Parikshit D Kandpal, CFA, HDFC Securities, Institutional Research Analyst, HDFC Securities.
Real Estate | Mixed performance
Sustenance sales to drive Q1FY23 presales; delayed launches to result in healthy H2FY23: Oberoi reported decent sustenance presales of INR 7.5bn (+3.4x/-19%, YoY/QoQ). Macrotech presales of INR 28bn (+3x/-19%, YoY/QoQ) were largely driven by sustenance sales. Sobha, however, delivered presales of INR 11.5bn (+68%/+3%, YoY/QoQ), aided by new launches. We believe that the globally increasing interest rate environment as well as the expected US recession and higher headline inflation eating into the purchasing power may cause demand sentiment to weaken. This might result in weaker H1FY23 presales (largely driven by sustenance sales), with new launches getting delayed to H2FY23. We still expect our coverage universe to deliver all-time high presales in FY23. We expect DLF to report presales of INR 18bn, Brigade INR 7bn, Mlife INR 7bn, PEPL INR22bn, and GPL INR 21bn in Q1FY23.
Demand slowdown transitory, structural drivers remain intact: Post the recent interest rate hikes, the loan eligibility has reduced, resulting in a larger down payment funding requirement. Another 50-100bps interest hike may worsen demand. All-time high affordability is still aiding demand. We believe developers should not go for price hikes now and support recovery. We build in launchheavy H2YF23 to help developers return to the growth path, supported by receding commodity and economic headwinds.
Demand for Grade A rental housing seeing strong traction, with rents inching up 15-20% higher than pre-COVID: Quality living is gaining traction with larger, organised, gated communities' projects witnessing strong rental demand and pricing, which is higher than pre-COVID levels. Renewals are happening at 15- 20% higher than pre-COIVD rates for Grade A, gated communities. This augurs well for organised developers as the investor market may pick up on hardening rental yield (the end-user market has been driving demand until now).
Malls' consumption surpassing pre-COVID level, office recovery seeing some delay on COVID resurgence: Malls as an asset class are seeing strong recovery, with consumption now surpassing pre-COVID levels. Discounts have been withdrawn; retailers have cut down discounts during the end-of-season sale as they are running short on inventories. Developers have started announcing new Capex/expansion plans. Our channel checks suggest that, while occupancies remain high, trading occupancies are lower whilst trading density is higher. Tenant churn/shops refurbishment comeback and higher trading densities may result in faster rental recovery. For offices, re-occupancies have improved from 10-15% to 25-30%, with 50% expected by Sep-22. The return to office has got delayed by two quarters and is impacting leasing decision-making.
Q1FY23 earnings trend for the sector: We expect the aggregate revenue/EBITDA/PAT for the coverage universe to report a sequential decline by -19/-14/-16%. Commodity prices have corrected since the last quarter, which is expected to reflect in Q1FY23 numbers. On an aggregate level, we are expecting margins to expand 140bps QoQ, largely on account of the revenue mix.
Recommendations and stock picks: We have cut our SOTP-based TP for Godrej Properties to INR 1,536/sh (vs. INR 1,783/sh, maintain ADD), which is largely reflective of a cut in NAV premium, from 50% earlier to 25% (in line with our coverage universe, comparable peers). We believe that (1) GPL is still lagging on expansion in the premium real estate segment; (2) pan-India expansion is getting crowded with other organised players' entry; and (3) there is likely disappointment in presales growth in FY23, all of which do not justify such a high premium. Top picks: DLF, Oberoi Realty, Phoenix Mills, Brigade.