wain while Mumbai city/suburbs may see robust sales only in select projects owing to unaffordable prices.
* While it is hard to ascertain the exact time when India’s residential property market picks up steam again, we prefer annuity based plays in the Indian property sector on the back of a sustained recovery in India’s office market over CY14-16, only few quality malls able to attract footfalls and improved occupancies and revenues for hotels.
* On these parameters, our top picks are companies such as Prestige Estates Projects (PEPL IN, Buy), Brigade Enterprises (BRGD IN, Buy) and Phoenix Mills (PHNX IN, Buy) where majority of EV is derived from operational rental/hotel assets along with an exposure to mid-income housing (Rs5-10mn ticket size in India). While DLF (DLFU IN) also has a strong rental portfolio, we await the completion of the multiple legs of the rental SPV stake sale.
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