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Residential Real Estate - in fine fettle

India’s residential real estate continues to perform exceedingly well, even against the backdrop of rising interest rates, commodity inflation, and implementation of metro cess. We notice traction continuing in 3QFY23. Mumbai registration data for Nov’22 (8,756 registrations; +4% MoM; +15% YoY) continues to offer a positive read-through for the whole sector. The supply situation also remains extremely favourable with steadily declining and decadal low unsold inventory (574msf across top 7 cities: Source Propequity). Key takeaways – i) All markets (Bangalore, Chennai, MMR, Delhi-NCR, Pune and Kolkata) barring Hyderabad have shown a declining trend in absolute inventory; ii) MMR, Pune and Hyderabad remain the best-performing markets with a run-rate of over 100msf of annual sales; iii) Delhi NCR market is rebounding sharply on a low base with upto 30% YoY price hikes; and iv) Ready To Move In (RTMI) inventory continues to decline sharply (down to INR 503bn; INR 829bn in CY19). Launches have already started picking up across cities but absorption remains higher. We remain constructive on the residential cycle, as the combination of i) supply side consolidation, ii) demand revival, and iii) calibrated price hikes will lead to a multi-year housing cycle. At current prices, DLF, Macrotech Developers, Mahindra Lifespaces and Prestige Estates are our preferred picks in the residential space.

* Property registrations remain strong in Nov’22: Mumbai property registrations saw 8,756 registrations (+4% MoM; +15% YoY; INR 6.7bn stamp duty; +22% YoY). As per Knight Frank, registrations were driven by homes of up to 500sqft (36% of all properties registered; 36% in Oct’22); 500-1000sqft homes continued to be the largest segment (c.46% of the total; 47% in Oct’22). The share of 1,000-2,000sqft homes came in at 16% (14% in Oct’22), and above-2,000sqft homes dropped to 2% (3% in Oct’22). (Link)

* MMR market continues to go from strength to strength: MMR absorption stood at 119msf for 10MCY22 (109msf in CY21; decadal high). Launches have increased to 107msf over 10MCY22 (89msf in CY21) due to premium benefits being availed by developers but remain lower than absorption. The market has seen significant reduction in inventory across ticket sizes and overall unsold inventory stood at less than 18 months.

* Delhi NCR sees highest price hikes; Mumbai lowest: On account of limited inventory, and to offset commodity inflation, developers have been hiking prices. Calibrated price hikes encourage fence-sitters to enter the market. In case of sharp interest rate hikes, we expect large developers to run payment schemes to limit the impact on the customer. On a YoY basis in 2QFY23, Mumbai has seen 4% price hike while Delhi NCR has seen 30%.

* Delhi NCR – c.2x sales run-rate of CY20 levels: Delhi NCR, led by cities of Gurgaon and Noida, is witnessing a sharp comeback in volumes and is on course to touch 60msf of annual sales run-rate in CY21. Moreover, the region has witnessed the highest price hikes (upto +30% YoY; +14% QoQ) as the market has consolidated and inventory remains low (c.18 months) across product categories / ticket sizes.

* MMR, Pune and Hyderabad all at 100msf+ annual sales run-rate: 10MCY22 has seen absorption of 447msf across the top 7 cities (CY15-20 average: 330msf; decadal high) while LTM sales stood at 532msf (current run-rate on track) led by cities like MMR (140msf), Pune (100msf) and Hyderabad (100msf). Launches, despite increasing from a low base, continue to lag sales (377msf in 10MCY22; 477msf in LTM).

* DLF, Macrotech Developers, Mahindra Lifespaces and Prestige Estates are preferred picks: We remain constructive on the residential cycle and even if regions like MMR, Pune and Hyderabad fail to grow on a higher base we feel Delhi NCR can further scale up and other tier 2 cities can also support industry volumes. Most of the listed developers are expecting 10-25% growth for FY23 even on a high base of FY22 as the market conditions remain favourable. At current levels, DLF (BUY; Sep’23 TP 465), Macrotech Developers (BUY; Sep’23 TP 1,425), Mahindra Lifespaces (BUY; Sep’23 TP 475) and Prestige Estates (BUY; Sep’23 TP 625) are our preferred picks.

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