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All set for yet another good year 

Listed real estate players posted a strong performance in 1QFY23 (booking values up +1.77x YoY; down 16% QoQ across a sample of 12 listed companies) in a seasonally weak quarter (2Q is generally the weakest). For FY23, booking values across developers are expected to show 10-30% YoY growth barring exceptions like Mahindra Lifespaces (+80%). Given the sales momentum in 1QFY23 we feel the ask rate for balance 9MFY23 appears to be realistic (Exhibit 2). A key monitorable remains the rise in interest rates / home loan rates which are currently being negated by i) fixed home loan rate schemes floated by developers and ii) limited systemic inventory, rising rental yields and price hikes influencing customer purchases. Given the healthy demand supply scenario, we feel developers with large land banks and aggressive launch pipelines are likely to benefit. Among other segments, retail has recovered sharply on all parameters while commercial / REITs are showing improvement in occupancies. With better access to capital (equity and debt) and minimal leverage, listed developers are looking to accelerate growth via acquisition of land banks / projects through JDA model. We remain positive on the listed real estate space on the back of a) healthy underlying demand, b) strong launch pipeline and c) consolidation theme playing out. We continue to like DLF, Macrotech, Prestige Estates, Oberoi Realty and Phoenix Mills as our preferred picks. Key risks: Slowdown in demand environment

* Interest rate worries linger but demand holding up: Across the listed universe, developers are expected to show 10-30% YoY growth in booking values for FY23 with broad based demand momentum (ticket sizes / regions). Given, the accelerated sales momentum and minimal leverage (less than 1x net debt to equity for the whole sector) business development activities continue at a frenetic pace. Over the past few months commodity inflation has also tapered off (Exhibit 5-6) and launches which were delayed are now likely to pick-up but systemic inventory remains low (Exhibit: 1) and launches continue to lag sales

* Leverage remains low; impact of interest rate likely to be minimal: Across the sample of 12 companies, all companies have net debt to equity below 1.0x as the developers have benefitted from i) liquidation of RTM inventory, ii) stake sale across assets, iii) equity issuances and iv) lower cost of borrowing. Given the current market conditions, developers are likely to maintain low leverage and interest rate hikes are unlikely to impact the cash flow profile meaningfully

* Interest rate – Mitigation plans: Macrotech Developers (one of the largest in the country) believes housing demand is not sensitive to modest increase in interest rate and after first 12-24 months from home purchase, EMI becomes a ‘non-issue’ due to salary growth. Macrotech has rolled out ‘interest rate increase’ absorption plan – increase in EMI due to increase in ROI beyond 6.99% to be borne by MDL up till Jun’24. Max. increase borne by Lodha capped at 150 bps. Other developers including Piramal seem to be following the fixed interest rate (6.75%) policy as the focus remains on sales velocity from a developer perspective. We feel this remains an attractive scheme from a customer perspective and given strong minimal debt across developers can be offered for a prolonged period thereby artificially depressing the interest rate volatility upto a certain extent.

* 2QFY23 likely to be QoQ seasonally weak but registration data shows traction: The average daily registration across Mumbai for the month of August (till 23Aug’22) stood at 248 units per day (+13% YoY; down 32% MoM; +31% higher than Aug’19; Source: IGR) indicating yet another strong month compared to historical years. While 2QFY23 remains the seasonally weakest quarter we don’t expect any meaningful change in the positivity across developers

* DLF, Macrotech, Oberoi Realty, Phoenix Mills and Prestige Estates are preferred picks: At a broader level, we are witnessing i) continued optimism in the residential space, ii) sharp recovery in retail and iii) gradual revival in commercial segment. We continue to like DLF, Macrotech, Oberoi and Prestige Estates as our preferred picks in the residential space while Phoenix Mills remains attractive in the mall space.

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