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 Residential optimism visible across Tier II cities also 

While optimism in the residential segment in Tier I cities (MMR, Delhi NCR, Bangalore, Pune, Hyderabad, Chennai and Kolkata) continues with decadal low inventory / decadal high absorption we find that Tier II cities (30 cities incl. Ahmedabad, Vadodara, Nashik, Gandhi Nagar, Jaipur, Mohali, Nagpur, Bhubaneswar, Surat) are also not so far behind. The total sales value of Tier I cities (INR 12.2trn; Source Propequity; Exhibit 12) over FY18-FY22 was 4x of Tier II Cities (INR 3.1trn) with Ahmedabad (Tier II; INR 0.83trn) being higher than Tier 1 cities like Chennai (INR 0.52trn) and Kolkata (INR 0.38trn). We believe given the highly fragmented nature of the real estate industry (mid-teen share in booking values for listed developers) and active business development plans, more developers will look to capitalise on the opportunities across Tier II cities. Presently, most of the listed developers have tapped these opportunities in a limited fashion (Exhibit 15-16) but the timing seems right given steady absorption, pricing trends and limited inventory (Exhibit 1-14). Structurally, Tier II cities benefit from a confluence of all-time high affordability, government push on infrastructure projects, work from home, and rapid urbanisation. These cities present significant early mover advantage and lower capital / regulatory requirements compared to Tier I cities. As the market gets more structured in these cities, there will be an active demand for quality real estate projects from branded developers. We expect developers with monetisable land banks in Tier II cities to be the biggest beneficiaries. DLF (Rating ‘BUY’; Mar’23 TP: 450) and Prestige Estates (Rating ‘BUY’; Mar’23 TP: 595) remain the preferred picks in that aspect.

* Ahmedabad market c.2x of Kolkata and c.1.6x of Chennai: Among Tier II cities, Ahmedabad remains the largest market (INR 0.83trn of booking values over FY18-22), larger than Tier 1 cities like Chennai (INR 0.52trn) and Kolkata (INR 0.38trn). Other key cities include Surat, Vadodara, and Gandhi Nagar in Gujarat on account of high absorption, high rate of urbanisation and industrialisation in the state, and Nashik and Nagpur in Maharashtra. Vishakapatnam, Bhubaneshwar, and Mohali experienced high growth in market size with rapid urban expansion (Exhibit – 1; Demand Drivers)

* Listed developers expanding to Tier II cities: Listed developers are already expanding to Tier II cities or are trying to monetise their existing land banks (Exhibit 15-16). Ashiana has projects across Bhiwadi, Jaipur, Jamshedpur, Jodhpur, Lavasa and Neemrana. Brigade has accumulated land parcels in Mysore (15 acres) and Kochi (18 acres). Godrej Properties recently added a 1.5msf saleable area project with a revenue potential of INR 5.75bn in Nagpur, has an ongoing 14.8msf project in Ahmedabad, and plans to launch a 1.07msf plotted development in Sonipat. DLF possesses land banks in Chandigarh (16msf of developmental potential), Bhuvaneshwar (6msf) and Gandhi Nagar (2msf) along with parcels in Kasauli and Goa. Prestige Estates has ongoing residential projects in Kochi (2.35msf) and Mangaluru (1.36msf). Sobha has multiple projects across Mysore, Kochi, Thrissur, Kozhikode, Trivandrum, Coimbatore, Hosur and GIFT City. Puravanakara has projects across Coimbatore, Goa and Kochi. Other developers including Macrotech, Oberoi and Mahindra Lifespaces continue to focus on Tier I markets.

* Why the time is right now: We believe the Covid-19 pandemic has triggered an inherent demand for quality real estate and demand-supply scenario remains healthy across markets with less than 24 months of inventory across all Tier II cities (Exhibit 15). Moreover, with deleveraged balance sheets, developers have some room to take risks and capture new markets.

*  Early mover advantage available; visible in retail space: In the retail / mall space, we have seen developers like Phoenix Mills entering into Tier II cities such as Ahmedabad, Bareilly, Indore and Lucknow, thus creating significant entry barriers for new developers looking to enter such markets given the limited market opportunity. Developers in Tier II cities will also benefit from the likely absorption / pricing growth opportunities in these cities

* Plotted developments – low-risk method to test the market: Plotted development is a preferred way to enter smaller markets while group housing projects are more focused on Tier I cities. 0

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