Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities
Pandemic triggered broad-based recovery: Contrary to the expectations of adverse impact on the sector, given prolonged lockdown, liquidity crisis, and limited government ammunition for fiscal incentives, real estate recovery has surprised positively. While the sector as a whole continues to see muted growth, the pandemic has accelerated market share gains for branded Tier 1 players. The entire ecosystem viz. landowners, financiers, suppliers, buyers and contractors are all backing the organized segment, and on the other side, challenges remain for Tier 2 developers. Supply shrinkage, stable demand, low interest rates, pent-up demand, economic easing and strong IT/ITES sector are driving developers' pre-sales to life-time high, largely driven by existing projects. New launches may help sustain the momentum as pent-up demand fades out post 4QFY21E.
Income-producing assets - concerns on offices remain, malls fundamental improving: Our channel checks suggest that office collections remain steady, but the three big unknowns may limit sector re-rating: (1) once travel restrictions ease, will lease momentum pick up; (2) consolidation of offices; (3) extent of renewal of the expiring leases on the backdrop of firming up of work from home policies. The net leasing has degrown 53% YoY to 19.9mn sqft during CY20 (source: Cushman & Wakefield) and is expected to be about ~25mn sqft for FY21E. Malls are seeing a good uptick, though fashion retail, entertainment and multiplexes remain the pain points. Softer mark to market rental repricing is key near-term concerns for office space.
Limited new launches, pre-sales hitting decade high: Our channel checks suggest that 3QFY21 will see decade-high/all-time high quarterly sales run-rate for few companies, that too in absence of new launches. Pandemic triggered freebies, discounts, attractive payment terms. This has improved sentiments for the sector, affordability is at decade best and interest rates are at all-time lows. Will this trigger a new cycle (as post-GFC the sector has been on the sideline) is something too early to take a call on. For now, we believe that 4QFY21 will match/better than 3QFY21, post which some slackness may surface. FY22E will be driven more by likely state government incentives for housing, new launches and market share gains for Tier 1 developers.
With normalcy returning and pick-up in presales, we have recalibrated our NAV estimates: We have factored in the pick-up in construction and pre-sales, driving the increase in our FY21/22E EPS estimates across coverage universe. During 3QFY21, we expect aggregate rev/EBIDTA/APAT YoY growth of (8)/2/8% for our coverage universe. We have increased our NAV to align it with pre-COVID estimates viz: (1) likely 0-5% increase in residential realization vs (10-20% cut after Mar-20); (2) cap rate compression to 8-8.5% (vs. 9-9.5% earlier); (3) rental growth unchanged at 3% and (4) Hotel ARR correction by 5-15% (vs 20-25% post Mar-20) with lower occupancies.
Downgrade GPL to REDUCE, Brigade to ADD, Prestige Estates to ADD: We downgrade GPL to REDUCE as believe that new launches by other Tier 1 developers will dent market share gains for GPL whilst valuation remains punchy at 65% premium to NAV. We downgrade Brigade to ADD on limited opportunities for it beyond Southern India and Prestige Estate to ADD as it enters new Capex cycle. We maintain BUY ratings on all other stocks with increased NAV. Top picks: DLF, Oberoi Realty, Phoenix Mills, Kolte Patil and Sobha Ltd.