Published on 26/10/2021 12:48:16 PM | Source: Motilal Oswal Financial Services Ltd

Real Estate Sector Update - Optimism intact for Residential Real Estate By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Real Estate Sector #Sector Report #Motilal Oswal Financial Services Ltd

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Optimism intact for Residential Real Estate

Office leasing to remain muted in the near term

* We hosted five companies in the unlisted Real Estate space to assess the ground reality of the recent demand pick-up, the optimism behind the expected upcycle, and divergent trends across the Residential and Office segment.

* The key takeaway was that the Residential sector is finally seeing positive sentiment with respect to demand after 7-8 years, and that the momentum is here to stay.

* Prices have hit rock bottomed and are expected to pick-up gradually in the near term as the supply crunch is likely to see demand exceeding launches.

* Outlook on Office leasing remains muted as the industry begins recalling employees to offices over the next 4-5 months. However, the long term outlook remains positive for Grade-A developers.


Demand sentiments positive and here to stay

* The demand momentum has picked-up over the last two months, continuing from where it left before the second COVID wave, and has absorbed a large part of the completed and near complete inventory across markets.

* Consumers have realized the importance of home ownership and upgradation demand, backed by strong IT hiring and salary revisions has led to a strong pickup in demand.

* The demand-supply balance will ensure the recovery has more legs. Further, Infrastructure development is leading to incremental habitable locations in urban centers, making sure that demand for housing is here to stay.


Prices to firm up after 12-18 months

* After remaining stagnant over the last 6-7 years, prices have hit rock bottom and have started to improve in few pockets/projects.

* While developers will remain watchful on how the inventory position pans out, the supply crunch will mean that prices are likely to inch up from that prevailing 12-18 months back.

* Over the next 4-5 years, it is expected that prices will be 1.3-1.4x of current levels, or 4-5% on a CAGR basis.


Consolidation to benefit large public and private organized players

* Stronger players, who could sustain the cash crunch, have survived, while a sizeable chunk of players has exited the sector.

* Over the next 6-12 months, supply will continue to be restricted to large listed and private players. Big bang expansions are expected only from these players, while smaller players will consolidate.

* Over the long term, 20-25 players are likely to dominate the market v/s current developer count of 400-500 players across markets.


Office leasing to remain muted over the next 2-3 quarters

* Tenants are right now focusing on recalling employees back to office, which will take at least 4-5 months. The leasing cycle will return once global Office occupancies are back to normal, which will take at least 2-3 quarters.

* Tenants are increasingly focused on employee hygiene and wellness, which means that demand for Grade-A office will remain in favor.

* While the near term outlook remains muted, the long term view remains positive as 50%/85% of global/domestic companies surveyed by CBRE are expected to grow their Real Estate portfolio by more than 30% over the next 3-4 years.

* Supply has remained stagnant at pre-COVID levels of 40-45m sq. ft. annually. Headline rentals have remained unchanged for a large part of last year, but saw a 3-5% correction in 2QCY21.


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