01 august 2020 sector update real estate estate - update - aug20... · and weak balance sheet of...

01 August 2020 Sector Update

Real Estate

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Cautious optimism

We attended CRISIL’s webinar on real estate–The Ground Realty is Shaky.

CRISIL's view- Residential: (a) demand could fall by 50-60% in FY21 and prices

would remain under pressure (decline of 5-15%); (b) sector consolidation would

accelerate as the financial position of small players worsens further. Commercial

office: (a) impact on the existing office space has been marginal as collection

remained healthy; (b) new leasing to face challenges; (c) strong financial position

of the players will help tide over the pandemic. Retail: (a) revenue could fall by

50% in FY21 as recovery would be slower; (b) closure of non-performing stores

could lead to increase in vacancy from 4% at present to more than 10%. At HSIE

we believe our coverage universe may see 15-20% YoY drop in pre-sales, despite

good recovery in second half of first quarter. Pain for malls may continue with

increase in vacancy and lower rental resets, whilst offices may see resilient

collections with lower rental resets, deferrals in new leasing and marginally

higher vacancy. Top picks: DLF, Prestige Estates and Brigade.

Residential– consolidation is the theme

CRISIL view: Demand and supply for residential space fell by 70-90% and more

than 80% in 1QFY21 as prices declined by 3-5% in the top six cities. Crisil expects

demand to fall by 50-60% in FY21 as job insecurity will keep it in check. The

deferment of completion of under-construction projects and muted new

launches will prevent the build-up of excess inventory. Prices across affordable,

mid and luxury segments could fall by 2-4%, 7-10% and 5-15% respectively.

Developers may face challenges in raising new capital. Large players with

strong balance sheet are likely to do better at the expense of smaller players.

Buyers will opt for branded developers. Market share of top-10 players (from

CRISIL universe) is likely to rise from 12.8% in FY19 to 20-22% in FY21.

Mr Hiranandani concurs with CRISIL's short-term view that the lack of demand

and weak balance sheet of some developers would induce a price correction.

Consolidation of the sector will also play out, given the distressed opportunities

in the market. However, he is upbeat about mid to long term prospects of the

real estate sector, particularly for the residential sector, and believes that interest

in real estate sector as an investment avenue will continue to grow unless

economic growth falters. He believes demand will pick up once a vaccine or an

effective cure for COVID-19 is available. Mr Hiranandani stressed on structural

changes that have been playing out in the segment. He believes that if WFH

continues for a longer period, there will definitely be demand for quality

residential space.

Commenting on the Northern market, Mr Tyagi said pressure on pricing in the

short term and consolidation of the sector would also play out. But in the long

term, the sector is bound to bounce back. The previous epicentres of the

pandemic have seen demand pick up and he expects a similar sentiment in other

areas once the pandemic blues are over. He too expects the customers to go for

quality products and reputed developers. He believes recovery is inevitable, and

the only question is when. In the meantime, rationalisation of inventory levels

will help match supply with demand.

Mr Gopal Sarda, CEO Kolte Patil believes affordable housing will be the

flavour of the market and will recover first, followed by the MIG segment. But

he does not expect large players to become active in the segment, given lower

ticket size of less than Rs 3,000/sqft. Product quality and lifestyle they plan for

their customer do not concur with this pricing. However, large players will

focus on compact housing of 600 sqft with Rs 4-5k/sqft, which gives the ticket

size of Rs 4-5mn. Developers who are not focusing on cash but IRR can focus on

this segment, given higher churn in the affordable segment.

Company MCap

(Rs bn)

CMP

(Rs) Reco.

TP

(Rs

/sh)

DLF 349 141 BUY 219

Oberoi 127 348 BUY 500

Prestige Est 78 195 BUY 280

Brigade Ent 29 141 BUY 213

Sobha Ltd 21 219 BUY 348

Kolte Patil 11 139 BUY 240

CMP as on 31st July, 2020

Panelists Designation

Niranjan

Hiranandani

Co-founder, MD,

Hiranandani Group

M.R.Jaishankar Chairman, Brigade Group

Ashok Tyagi Whole time director , DLF

Gopal Sarda Group CEO, Kolte Patil

Dilip Sehgal CEO, Nexus Malls

FY21 pre-sales estimates

(mn sqft) FY20 FY21E YoY growth

Oberoi 0.6 1.0 64%

Prestige 6.5 4.3 -34%

Sobha 4.1 3.5 -15%

Brigade 4.3 2.5 -41%

Kolte Patil 2.5 2.0 -20%

Overall 18.0 13.3 -26%

Parikshit D Kandpal, CFA

[email protected]

+91-22-6171-7317

Chintan Parikh

[email protected]

+91-22-6171-7330

Rohan Rustagi

[email protected]

+91-22-6171-7355

Page | 2

Real Estate : Sector Update

If work-from-home (WFH) becomes a long-term reality, there would

undoubtedly be a question of why people should not work from

their hometowns rather than sitting in big cities where they hold their

jobs. However, WFH comes with its own share of infrastructure issues, Mr

Jaishankar believes. Many people, particularly youngsters, want to work in

urban centres. The whole urbanisation story is not complete yet, which puts

questions on the idea of the shift in demand to Tier-2 and 3 cities.

There has been a general perception that millennials prefer to rent houses rather

than buying them. However, Mr Sarda believes otherwise and said that

millennials were active pre-COVID also. It is not that they do not want to invest

in a house and spend on travelling. There is a demand for all kinds of products

from all types of demographics. The right product mix is the most important.

According to him, specific segments of people who have stable jobs and

financial closures are likely to buy a house.

Commercial– office absorption to moderate

CRISIL view: Rental collections have remained healthy, >90%, across CRISIL-

rated office space. In the short term, CRISIL expects the impact on office

segment to be low as 35% of the space coming up for renewal is unlikely to face

major challenges, given significant fit-out costs incurred and mark-to-market

potential. However, absorption could decline in the absence of large deals, given

the sentiment around WFH. Net leasing of office space could decline by 70% in

FY21. However, healthy collections from the existing portfolio and low leverage

would help office players withstand the long-term impact.

Robust rental collection has kept short-term stress in the office segment under

check, but the segment is facing long-term structural issues as more and more

people are going to work from home. Mr Hiranandani believes demand for

office space will remain tepid in the short term but does not expect it to shrink

significantly in the long term unless the economic growth fails to pick up.

During the 2008 GFC crisis, people said there would be no demand for office

space for the next five years, but the sector recovered quicker than anticipated.

Mr Tyagi believes that the ability of clients to sign new and larger leases

could be impacted in the short term. Fundamentally, WFH will continue and

strengthen, but whether it hits the TCS level of projection (75% WFH by

CY25) is debatable. But assuming a part of it is realised, there is a

counter component of de-densification. People do not have a proper

infrastructure to work from home; therefore, they are eager to go back to the

office. Besides, India's value proposition as a destination of choice for

outsourcing does not change. So, in the next 6-12 months, he does expect

stress to be there in the office space in the absence of new leases. But how it

pans out in the long term, the jury is still out on that.

Retail– worst hit, FY21 revenue could fall by 50%

CRISIL view: Retail malls are hit the worst among all real estate categories,

given curtailed operations. Entertainment and F&B sections remain closed in the

majority of the malls. CRISIL expects FY21 revenue of the malls to fall by 50%

for 10 retail assets rated by CRISIL and reach 80% of FY20 level in FY22. While

RBI's moratorium will help manage liquidity in the short term, retail players

would require raising funds to tide out the pandemic. Multiplexes and fashion

retailers are likely to be impacted more severely than hypermarkets. Some of the

demand could go permanently to e-commerce platforms. Closure of smaller

retailers could lead to increase in vacancy from 4% currently to more than 10%.

Demand for residential space

unlikely to shift to Tier-2 and

Tier-3 cities given

infrestructure issues there

Stable rental collection has

kept stress on office segment

under check; low leverage

would help withsatnad long-

aterm impact

Work from home trend could

last longer; but de-

densification to offset impact

from work from home

Lack of proper infrastructure

at home would bring people

back to office

CRISIL expects FY21 revenue

of the malls to fall by 50% for

10 retail assets rated by

CRISIL and reach 80% of FY20

level in FY22

Multiplexes and fashion

retailers are likely to be

impacted more severely than

hypermarkets. Some of the

demand could go permanently

shift to e-commerce platforms

Page | 3

Real Estate: Sector Update

Of the 600 malls in the country, 500 are open and, with Maharashtra lifting the

restriction from next week, more will open soon. The reopening sentiment has

been good, and consumption levels are at 45-75% of 2019 level. Mr Sehgal

believes this is a very encouraging sign, given the restrictions on movement, the

opening of entertainment centres, allowed timings, and curbs on people of a

certain age. He expects consumption to reach 75-80% by Diwali. Despite the

pandemic, he believes India's consumer story is intact, but business models

could change, and small players may consolidate.

Commenting on the recovery of different segments at malls after reopening,

Mr Sehgal said beauty brands are doing well and at 100% of the pre-COVID

level. Beauty is followed by durables/electronics/white goods. Within

fashion, casual wear is doing better than formal wear. Retailers who have

revamped their portfolio pro-actively are doing better. Entertainment as a

category has not even opened. F&B just started but has been slower. On the

flip side, 70-80% of what is open is doing well.

The panel also discussed general topics affecting the sector such as labour

availability, consolidation, PE interest in Indian real estate after the

pandemic, and REIT as a way of funding.

Mr Jaishankar expects labor availability to revert to the pre-COVID level once

the monsoon, sowing and festival season is over, probably by the year-end.

Labour availability in the Southern market, which had reduced by 70% at one

point, is now at 40-50% and he believes the situation would not get worse from

here. The experience of migrant workers in their home states has not been

excellent. Hence, they are expected to return once they realise that there are

better employment opportunities here.

Developers with weaker balance sheet are going to be in an extreme

condition, Mr Tyagi believes. Whether they consolidate is something that

remains to be seen. Many of the better developers have not gone for

acquisitions as they have, after much effort, managed to fix their balance

sheet and have their own land banks. Therefore, they are not motivated to

go in for acquisitions. There are joint development agreements, and PE

money is funding excellent opportunities. It could be the last nail in the

coffin for smaller players.

Retail and commercial have received much interest from global funds

recently. Mr Sehgal believes interest from PE funds will not just continue

but even increase substantially, going forward. India's growth story is still

intact. Any investor, especially in the real estate sector, would take a longer-

term horizon. India, as an investment destination, has never been an issue.

But as a category of investment, particularly retail, is still attractive. The

largest players are still small, and retail is still a regional play, although

consolidation would take place. There are excellent opportunities as

valuation is down and reasonable.

Answering to the question on REIT as a way for capital raising, Mr Sarda

said developers with outstanding rental portfolios, reasonable yields, and

grade A assets can attract money through REITs. Most of the institutional

players are chasing stable money. On the other side, HNIs and prop money

are the ones who generally take the bet. Given the uncertain times,

institutional players are more active and looking at stable assets.

Historically, global funds, which have a lower risk appetite and return

expectations, have been chasing this type of stable money. So, reputed

developers can look at REIT as a way of raising funds.

Page | 4


Pre-sales estimate (mn sqft) FY20 FY21E YoY growth Comment

Oberoi 0.6 1.0 64% We expect FY21E pre-sales growth on account of

Thane project launch in the affordable luxury

segment. Besides financial structuring in completed

projects may drive pre-sales volume for Mulund,

Goregaon and Borivili projects

Prestige 6.5 4.3 -34% De-growth likely as largely Southern presence may

limit growth in a saturated market. New launches to

be limited

Sobha 4.1 3.5 -15% On back of robust 1QFY21 pre-sales of 0.65mnsqft

and management commentary of further

improvement in 2QFY21, Sobha is well placed for

residential presales recovery. Sobha is well

recognized as Tier 1 developer in south and its brand

inspires confidence in buyers. Large part of pre-sales

traction may also be on back of market share gains

Brigade 4.3 2.5 -41% We assume large cut in numbers as presales is largely

driven by Bengaluru macro market and hence BEL

may not benefit from market share shift in other

markets due to limited presence

Kolte Patil 2.5 2.0 -20% Pune market has been resilient and with KPDL being

large developer with land parcels in demand

locations, it is well placed for pre-sales recovery

Overall 18.0 13.3 -26% Overall, we expect 26% YoY decline for coverage

universe

Source: Company, HSIE Research

Residential: CRISIL expects annual demand to decline by 50-60% in FY21

Source: CRISIL, HSIE Research

Residential: construction will be paced according to demand


We expect pre-sales for our

coverage universe to

decline by 26% in FY21

We expect Oberoi Realty

to register growth of 64%

YoY in FY21 given launch

of Thane afforadable

luxury project

Sobha is well placed for

residental demand

recovery

CRISIL expects annual

demand to fall sharply in

FY21, followed by rebound

in FY22

Construction/new launches

wiil be paced according to

demand

182 182 176

80

135

50

70

90

110

130

150

170

190

FY

18

FY

19

FY

20

FY

21

FY

22

Annual demand (msf)

50-60 % decline

60-80 % growth

183

228

288

175

340

100

150

200

250

300

350

400

FY

18

FY

19

FY

20

FY

21

FY

22

Annual supply - completion (msf)

Page | 5


Residential: inventory to decline by 8-10% by FY21

Source: CRISIL

Residential: low leverage will help large players manage stress better

Source: CRISIL

Residential: smaller players vulnerable due to stretched balance sheet


720 735

670

615

515

300

350

400

450

500

550

600

650

700

750

800

FY

18

FY

19

FY

20

FY

21

FY

22

Inverntory at FY end (msf)

8-10 % decline

41% 34% 32% 31% 32%0.0

0.5

1.0

1.5

2.0

2.5

3.0

0%

10%

20%

30%

40%

50%

FY

17

FY

18

FY

19

FY

20

E

FY

21

P

Financial position of top 10 players

Debt to asset ratio Interest service coverage ratio (x)

65%

71%74%

79%74%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

40%

50%

60%

70%

80%

90%

FY

17

FY

18

FY

19

FY

20

E

FY

21

P

Financial position of smaller players

Debt to asset ratio Interest service coverage ratio (x)

Page | 6


Residential: share of top 10 players space to rise


Commercial: rental to remain under pressure with rise in vacancy

Source: CRISIL

Commercial: lower risk to renewals, 35% in the next three years

Source: CRISIL

8.2% 8.1%6.6%

8.8%

12.8%13.7%

21.0%

0%

5%

10%

15%

20%

25%

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

P

Market share of top 10 players

85 86 87 86 82 10%

11%

12%

13%

14%

15%

16%

17%

18%

79

80

81

82

83

84

85

86

87

88

FY

18

FY

19

FY

20

FY

21

FY

22

Commercial office space- Rental & vacancy

Rental (Rs/sqft/month) Vacancy (RHS)

5-10 % decline

12%

9%

14%

12%13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY

21

FY

22

FY

23

FY

24

FY

25

Upcoming renewals (% of total area)

Page | 7


Commercial: low leverage to help manage crisis

Source: CRISIL

Retail: recovery in apparel and multiplexes to be prolonged

Source: CRISIL

Retail: mall revenue could fall as much as 50%

Source: CRISIL

Low leverage of office

players has been a key

positive, which gives them

sufficient headroom to sail

through this crisis

Work from home trend

remains key monitorable

Multiplexes, which are yet

to open, would be hit the

hardest in retail space;

high capacity losss due to

social distancing and

preference for content over

OTT platforms would

delay recovery

Apparel segment at the

malls would also feel the

pinch as some of the

demand could

permenentaly shift to

online e-commerce

platforms

CRISIL expects mall

revenue to decline by as

much as 40-50% in FY21

and to rebound to 80-85%

of FY20 levels in FY22

0

1

2

3

4

5

6

7

8

0%

10%

20%

30%

40%

50%

60%

Pre-covid Stress case- 20% vacancy buildup & no

escalation

Low leverage to help manage impact

Loan to value ratio Debt to lease rental ratio (x)

Page | 8


Valuation Summary

COMPANY Mcap

(Rs bn)

CMP

(Rs) RECO

TP

(Rs)

Adj. EPS (Rs/sh) P/E (x) EV/EBITDA (x) ROE (%)

FY

20

FY

21E

FY

22E

FY

20

FY

21E

FY

22E

FY

20

FY

21E

FY

22E

FY

20

FY

21E

FY

22E

DLF 349 141 BUY 219 4.0 3.1 4.4 35.6 44.9 31.8 34.2 55.6 62.4 2.9 2.2 3.1

Oberoi Realty 127 348 BUY 500 19.0 20.6 20.4 18.4 16.9 17.1 13.1 20.6 15.0 8.3 8.3 7.7

Prestige Estates 79 196 BUY 280 9.1 1.5 5.9 21.5 127.2 33.2 6.6 8.6 7.3 14.4 3.5 6.9

Sobha Limited 21 220 BUY 348 29.7 24.0 25.7 7.4 9.2 8.6 2.7 3.2 3.0 12.1 9.0 9.0

Brigade

Enterprises 29 140 BUY 213 6.4 (1.2) 6.6 21.9 (114.8) 21.2 6.0 8.2 4.9 5.8 (1.1) 6.1

Kolte-Patil

Developers 10 138 BUY 240 8.7 7.5 14.8 15.9 18.5 9.3 6.5 7.1 5.1 5.2 3.7 10.1

Source: Company, HSIE Research

Page | 9

Real Estate : Sector Update

Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,

Senapati Bapat Marg, Lower Parel, Mumbai - 400 013

Board: +91-22-6171-7330 www.hdfcsec.com

Disclosure:

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01 august 2020 sector update real estate estate - update - aug20... · and weak balance sheet of...

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