CLSA says Covid-19 does not alter Property market fundamentals - Phoenix Mills, Prestige Estates, Embassy REIT and DLF preferred picks
Work from home has led more people to focus on their homes and is driving upgrades (sales in the luxury segment picked up in Q2 FY21). Affordability is up with mortgage rates at a 15-year low (<7%) and stagnant prices. Supply is shrinking due to lack of liquidity for smaller developers, and the end of the interest moratorium in August 2020 will only aggravate liquidity issues.
CLSA hosted a panel discussion with esteemed panellists Vinod Rohira (CEO, Mindspace REIT), JC Sharma (VC & MD, Sobha Ltd) and Anuj Puri (Chairman, Anarock) at our 23rd Annual CITIC CLSA India Forum. The takeaway was that while demand may remain subdued in the near-term, recovery signs are visible, and strong fundamentals such as the moats of Indian IT and ITES (Information Technology Enabled Services) and improved ‘affordability’ are likely to drive demand in the office and residential spaces, respectively. Reputed developers will continue to gain market share due to consolidation. CLSA believes annuity portfolios are likely to remain more resilient than residential and thus prefer developers with strong annuity income such as Phoenix Mills, Prestige Estates, Embassy REIT and DLF.
Resilient office space demand led by the strong moats of the Indian IT / ITES industry:
Panellists believed office absorption is likely to cross 20 msf in 2020 (vs 45 msf in 2019), which is commendable considering it is a US election year and decision-making by MNCs has come to a standstill due to the pandemic. Demand is likely to pick up driven by the increased digitisation of services and the continued cost arbitrage of India’s IT/ITES industry. 60% of supply is likely to be impacted due to a lack of capital among smaller developers.
Residential recovery likely with ‘affordability’ at multi-decadal best:
Work from home has led more people to focus on their homes and is driving upgrades (sales in the luxury segment picked up in Q2 FY21). Affordability is up with mortgage rates at a 15-year low (<7%) and stagnant prices. Supply is shrinking due to lack of liquidity for smaller developers, and the end of the interest moratorium in August 2020 will only aggravate liquidity issues.
Industry consolidation gathers pace, large to get larger and to get there faster:
Demand is gravitating to reputed developers in both the residential and office segments. Top 10 listed developers have already gained significant market share in the residential segment (27% in 9 months of 2020 versus 12%-13% in 2018-2019). Office space demand too has shifted to reputed developers such as Embassy, DLF, Oberoi Realty and others which have leased sizable areas despite the challenging environment.
Q2 FY21 results substantiate CLSA’s view:
Despite residential sales for the industry were 55% below their pre-Covid-19 level, reputed listed developers have reported near pre-Covid-19 sales (90% of the pre-Covid-19 level). The office segment too delivered steady performance with overall rent collections of >98%. Developers have managed costs and cash flow prudently, with debt levels for our covered companies increasing by only 2% over the past six months.
Industry consolidation gathers pace:
While overall industry pre sales declined 55% YoY in Q2 FY21, top 10 listed developers have reported near pre-Covid-19 sales (90% of pre-Covid-19 level). As a result, the market share of the top 10 property developers increased sharply from 13% in 2019 to 27% in 9 months of FY21. CLSA believes a considerable part of the market share gain for top developers over the past six months will be maintained, even after Covid-19, as liquidity stress will expedite the pace of consolidation.
Few developers in certain markets are providing moderate price discounts to facilitate cash flows in the short run. Moreover, developers are offering various freebies such as no EMIs for a year/ deferred payment schemes, no stamp duty, etc. to attract prospective homebuyers. This has resulted in a marginal dip in residential prices in certain markets.
Affordability is at its best:
Affordability has increased across all cities. Despite a bigger fall in annual household income as compared to the residential prices, affordability increased in 2020. A sharp decrease in the mortgage rates from around 8.9% in 2019 to 7.5% in 2020, more than offset the adverse impact of lower incomes on affordability.
See Zee Business Live TV Streaming Below:
Office demand recovering but a long way to go:
As visibility on new supply remains uncertain due to Covid-19, large MNCs such as Alphabet, Morgan Stanley, Standard Chartered Bank, Amazon, JPMorgan and others have concluded or are in the process of signing large office space transactions across Indian cities. Leading global and domestic technology companies such as Accenture, Oracle, IBM, Tech Mahindra, Tata Consultancy Services, Microsoft and Capgemini have renewed large office lease agreements during the past two months. The lease renewals cover more than 3.5 msf of office space in Bengaluru, Hyderabad, Pune and Mumbai. Most companies have renewed their leases for nine years, indicating that India still offers compelling reasons such as cost arbitrage and high-quality talent for multinational corporations to set up offices in the country.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.
RECOMMENDED STORIES
Senior Citizen Latest FD Rates: Know what major banks like SBI, PNB, Canara Bank, HDFC Bank, ICICI Bank are providing on fixed deposits
Gratuity Calculator: Rs 38,000 as last-drawn basic salary, 5 years and 5 months of service; what will be gratuity amount?
EPFO Pension Schemes: Early pension, retirement pension, nominee pension and 4 other pension schemes that every private sector employee should know
Top 5 Small Cap Mutual Funds with best SIP returns in 1 year: See how Rs 25,000 monthly investment has grown in each scheme
Top 7 SBI Mutual Funds With Best SIP Returns in 1 Year: Rs 25,000 monthly SIP investment in No.1 fund has jumped to Rs 3,58,404
04:23 PM IST