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Real Estate (Sector Update) - Greenshoots visible - HDFC Securities

Posted On: 2020-07-08 04:07:25

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

Real Estate (Sector Update) - Greenshoots visible

Continuing with our Real Estate Knowledge Series, we hosted the Real Estate - Emerging Trends - APAC and India Call with JLL India CEO and Country Head Mr Ramesh Nair and JLL, APAC Director of Research, Mr Roddy Allan. Whilst the near-term data points remain weak as the Indian economy grapples with COVID-19 headwinds, we are seeing incremental positive news flows on the following: (1) large occupiers are showing interest in leasing new space in Southern India; (2) recent Sobha 1QFY21 pre-sales numbers have been better than expectations (65% of pre-COVID levels); (3) malls are gradually opening, and consumption is picking up; (4) very few office occupiers have invoked force majeure; (5) rental negotiations for renewals have started; (6) rent collection in office remains at 90% plus; (7) construction on new supply has been delayed/postponed to manage the supply/demand equilibrium. These pointers paint a positive picture. Risks emanating from the work-from-home move are not yet visible on the ground and will gradually emerge; de-densification is the near-term savior, which shall restrain the increase in vacancies, and further consolidation will aid Tier1 developers. Pricing may remain soft as landlords will not risk losing revenue. We are positive on mixed-use plays with DLF, Prestige Est and Brigade as top bets.

Office - consolidation is the theme: In Hong Kong, Beijing, and Shanghai, rentals have dropped by 9%/4%/2.6% QoQ, driven mainly by incremental supply. Indian office markets recorded a 45%/41% 1HCY20 drop in absorption/supply YoY. The lockdown has hindered inspection/commitment of new leasing. Vacancy is likely to go up, and demand may remain tepid in the near term. Lease restructuring, renegotiation and renewals have already started. Consequently, landlords will have to support their tenants to retain them as switching costs of a tenant leaving is high. JLL client survey suggests around 5-22% of employees may work permanently from home, indicating that office demand is likely to firm up as situation normalizes. Current office space can accommodate 40-45% of employees with current social distancing norms. Market growth and rental growth are expected to be limited over the next two years.

Residential - Sentiment improving, pent up demand at play: Sales rebounded in Beijing and sentiment is improving in HK. The COVID-induced lockdown is still impacting while Bangkok demand is lacklustre. In Indian markets, the 1HCY20 sales/launches were down 51%/24% YoY. Developers of luxury apartments are offering a 10-12% discount. Developers of mid-market and affordable housing are offering a 5-7% discount. Flexible payment terms are being offered with a 6-7% discount. The silver lining is that cancellations are few. In May, the Tier 1 developers were reporting about 40% of pre-COVID sales, while Tier 2 developers were at 20% of pre-COVID sales. June sales have been better than those of April and May. The market may consolidate further with Top 10 developers.

Retail, Hospitality worst-hit whilst Warehousing is seeing a good uptick: Discretionary spends have been hit hard by the lockdown. Retail recovery may get further pushed beyond Diwali. Tenants will have to offer good discounts for getting back footfalls, which are tepid now. The good news is that price negotiations have been settled amicably. In China, mall consumption is back to 60% of pre-COVID levels. JLL expects cap rates, lending rates and debt-equity funding mix to deteriorate in the near term for the sector. Hospitality will suffer until a COVID-19 vaccine is out and needs government support. Warehousing is seeing good demand as online retailers are doing well in the lockdown.

Source: Equity Bulls

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