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High absorption + Low inventory = Perfect Blend

CY21 is slated to be the best year for absorption across residential real estate in over a decade. (362msf of absorption across top 7 Indian cities in 11MCY21; 410msf in CY10; 313msf in CY20; Source Propequity). Moreover, in terms of unsold inventory we are expected to be at a decadal low with 571msf of unsold inventory across top 7 cities (CY11: 565msf and CY20: 641msf) indicating a positive outlook for the overall sector. We expect this trend to continue in CY22 as launches continue to lag sales, resulting in declining inventory. A combination of i) stamp duty cut in Maharashtra, ii) low home loan rates, iii) developers offering schemes, iv) rising need for larger homes and v) anticipation of price hikes by customers has driven the current demand for homes. We deep dive into the various markets and map the inventory, absorption and supply trends across cities. Key takeaways – i) All markets (Bangalore, Chennai, MMR, Delhi-NCR, Pune and Kolkata) barring Hyderabad have shown a declining trend in inventory for CY21, ii) Pune remains one of the best performing markets with inventory less than 15 months (partly due to stamp duty cut also), iii) Mumbai’s large ticket sized inventory (INR 50mn and above) has declined by 19% to INR 732bn (INR 900bn in CY19) and iv) Gurgaon market seems to be improving with higher launches and absorptions. Further, the ready to move in (RTMI) inventory continues to decline sharply (down to INR 490bn; INR 803bn in CY19) across markets thereby releasing cash flows for developers. We remain constructive on the residential cycle, as the combination of i) supply side consolidation and ii) demand revival plays out. The listed developers are likely to report strong 2HFY22 based on their launch pipelines. DLF, Mahindra Lifespaces, Oberoi Realty and Prestige Estates are our preferred picks in the residential space.

* MMR shows all time high absorption buoyed by stamp duty cut: MMR markets have benefitted from the stamp duty benefits offered by the government as 11MCY21 absorption stood at 98msf (previous high: 100msf in CY10; 88msf in CY20). This has resulted in significant inventory clearance across ticket sizes (especially the INR 50mn+ ticket size which has declined by 19% to 732bn; INR 900bn in CY19). A similar trend is visible across all ticket sizes particularly, INR 10-20mn and INR 20-30mn. Thane market (c.50% of MMR absorption in volumes) has also seen 26% decline in inventory as new launches have slowed down.

* Pune / Hyderabad showing higher absorption than Bangalore: Over CY15-21, Pune / Hyderabad have seen steady increase in absorptions to 71msf / 68msf in 11MCY21 (56msf / 33msf in CY15) while Bangalore stood at 55msf. Over CY16-19, Bangalore has shown steady absorptions at c.63msf and remained stable with 55msf for 11MCY21. Pune, Hyderabad and Bangalore continue to be driven largely by demand from IT sector and the outlook for IT companies (revenue growth / hiring patterns remains strong). 

* Delhi NCR – encouraging trends: Markets like Greater Noida, Noida and Gurgaon are yet to recover to the heights of CY10-14 and inventory levels have rationalised across these markets as supply remains relatively weak. Recently, developers like DLF with strong market positioning have started effecting price hikes (c.15% price hike across super luxury Camellias project as supply from branded developers remains limited.

* 2HFY22 remains launch heavy – Listed developers to post strong booking values: With consolidation playing out in the sector (share of booking values stood at 19% in 2QFY22 for listed developers across top 7 cities) and minimal leverage, listed developers continue focussing on business development and new project launches to scale up operations. Covid third wave related delay in launches remains a key variable.

* DLF, Mahindra Lifespaces, Oberoi Realty and Prestige Estates are preferred picks: We remain constructive on the residential cycle, as the combination of i) supply side consolidation and ii) demand revival plays out. Recovery in commercial, retail and hospitality segments are expected to take a few more quarters to be back at pre-Covid levels. At the current levels, we continue to prefer DLF, Mahindra Lifespaces, Oberoi Realty and Prestige Estates.

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