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Multiple Headwinds - Sector Update on Real Estate - HDFC secrities

Posted On: 2020-04-08 12:50:53


We hosted 'Real Estate - COVID 19 Challenges and Opportunities' call with JLL India CEO and Country Head Mr. Ramesh Nair. The key takeaways include (1) Strong office fundamentals with low vacancy and limited new supply (2) Occupiers still committed but lease decision getting postponed by few weeks (3) Work from home can take away 7-8% office demand (~3mn sqft annually) (4) Rental pricing may remain muted, mark to market opportunity may get repriced lower (5) Retail worst hit as occupiers asking for rent free period until lockdown (6) Landlords want minimum guarantee, occupiers asking for revenue share, some compromise may happen (7) LRD hit to be borne by landlords, if any (8) Residential real estate to bottom out by CY20E (9) Consolidation to increase further (10) Force majeure difficult to implement, out of court settlement, one on one negotiated settlement way forward. We remain positive on mixed used plays with strong balance sheet. DLF & Oberoi are our top sectoral picks.

Office the most resilient asset class with muted headwinds

CY19 recorded robust net absorption of 42mn sqft. Whilst pre COVID the market was expected to maintain growth momentum, lease commitments may see 4-5weeks of postponement now. US/EUROPE constitute 2/3rd of lease demand and with high COVID impact in these geographies, Indian CY20 demand may see weak outlook. Office assets are the least volatile amongst other asset classes and with high global volatility, may see increased interest once recovery pans out. Offices with high dependence on critical business activities may continue to see good demand. Retail will be worst impacted as force majeure may not work and land lords will likely take the hit and pass on abatement to occupiers (~8 occupiers control 70% of leasing). About $330bn of dry powder is available for deployment once pent up demand emerges in 2HCY20. Industrial assets are seeing good demand from warehousing and e-commerce.

Force majeure, difficult to implement

For leased offices, landlords believe that force majeure does not apply as space is fit to use, occupier services are still functioning there, data processing is happening. Employees are not able to sit and work in facility is beyond landlord control. Lawyers are preparing white papers with their views. Retail assets dynamics are slightly different. The retailers have reacted the fastest given that it is a low margin business. Landlords are willing to sit and discuss.

Residential markets different vs GFC crisis, may bottom out by CY20 end

The residential markets are much different vs the 2008-09 GFC crisis. We have buyers market now, demand is end user driven, FDI is largely nonresidential, land prices are expected to correct further and developer's margin has contracted. Govt support on affordable housing and CLSS scheme has aided demand. Though luxury and super luxury will see more delayed demand recovery. Interest rates at all time low, LTV is conservative at 75-80% vs 95-105% during GFC crisis. NBFC crisis priced in.

COVID-19 scenarios, expect aggregate 29.2/49.6% cut in FY21E EPS

We have built in two scenarios for FY21E earnings sensitivity. Scenario 1 - one month complete lockdown with another two months time for full recovery and Scenario 2 - two month complete lockdown with another four months for full recovery. We expect partial lifting of lockdown and slow reverse labor migration to sites. Supply chain will also take time to revive. Stay with strong balance sheet companies. DLF & Oberoi Realty our preferred picks.


Source: Equity Bulls

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