Godrej Properties and DLF are top stock picks for Jefferies as property prices, home loan interest rates at cycle lows

A new residential cycle start should become evident over 2021 as both end-users and investors get back into action. It is expected that residential sales are set to cross 2019 levels, inventory to fall to 8-year low by end'21 and prices to rise by 10%+ over next two years. Office demand could surprise in second half of FY21 if tech hiring remains strong. As we build in a new multi-year cycle kickoff, Jefferies raises estimates and price targets with Buys through Jefferies coverage. Godrej Properties and DLF are top picks in the Real Estate Sector.

Listed developers should still outperform the industry given consolidation and shifting consumer preferences. Godrej Properties with its strong nationwide residential franchise and DLF with its strong pro-cyclical stance are top picks. Jefferies 3-year analysis for Godrej Properties suggests 80% return potential.

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Inventory reduction to drive pricing uptick, necessary to sustain cycle:

Supply increase in 2021 should trail demand as industry consolidation over the last 5 years plays out. Inventory (units) is already down 20% from peak. By end 2021 inventory should reach c.25 months of sales, which is close to price appreciative levels. Importantly, to sustain the cycle beyond 2021, some price increases would be considered healthy.

Offices to start slow but pent-up demand is building:

Net office absorption was down 50-60% in 2020 but is improving now. Vacancy levels have risen 2-4%, but damage to rents have been limited so far at 5-10% levels. Interestingly, IT hiring, key office demand drivers, has picked up but the same hasn't translated to demand yet as WFH continues. Unwinding of the same in the second half could release pent-up demand.

Low rates driving affordability, investor interest:

In 2021, low-interest rates (home loan interest rate at record low of sub 7%) should continue. Low rates, along with likely double digit income growth, should keep affordability at cycle best levels. Investment demand is also improving as evident by sales pick-up even at the high-end. Low system-wide interest rates, negative real rates after 5+ years and government support to housing have created the impression of property prices being at cycle low levels, driving a sentiment change.