India Property Sector
SECTOR REVIEW
No recovery in sight
■
The RBI’s recent liquidity infusion and a possible fall in property prices
in the near term could improve affordability. However, we believe that
developers are not out of the woods yet, as demand is likely to remain
depressed, particularly with the recent turmoil in global markets and a
possible economic slowdown in India and globally. Fewer employee
hires by IT/ITES companies, job uncertainty and lower wage hikes and
payouts are likely to lead to risk-averse behaviour from buyers, making
them postpone decisions to buy property.
■
Fuelled by high real estate prices in recent years, real estate
developers across the country have embarked upon huge growth
plans, building up large land banks at a high cost. This necessitated
huge fund-raising by these companies, leading inevitably to stretched
balance sheets. Sector liquidity has now become extremely tight, debt,
if available, comes at a very high cost, while private equity has also
slowed. Most developers now find themselves faced with a severe
liquidity crunch, a situation that we believe will persist and lead to
future delays in execution.
■
We have lowered our earnings estimates and NAVs for the stocks
under our coverage. This reflects the delays in project execution as a
result of tight liquidity and high gearing, longer development cycles for
projects on account of weak demand and also to account for sharper
property price falls than we had previously assumed. Despite
consensus estimates having corrected since July, we perceive further
potential downside to consensus earnings, driven by weak volumes
during the generally stronger 2H. With more downside risks and a lack
of positive catalysts, we maintain our UNDERPERFORM ratings on DLF
and Parsvnath, and NEUTRAL ratings on Unitech, IBREL and Sobha.

No recovery in sight
Risk-aversion to drive volumes down
Until now, the slowdown in demand for residential property was a result of rising mortgage
rates and property prices impacting affordability. The expectation was that with a 20-25%
correction in prices and a 200 bp fall in interest rates, demand could recover. However,
with recent turmoil in the global markets and a possible economic slowdown in India and
globally, we now believe that demand is likely to remain depressed. Fewer employee hires
by IT/ITES companies, job uncertainty and lower wage hikes and payouts are likely to lead
to risk-averse behaviour from buyers, making them postpone the decision to purchase
property.
Data from the previous cycle (1991-2001) shows that despite the sharp correction in
property prices from 1996 onwards, demand recovered only much later – despite interest
rates declining steadily from 1997-2002. For demand to pick up, a favourable macroeconomic
environment is required. We expect this phenomenon to persist in the current
cycle as well, which bodes poorly for real estate stocks.
Liquidity squeeze to continue
Fuelled by high real estate prices in recent years, real estate developers across the
country announced huge growth plans. They began building large land banks at high cost,
which required huge fund raising that led to a stretching of their balance sheets. The
sector’s liquidity has since turned extremely negative. Debt, if available, comes at very
high cost, and private equity too has slowed, with developers, particularly those which are
highly levered, now facing a severe liquidity crunch. This is likely to persist and lead to
delays in the execution of future projects. Companies appear to have finally acknowledged
the tight liquidity environment, and have begun making announcements that they plan to
concentrate only on projects nearing completion, and defer or scrap, newer projects.
More downside to stocks
Despite the 84% fall in the BSE realty index since the beginning of 2008, we believe it is
still too early to turn bullish on the Indian property sector’s prospects. Historically, in the
regional property markets, the stocks have traded at deep discounts to NAVs during times
of falling property prices. India should be no different, especially given the high leverage of
Indian developers and lower transparency in the sector.
We have lowered our earnings estimates and NAVs for the stocks under our coverage in
order to reflect delays in the execution of projects as a result of tight liquidity, longer
development cycles for projects on account of weak demand and also to account for a
sharper fall in property prices than previously assumed. Despite consensus estimates
having corrected since July 2008, we perceive further downside to consensus earnings
driven by weak volumes during a generally stronger 2H. With more downside risks and a
lack of positive catalysts, we maintain our UNDERPERFORM on DLF and Parsvnath, and
NEUTRAL on Unitech, IBREL and Sobha.