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Residential cycle: The way forward

CY21 was the best year from residential real estate perspective with decadal high absorption across top 7 cities (423msf in CY21; 394msf in CY11; Source: Propequity) and decadal low unsold inventory (585 msf; 566msf). Going forward, factors like higher stamp duty in Mahrashtra, rising interest rates, marginal price hikes (inflation led), limited ready to move in inventory (RTMI) will impact buyer behaviour but channel checks suggest demand trends remain healthy. On the supply side, developers have availed benefits of premium cuts (in Maharashtra) and will opportunistically look to launch projects based on demand-supply environment however launches remain significantly lower than absorption (17% lower than CY21 absorption; annual launches lower than absorption since CY16). Hence, we believe a slight moderation in demand and increase in supply is unlikely to derail the cycle and unsold inventory levels will remain near decadal low levels. We run a sensitivity analysis at an individual customer level and find EMIs will range between 20-36% of monthly salary (assuming 2/3rd debt and 1/3rd equity; 3.2x-5.0x value to income ratio; 7-9% interest rates) which indicate high affordability across most Indian micro-markets. Moreover, demand is being upfronted across markets as developers advertise price hikes / stamp duty reversals. Even in April, once the stamp duty reversals (+1% ppt in Maharashtra) happen developers might roll out schemes and offer lower stamp duty rates to keep up the volumes. Given the current backdrop, DLF remains a preferred pick exhibiting significant market leadership in a fast recovering Delhi NCR market and side stepping the more competitive MMR market. We continue to like Macrotech Developers and Mahindra Lifespaces also in the space.

Sensitivity analysis indicates – limited impact of interest rate hikes: We run a sensitivity analysis at an individual customer level and find EMIs will range between 20-36% of monthly salary (assuming 2/3rd debt and 1/3rd equity; 3.2x-5.0x value to income ratio; 7- 9% interest rates; 20 years tenure; Exhibit 1-8). Moreover, customers also have the option to extend loan tenures to a longer duration and further reduce monthly EMI burden.

Affordability remains attractive; likely to continue: The selling prices across most micromarkets have stagnated over the past few years while income levels have inched upwards resulting in structurally higher affordability (highest in 25 years as per HDFC at 3.2x property value to income ratio). Presently, developers are looking at calibrated price hikes (in-line with inflation to protect margins) while focus remains on selling down unsold inventory. Therefore, in the absence of any major income shocks the affordability will continue to be attractive in the coming times. From a developer perspective also, the unit sizes have been calibrated downwards (down 5% across top 7 cities over CY11-21) consequently bringing down the unit values to cater more towards mid-income and affordable housing projects where affordablity inherently is higher and leverage lower

Healthy demand for good projects by branded developers: Due to sudden demand surge and construction / launches unable to keep up pace, the RTMI inventory has reduced significantly across micromarkets (down 43% across top 7 cities over past 2 years). Due to commodity led inflationnary pressures and customer confidence shifting towards branded developers we expect consolidation theme to continue playing out and therefore remain constructive on large branded developers having balance sheet strength.

Customer now believes price hikes are possible and pre-buying visible: Our channel checks across Thane (low ticket size market) and South Mumbai region (high ticket size market) indicate site visits continue to be steady and customers are looking to close deals in the anticipation of an upcoming price inflation. RTMI remains the preferred choice but transactions are happening across under-construction projects also.

Preferred picks include DLF, Macrotech Developers and Mahindra Lifespaces: Given the current backdrop, DLF remains a preferred pick currently exhibiting significant market leadership and side stepping relatively more competitive MMR market. Other preferred picks operating primarily in the residential segment include Macrotech Developers (MMR market leadership) and Mahindra Lifespaces (bottom-up story).

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