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Fewer, But Bigger, Developers To Rule India’s Real Estate, Says Edelweiss
Bloombergquint.com  |  September 11, 2019

Devina Khanna

In India’s housing market battered by muted sales, piling inventory, stagnant-to-falling prices and an acute liquidity crisis, consolidation has emerged as the big theme for organised players, according to Edelweiss Research.

 

The number of developers in the top nine Indian cities fell nearly by half between 2011-12 and 2017-18, it said in a report. The worst is nearly over for organised players, who stand to gain market share, it said.

 

Recovery will be gradual, according to the report, on the back of steady improvement in house affordability, waning competition, pickup in demand since 2017, correction in inventory levels and mortgage rates ping to the lowest in over a decade. And the share of the top 10 developers in housing demand across the major cities is likely to touch 50-60 percent over the medium term from 20-40 percent at present, the report said without specifying a timeline.

 

The optimism comes as developers struggle to raise funds after non-bank lenders turned ive following a shock default by the IL&FS Group last year triggered a liquidity crisis. That, coupled with an economic slowdown, stalled a nascent recovery in the sector from the disruption caused by Prime Minister Narendra Modi’s cash ban and a stricter housing law.

 

The liquidity crisis faced by developers in tier 2 and 3 cities has hastened the consolidation. “Net disbursals by non-bank lenders/housing financiers to real estate developers declined by almost half to around 260 billion rupees from about 510 billion rupees in 2017-18,” the report said, quoting JLL. “However, bigger developers will have an edge as far as fund availability is concerned.”

 

A softer interest rate regime would likely raise affordability and increase the preference for smaller-ticket-sized units, Edelweiss Research said. That will boost the prospects of companies with exposure to affordable and aspirational housing.

 

Demonetisation, RERA and goods and services tax are leading to formalisation of the residential space, the report said. “Focus on execution and project delivery under RERA has led to average time taken from launch to complete construction up to the first floor declined drastically from 21 months before 2016 to just six months now,” Edelweiss said. “Organised developers with access to modern construction technologies will thrive in this environment, leading to further consolidation.”

 

Edelweiss’ Take On Developers

 

DLF

 

  • Boasts of an attractive rental portfolio that’s growing steadily.
  • Has a revamped balance sheet, which is likely to generate better cash flows, and is likely to be a key beneficiary of the ongoing sector consolidation.
  • In the post-RERA environment, DLF intends to launch projects only after achieving a reasonable level of completion, which may strain cash flows somewhat.
  • Maintains ‘Buy’ with a target price of Rs 238 on the stock.

 

Godrej Properties

 

  • Remains the best bet to play the industry consolidation in the medium to long term.
  • Robust project pipeline, rapidly expanding project portfolio and tailwinds from RERA are key positives.
  • Surging growth has brought along challenges in the form of cash flow strain, repeated fundraise and expensive valuations.
  • Maintains ‘Buy’ with target price of Rs 1,088.

 

Oberoi Realty

 

  • A strong brand name and history of delivering quality projects in Mumbai, planned new launches and rising size of annuity portfolio make an investment case for the stock.
  • Delay in launch of planned projects—Exquisite Phase III, Thane and future Sky City—and slowdown in Mumbai metropolitan region are challenges.
  • Maintains ‘Hold’ with target price of Rs 590.

 

Sobha

 

  • It’s on a steady growth path aided by robust fundamentals in its mainstay market of south India.
  • Varied product offerings have enabled it to capture changing customer preferences adequately.
  • Physical market demand weakening, especially in Bengaluru, approval delays leading to slower new sales and IT slowdown impacting residential demand in Bengaluru could pose risks to upside.
  • Maintains ‘Buy’ with revised target price of Rs 670.

 

Brigade Enterprises

 

  • Ability to manage leverage levels, leasing trajectory for under-construction assets and value unlocking in the hospitality arm will be key stock catalysts.
  • Potential pressures could be cash flow stress given exposure to annuity businesses, leasing risk on under-construction office projects considering 2019-20 deadline for tax exemption.
  • Maintains ‘Buy’ with target price of Rs 252.