Real Estate Sector - Oct11

8/3/2019 Real Estate Sector - Oct11

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Post a short-lived recovery in 2009-10, volumes have again dried up for the Indian real estate sector in the wake of sharpprice escalations as also an adverse regulatory environment (high interest rates, approval delays). Though solvencyconcerns similar to 2008 are unlikely given the relatively strong balance sheets this time, cashflow/ profitability pressuresare visible for most players. These pressures will likely force developers to blink and undertake price cuts (10-25%) in thenear term. Further, with an expected reversal of interest cycle by early-FY13 and given the robust underlying demand forresidential property, we anticipate an uptick in sales volumes/ cashflows for developers in the next 6-12 months. This, inturn, could lead to a cyclical rebound in stocks. However, we believe persistent structural issues poor corporategovernance, patchy execution, inconsistent accounting policies, etc will continue to cap any broad-based re-ratingacross the sector. We see the sector increasingly becoming a stock-specific play with the possibility of significant valuecreation in select stocks. Oberoi Realty (ORL), Sobha Developers and Jaypee Infratech (JIL) are our top picks in the space.Developers in a tight spot, yet again: RBIs tightening regime, coupled with banks reluctance to lend to the sector, hasmagnified the pain emanating from a sharp slowdown in absorptions. Sluggish new product launches due to increasingly

stringent approval processes and a sharp rise in input costs (steel, cement, sand and labor) have added to the woes. BSE

Realty index has underperformed the broader index by 36% in the past 12 months and ~ 63% since March 2009.

Expect cyclical rebound in the near term; structural re-rating unlikely: We see a 10-25% drop in property prices over thenext 6-12 months as developers seek to regenerate the sales momentum. Along with the likely reversal of the interest rate

cycle by early-FY13, this could spur a sharp bounce-back in stock prices, though a further slowdown in the economy andhardening of interest rates are key risks to this thesis. However, this likely recovery will not address the structural issues that

have led to investor disenchantment with the broader space and the consequent de-rating.

Increasingly a stock-specific play; only a few winners likely: Given the diversity in business models and governancestandards as also an increasingly tough macro environment, we expect divergent stock performances with only a few clear

winners. We prefer ORL, Sobha and JIL which possess most of the winning traits: Balance sheet strength, strong

cashflows, proven execution capabilities, land bank focused on tier I/II cities and high corporate governance.

Comparative valuations (FY13E)

Price Mkt Cap Rating Target Upside NAV EPS CAGR P/E P/B RoE Gearing

Company (Rs) (Rs m) pri ce (Rs) potential (%) FY13E Prem/ (Disc) FY11-13E (%) (x) (x) (%) FY12E (x)

DLF 231 391,589 N 222 (4) 247 (7) 11 20.7 1.3 6.5 0.8

Jaypee Infratech 60 83,614 OP 84 39 105 (42) (36) 12.4 1.2 10.0 1.2

Oberoi Realty 234 76,872 OP 328 40 298 (21) 17 12.4 1.7 15.0 (0.4)

Godrej Properties 661 46,153 N 694 5 631 5 17 25.7 3.9 16.2 1.2

HDIL 94 39,344 N 99 6 142 (34) 2 4.7 0.4 8.3 0.3

Sobha Developers 230 22,555 OP 314 36 392 (41) 10 10.3 1.0 10.2 0.6

Sunteck Realty 352 22,152 OP 431 23 539 (35) 1,311 4.1 1.8 54.9 0.6

APIL 36 5,674 OP 66 83 94 (62) 25 3.3 0.2 7.1 0.6

Source: Bloomberg, IDFC Securities Research

Nitin [email protected] 2568

For Private Circulation only.Important disclosures appear at the back of this report

SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.

Vneet [email protected] 2579

Real EstateOn shaky ground!

INSTITUTIONAL SECURITIES

INDIA RESEARCH REAL ESTATE BSE SENSEX: 16937 20 OCTOBER 2011SECTOR UPDATE

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2 | OCOTBER 2011 IDFC SECURITIES

Content

Investment Argument ..............................................................................................................3Indian Real Estate: back in the woods! ...................................................................................9

The going has become toughAGAIN! ...............................................................................9

Multiple headwinds buffeting the sector .............................................................................12

Regional diversities: Market no longer homogenous .........................................................18

Commercial outlook healthy; only a few listed players.......................................................22

The good news: A business revival may be nigh ..................................................................24Long-term demand drivers intact........................................................................................24

Healthier solvency will prevent another 2008......................................................................25

Price and interest rate decline would boost absorption .....................................................28

Cyclical rebound to drive a spike in stock prices................................................................31

Key risks to near-term recovery .......................................................................................... 32

The bad news: Valuations will continue to lag.......................................................................34Structural issues continue to plague the sector..................................................................34

Market fragmentation adds to the challenges.................................................................37

Valuations will not attain even 2HFY10 levels .....................................................................39

How to play the sector ..........................................................................................................42Multiplicty of business models/ geographical focus ....................................................... 42

impels a bottom-up approach.........................................................................................43

Identifying the winners.........................................................................................................47

Companies ........................................................................................................................... 49Ansal Properties ................................................................................................................... 51

DLF....................................................................................................................................... 53

Godrej Properties ................................................................................................................. 55

HDIL...................................................................................................................................... 57

Jaypee Infratech................................................................................................................... 59

Oberoi Realty........................................................................................................................ 61

Sobha Developers................................................................................................................ 63

Sunteck Realty...................................................................................................................... 65




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OCTOBER 2011 IDFC SECURITIES

INVESTMENT ARGUMENT

Challenges besetting the Indian real estate space reflected in the underperformanceof stocks over the past few quarters

While there are no solvency issues like in 2008, significant operational cashflowpressures have emerged again due to slump in sales

Unless global macro issues and sharp economic slowdown play spoilsport, weanticipate a near-term revival in the sector catalyzed by price cuts

However, we expect stock performances to increasingly diverge going forward andnot move in a herd as seen in the past

Quality of business models will differentiate the men from the boys; we see only afew winners

The going has become toughAGAIN!The Indian real estate sector, yet to fully recover from the 2008 meltdown, has hit

another rough patch in the past few quarters. Sales volumes have slowed considerably,

led by historically high residential prices and stringent approval processes delaying new

launches. Operational margins are stretched due to sharp inflation in input costs, with

higher interest cost denting profitability. Debt levels, though off the peaks of 2008, are

still high for most developers. Given a tough lending environment, operational cashflows

will increasingly be insufficient to meet repayment obligations.

Exhibit 1: Current st ate of real estate

Source: Company, IDFC Securities Research

Weak sales, tougherregulations and sharprise in input costsbuffeting the sector

Falling sales volumes

Historically high prices impacting

affordability

Purchase decisions delayed in

anticipation of price correctionFa

llingsalesvolumes

Declinin

g

margins

/pro

fitabili

ty

Regulatory logjam

Inadequateoperational

cashflowsFundin

gsour

ces

capp

ed

Depre

ssed

valu

ati

ons

The BIG Question

Will developers blink?

Real estate not in a good shape

Declining margins/profitability

Sharp inflation in input costs

Higher interest rates increasing interest

burden

Inadequate operational cashflows

Slower new launches limiting cashflow

generation

Operational cashflows insufficient to

meet debt repayment requirements

Regulatory logjam

Increasing diligence in approval

processes

Delays due to policy inactions

Funding sources capped

Debt becoming more expensive and

selective

PE funding increasingly difficult

Depressed valuations

Real estate stocks trading at historical

lows

Discounts to NAV widening

Falling sales volumes

Historically high prices impacting

affordability

Purchase decisions delayed in

anticipation of price correctionFa

llingsalesvolumes

Fallingsalesvolumes

Declinin

g

margins

/pro

fitabili

ty

Declinin

g

margins

/pro

fitabili

ty

Regulatory logjamRegulatory logjam


cashflows


cashflowsFundin

gsour

ces

capp

ed

Fundin

gsour

ces

capp

ed

Depre

ssed

valu

ati

ons

Depre

ssed

valu

ati

ons

The BIG Question

Will developers blink?

Real estate not in a good shape

Declining margins/profitability

Sharp inflation in input costs

Higher interest rates increasing interest

burden

Inadequate operational cashflows

Slower new launches limiting cashflow

generation

Operational cashflows insufficient to

meet debt repayment requirements

Regulatory logjam

Increasing diligence in approval

processes

Delays due to policy inactions

Funding sources capped

Debt becoming more expensive and

selective

PE funding increasingly difficult

Depressed valuations

Real estate stocks trading at historical

lows

Discounts to NAV widening




4/68


clearly reflected in the BSE Realty performance (down 54% since Oct-10)Since the bribery-for-loan scam broke out in October 2010, BSE Realty has significantly

underperformed the broader indices. The index is down 54% in the past one year and

has underperformed the Sensex by a wide margin (36%).

Exhibit 2: BSE Realty index has signifi cantly underperf ormed Sensex since Oct-10

20

40

60

80

100

120

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Sensex BSE Realty

Source: Bloomberg

Broad-based solvency concerns of the 2008 kind unlikleyThe macro drivers of real estate demand a young population, rising urbanization,

higher disposable household incomes and growing nuclear families are still in place.

Also, developers are far better placed compared to 2008 as positive operational cash

flows, manageable gearing levels and limited investment in land in the past two years

mitigate solvency concerns this time. Further, unlike the fairly homegenous trends

witnessed in the real estate industry across different regions around 2008, there is

increasing diversity across various markets in terms of pricing trends and absorptions.

Probable business recovery from the lows in the near term...Huge unmet demand for housing and continued strong growth in the economy are the

key demand drivers of residential real estate. We expect improvement in supply-side

dynamics in the form of a 10-25% price correction in the next 6-12 months in most

markets (especially Mumbai and Gurgaon). A reversal of the interest rate cycle

(expected by early-FY13) would provide another positive trigger. Emergence of these

two positive factors, supported by a high savings rate (23%) and largely unleveraged

balance sheets of Indian households, will drive a near-term turnaround in the sector and

thereby a cyclical rebound in stock prices..

Index has plunged by54% in the past year,underperformingthe Sensex by 36%

Positive operationalcashflows, lower gearingand limited investment inland to prevent another2008

Supply-side dynamicsto improve after alikely correction inthe next 6-12 months

BSE Realty down 54%vs. ~ 18% for Sensex




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5|


Exhibit 3: A repeat of the 2009 post-down turn rebound likely

10-30% correcti on in property prices boosted volumes further aided by rate cuts by the RBI

leading to a cycli cal rebound in real estate stocks

-

100

200

300

400

6-M

ar-0

9

15

-Mar-0

9

24

-Mar-0

9

2-A

pr-0

9

11

-Apr-0

9

20

-Apr-0

9

29

-Apr-0

9

8-M

ay

-09

17

-May

-09

26

-May

-09

4-J

un

-09

13

-Jun

-09

22

-Jun

-09

1-J

ul-09

10

-Ju

l-09

19

-Ju

l-09

28

-Ju

l-09

6-A

ug

-09

15

-Aug

-09

24

-Aug

-09

2-S

ep

-09

11

-Sep

-09

20

-Sep

-09

29

-Sep

-09

8-O

ct-0

9

17

-Oc

t-0

9

Sensex BSE Realty

Source: Bloomberg

but structural issues will continue to plague sector valuationsWhile macroeconomic concerns (high interest rates, inflation, etc) may start to ease by

early-FY13, we believe structural issues that plague the sector/ listed stocks will persist.

We reckon that a lot remains to be achieved in terms of transparency and disclosures,

consistency of accounting policies, timely execution, land bank visibility, and discipline

in maintaining conservative balance sheets. We do not see these issues dissipating,

until the sector gets a regulator and a comprehensive regulation act. Until then, a re-

rating of the sector is unlikely.

-

3,500

7,000

10,500

14,000

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

Mumbai Thane Gurgaon

4.0

5.5

7.0

8.5

10.0

Oct-08

Oct-08

Oct-08

Nov-08

Nov-08

Dec-08

Dec-08

Jan-09

Jan-09

Feb-09

Feb-09

Mar-09

Mar-09

Apr-09

Apr-09

Apr-09

Repo rate (%)

Repo rate cut by 425bpsover 6-month period

Concerns on balancesheet health, accountingmethodologies andgovernance persist

BSE Realty outperformedSensex by 121% in Mar-

May 2009




6/68


Exhibit 4: Too many issues to gr apple with before arriving at a fair valuation

Source: IDFC Securities Research

and prevent stocks from attaining valuation levels of H2FY10We believe the sector will remain unattractive to long-term investors until the structural

issues are significantly resolved. Most investors had burnt their fingers after the 2006-07

boom and again in FY10 (QIPs, stake sale, IPOs), resulting in total lack of confidence in

real estate valuations. Also, with developers failing to sustain FY10 sales volumes and

sharp inflation in input costs (especially labour) as well as rising interest cost eroding

operational margins, we believe growth as well as profitability profile of most developers

have significantly contracted in the last 12-18 months. We also do not see structural

issues being addressed at least in the next 2-3 years. We, therefore, do not expectvaluations to return even to H2FY10 levels, which were also too expensive to provide

any meaningful returns. We believe while investors might look for trading gains in the

sector, any short-term bounce would be used as an exit opportunity.

Indian real estate a highly fragmented market, with regional dynamicsReal estate is one of the most fragmented sectors in India, with listed players

accounting for only a minority of the overall market. The sector is also highly

unorganized with a large number of small/ medium players and just a handful of large

names. As a result, the broader real estate market, in most cases, is governed more by

Limited

operational

disclosures

Land bank remains

a black box

Patchy execution

Current state

No operational details provided till 2008

Post downturn, many companies have started sharing

information on quarterly basis; extent of information stillremains limited

Information missing in most cases

Segmental and geographical break-up of sales

Detailed land bank and cashflow information

Extent of revenue/cost recognized from projects

Execution status of projects

Most information required to make reasonable valuation

assumptions for land bank remain absent

Limited information on total area and key land parcels

available while contribution to Gross NAV remains quitesignificant

Details required include geographic and segmental break-

up, companys stake, acquisition cost, amount paid and

payable, land status (agri, residential, industrial etc)

Most companies have failed to scale-up execution post a

bumper sales in FY10 resulting in delays across projects

Limited project management bandwidth and high input

cost inflation have added to the woes

Companies that stand out

Oberoi Realty Sobha Developers

Prestige Estates

Godrej Properties

Oberoi Realty

Prestige Estates

Sobha Developers

Godrej Properties

Oberoi Realty

Sobha Developers

Lack of regulatory

body

Sector currently lacks a regulatory body to oversee

operation and ensure accountability

Real estate regulation act remains in draft mode; final billstill 12-24 months away

Inconsistent

accounting

policies

Multiple methods of revenue recognition makes it difficultto compare companies financials

IFRS accounting also modified to include percentage

completion methodology

Companies following IFRS standards of accounting:

HDIL

Sunteck Realty

Limited

operational

disclosures

Land bank remains

a black box

Patchy execution

Current state

No operational details provided till 2008

Post downturn, many companies have started sharing

information on quarterly basis; extent of information stillremains limited

Information missing in most cases

Segmental and geographical break-up of sales

Detailed land bank and cashflow information

Extent of revenue/cost recognized from projects

Execution status of projects

Most information required to make reasonable valuation

assumptions for land bank remain absent

Limited information on total area and key land parcels

available while contribution to Gross NAV remains quitesignificant

Details required include geographic and segmental break-

up, companys stake, acquisition cost, amount paid and

payable, land status (agri, residential, industrial etc)

Most companies have failed to scale-up execution post a

bumper sales in FY10 resulting in delays across projects

Limited project management bandwidth and high input

cost inflation have added to the woes

Companies that stand out

Oberoi Realty Sobha Developers

Prestige Estates

Godrej Properties

Oberoi Realty

Prestige Estates

Sobha Developers

Godrej Properties

Oberoi Realty

Sobha Developers

Lack of regulatory

body

Sector currently lacks a regulatory body to oversee

operation and ensure accountability

Real estate regulation act remains in draft mode; final billstill 12-24 months away

Inconsistent

accounting

policies

Multiple methods of revenue recognition makes it difficultto compare companies financials

IFRS accounting also modified to include percentage

completion methodology

Companies following IFRS standards of accounting:

HDIL

Sunteck Realty

Growth and profitabilityprofiles of most playershave been dented in thepast 12-18 months

Sector dynamicsdominated by the largenumber of unlisted players




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7|


the actions of unlisted players than of listed ones. Also, high dependence on the project

location (different micro-markets display divergent trends) and business models (owned

land, joint development agreement, re-development, slum rehabilitation, etc), we

believe, make companies difficult to compare.

Exhibit 5: Projects of li sted players accounted for 5% of the total in FY11Ongoing projects i n FY11

Cities By listed players PropE coverage % by listed players

Bengaluru 58 623 9

Chennai 14 460 3

Greater Noida 17 138 12

Gurgaon 34 176 19

Hyderabad 3 444 1

Mumbai 55 956 6

Navi Mumbai 4 692 1

New Delhi 7 15 47

Noida 26 141 18

Pune 26 675 4Thane 9 422 2

All India 330 6,547 5

Source: PropEquity

We prefer a bottom-up approach to invest in the sectorGiven high dependence on location and business model, we believe the sector is

increasingly a play on individual companies. As a result, we do not expect all stocks to

move in a pack even when optimism returns to the sector. We believe the next 1-2 years

could see significantly divergent trends in terms of stock performance. The key

challenge, therefore, is to tap the right business model with presence in right markets

and asset classes, and wait for a recovery. We expect select stocks, depending on the

macro (regional presence, asset class and corporate governance) and micro factors(diversified business model, low leverage, higher cashflows in the near term, quality

land bank, and execution scalability) to do well in the next 1-2 years, while others may

continue to trade at discounted valuations.Exhibit 6: Key parameters to identify winners


We look for a favorableblend of regionalpresence, asset class,business model

and visibility ofcashflows in the nearterm, besides quality landbank and execution

Oberoi Realty, SobhaDevelopers and JaypeeInfratech satisfy most ofthe winning criteria

Key to success

Low gearing

Visibility on near-term cashflows

Execution capabilities and track record

Quality and quantity of land bank

Levels of corporate disclosures

Key to success

Low gearing





Low gearing








8/68


Oberoi Realty, Sobha Developers and Jaypee Infratech stand out on most parametersand, therefore, are our top picks in the sector. We maintain Outperformer on AnsalProperties and Sunteck Realty given the sharp correction in stock prices and attractivevaluations at current levels. We maintain Neutral on Godrej Properties and HDIL, anddowngrade DLF to Neutral as current valuations offer limited upside.

Exhibit 7: Ranking coverage companies on key to suc cess parameters


Exhibit 8: Comparative valuations (FY13E)

Target Upside NAV EPS CAGR P/E P/B RoE Gearing

Company Price Mkt Cap Rating pric e poten tial FY13E Prem./(Disc) FY11-13E (x) (x) (%) FY12E (x)

DLF 231 391,589 N 222 (4) 247 (7) 11 20.7 1.3 6.5 0.8

Oberoi Realty 234 76,872 OP 328 40 298 (21) 17 12.4 1.8 15.0 (0.4)

Jaypee Infratech 60 83,614 OP 84 39 105 (42) (36) 12.4 1.2 10.0 1.2Godrej Properties 661 46,153 N 694 5 631 5 17 25.6 3.9 16.2 1.2

HDIL 94 39,344 N 99 6 142 (34) 2 4.7 0.4 8.3 0.3

Sobha Developers 230 22,555 OP 314 36 392 (41) 10 10.3 1.0 10.2 0.6

Sunteck Realty 352 22,152 OP 431 23 539 (35) 1311 4.1 1.8 54.9 0.6

APIL 36 5,674 OP 66 83 94 (62) 25 3.3 0.2 7.1 0.6

Source: Bloomberg, IDFC Securities Research

APIL, Sobha,JIL

Valuation upside -discount to NAV

ORL, Sobha,GPL

Transparency /disclosures

ORL, Sobha,JIL

Execution trackrecord

JIL, Sobha,DLF

Quantity/Qualityof land bank

ORL, SRL Visibility on near-term cashflows

ORL Low Gearing

Best placedRLobhaRLILDILPLLFPIL

APIL, Sobha,JIL

Valuation upside -discount to NAV

ORL, Sobha,GPL

Transparency /disclosures

ORL, Sobha,JIL

Execution trackrecord

JIL, Sobha,DLF

Quantity/Qualityof land bank

ORL, SRL Visibility on near-term cashflows

ORL Low Gearing

Best placedRLobhaRLILDILPLLFPIL




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9|


INDIAN REAL ESTATE: BACK IN THE WOODS!

Post a short-lived recovery, the Indian real estate sector is again beset withproblems

Sales volumes have nosedived due to steep price escalation, while inflationary costpressures have mounted squeezing cashflows

An unfavorable macro-environment in the form of delays in approvals and a highinterest rate regime have added to the woes

Widely varying dynamics across regional markets; e.g. Bangalore has been stabledue to reasonable price hikes, Mumbai reels under sharp price escalation

The going has become tough AGAIN!

The Indian real estate sector, yet to fully recover from the impact of the 2008 meltdown,

has hit another rough patch in the past few quarters. Sales volumes have slowed with

prices of residential apartments at historical highs, profitability is under stress because

of a sharp inflation in input costs, and operational margins have been hit by higherinterest cost. Debt levels, though off the peaks of 2008, are still stretched. Given the

tough lending environment, operational cashflows, though positive, are insufficient to

meet repayment obligations.

Slowdown in volumesSales volumes of most listed players have stagnated or have started declining over the

past few quarters. While historically high prices and a slowdown in approvals have hit

sales in Mumbai, the NCR market (especially Noida and Greater Noida) is under

pressure due to increasing concerns over land acquisition. Bangalore players, though,

have been reporting strong sales.

Exhibit 9: Quarterly sales of most list ed developers have declined over the past 3-5 quarters


Profitability under pressureDespite improving realizations in the past few quarters, margins of most developers

have stagnated. While EBITDA margins have declined on higher construction cost and

rising SG&A expenses, PAT margins have fallen due to the higher cost of debt and

lower other income. To curb margin erosion, players like DLF have shown a marked

shift in strategy to launching plotted developments.

(msf)

0.0

1.0

2.0

3.0

4.0

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

DLF(msf)

0.0

1.0

2.0

3.0

4.0

5.0

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Unitech(msf)

0.0

1.5

3.0

4.5

6.0

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Jaypee Infratech

Margins and debt levelsof developers are understress, but not as gloomyas in 2008

High prices and slowapprovals have hit sales inmost markets; Bangaloreis an exception

High cost of debt, lowerother income and steepconstruction costs haveshaved off margins




10/68


Exhibit 10: Margins of r eal estate companies on a decline

Margins falling consistently Quarterly EBITDA margins and PAT margins witness gradual decline


Operating cashflows remain stagnantCashflows of most developers have been strained, with operating cashflows (before

working capital changes) having grown only modestly in the past 3-5 quarters. We see

the following reasons for the same:

Customer inflows are declining, led by slowdown in new launches and sales.

Increased construction cost of ongoing projects and higher interest burden have

squeezed liquidity.

Substantial debt repayment obligations and the difficult funding/ refinancing

environment have forced developers to look for alternative funding options (PE

investment, land sale, non-core asset sale, etc).

Exhibit 11: Operational cashflows yet to witness any significant improvement

Operational cashflows stagnant in last few Qs FY11 operational cashflows fail to show any substantial growth despite strong FY10 sales


0

17

34

51

68

(%)

FY07 FY08 FY09 FY10 FY11

Coverage EBITDA margin ex-JIL

Coverage PAT margin ex-JIL

0

20

40

60

80

(%)

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

DLF Unitech

Sobha Developers HDIL

0

15

30

45

60

(%)

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

DLF UnitechSobha Developers HDIL

Operational cashflows before WC changes(Rsm)

-

3,500

7,000

10,500

14,000

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

DLF HDIL

-

6,000

FY08 FY09 FY10 FY11

12,000

18,000

24,000

Unitech HDIL

Ansal API Sobha Developers

-

25,000

FY08 FY09 FY10 FY11

50,000

75,000

100,000DLF

Steep construction costand high debt havesqueezed liquidity




11/68

11|


Debt levels high despite capital-raising and limited land acquisitionGearing levels have declined from the highs of 2008, but gross debt of real estate

companies has not seen any significant reduction despite capital-raising by most

companies during FY10-11 and limited investment into land acquisitions. While DLFs

debt escalated due to consolidation of DLF Assets (DAL) in Q4FY10, gross debt of

most other companies has failed to come down substantially.

Exhibit 12: Gross debt levels have not f allen in the past year


BSE Realty crumbling under the pressureThe impact of the aforementioned headwinds is clearly reflected in the BSE Realty

index, which has tumbled by 54% in the past 12 months, underperforming the broader

market by ~ 36%.

Exhibit 13: BSE Realty index signifi cantly underperformed the Sensex since Oct-10

20

40

60

80

100

120

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Sensex BSE Realty

Source: Bloomberg

1.93

0.88 0.87

0.65 0.68

-

100,000

200,000

300,000

400,000

FY07 FY08 FY09 FY10 FY11-

0.60

1.20

1.80

2.40

Coverage Gross Debt ex-JIL (Rs m) Coverage gearing ex-JIL (Rs m)

100,000

140,000

180,000

220,000

260,000

Q

1FY10

Q

2FY10

Q

3FY10

Q

4FY10

Q

1FY11

Q

2FY11

Q

3FY11

Q

4FY11

Q

1FY12

DLF

-

21,000

42,000

63,000

84,000

Q

1FY10

Q

2FY10

Q

3FY10

Q

4FY10

Q

1FY11

Q

2FY11

Q

3FY11

Q

4FY11

Q

1FY12

Unitech HDIL Sobha Developers

Gearing levels have fallen,but the gross debt profilehas been stubborn

The realty index has fallenby 54% in the past 12months

BSE Realty down 54%vs. ~ 18% for Sensex




12/68


Multiple headwinds buffeting the sector

The sharp rise in property prices, a series of monetary tightening measures by the RBI,

and developers insistence on keeping prices high have led to significant slowdown in

volumes across markets in the country. Also, availability of debt has become extremely

difficult for the sector after the bribery-for-loan scam was exposed in November 2010.

Approval processes have become more stringent due to the irregularities in Adarsh

Housing Society (Mumbai). To add to these woes, higher commodity prices and acute

labor shortage have dented profitability and led to slower execution.

Exhibit 14: Current state of real estate


High prices keep both genuine buyers and investors awayWhile sales volumes have taken a hit with both genuine buyers and investors sitting on

the sidelines in anticipation of a significant price correction, banks have significantly

tightened lending norms for real estate developers. The problems have been

aggravated by developers keeping property prices elevated driven by the expectation of

a quick turnaround in fortunes.

Sharp escalation in prices across key citiesPrices have risen sharply almost across the country from the lows of 2009 when

developers had to significantly cut prices to spur demand. The pace of escalation was

unexpected, especially given the depressed dynamics not too long in the past. While

prices have trended up in most markets, the pace has been higher in Mumbai (up 37%

in two years), Gurgaon (34%) and Thane (45%). Prices have already surpassed previoushighs in some of these markets.

Banks

Reduced lending to Real Estate

Developers

Investors

Not investing at current levels as returns

are no longer attractive

Genuine Buyer

Adopt wait and watch strategy inanticipation of price correction

Developers

Hold on to their prices in the midst ofcredit crunch and demand slowdown.

Rising interest burden and reduced

availability of finance impacts cash flows ofprojects

Real Estate

Banks


Developers

Investors



Genuine Buyer


Developers




Banks


Developers

Investors



Genuine Buyer


Developers




Real Estate

High commodity pricesand labour shortage havedented profitability

The rise in prices hasbeen the sharpestin Mumbai, Gurgaonand Thane




13/68

13|


Exhibit 15: Sharp rise in prices in the past two years


and falling affordabilityThe sharp rise in property prices as also developers preference for high-margin luxury

residential projects have increased the average ticket size (apartment value) by 30-45%

across most markets in the past two years. With income growth not commensurate tothe rise in prices, affordability - and thereby absorptions - have seen a gradual decline.

70

95

120

145

170

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

South Mumbai Central Suburb Western Suburb

Thane west Navi Mumbai - Airoli

60

115

170

225

280

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Gurgaon - Sohna Road Gurgaon - new sectors

Noida - Sec 92-96 Noida - Expressway

Greater Noida - sector Omnicom

70

85

100

115

130

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Tumkur road Hosur road Mysore road

60

85

110

135

160

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Chennai - north west Chennai - south east

Hyderabad - south west

MMR NCR

Bangalore Chennai

The average ticket size offlats has risen 30-45% inthe past two years




14/68


Exhibit 16: Average ticket size up by 30-45% across markets in t he past two years

(Rs m) South Mumbai Thane Gurgaon Noida Greater Bangalore

Mumbai western suburbs Noida

Avg. ticket size of apts sold in FY09 (Rs m) 41.8 10.0 3.9 6.1 9.6 6.5 5.2

Change from FY09 to FY10

% increase in prices (10) 2 15 2 (34) (20) 7

% increase in avg. unit size 25 12 (15) (16) (25) (34) (5)

Cumulative impact (%) 15 15 0 (14) (59) (54) 2

Avg. ticket size of apts sold in FY10 (Rs m) 46.9 11.5 3.9 5.2 4.7 3.5 5.2

Change from FY10 to FY11

% increase in prices 0 17 33 37 26 (1) 20

% increase in avg. unit size 20 12 (2) 11 (19) 9 (1)

Cumulative impact (%) 20 29 31 49 7 8 19

Ticket size as of Mar-11 56.2 14.8 4.9 7.7 5.0 3.7 6.2

Increase in ticket size from FY09-11 (%) 35 43 31 34 (53) (46) 20

Source: PropEquity, IDFC Securities Research

have impacted absorptionsThe sharp rise in property prices in certain pockets (NCR, MMR), combined with

developers unwillingness to cut prices, have squeezed volumes in these regions. While

end-user demand has been impacted by falling affordability and expectations of a price

reduction, investor interest has also fallen as prices are unlikely to appreciate

considerably from current levels. As a result, absorptions in these markets have

declined by 40-55% yoy in the past 3 quarters. However, absorptions in South Indian

markets (Bangalore and Chennai) have remained stable and not witnessed any

downward trend.

Exhibit 17: NCR and MMR absorptions decline 40-55% yoy; South Indian markets buck the trend

NCR and MMR have witnessed maximum decline in absorptions Bangalore and Chennai absorptions have remained stable

Source: PropEquity

The volume squeeze is most evident in Mumbai, where monthly property registrations

have been constantly declining for the past few quarters. Average registrations have

fallen below 5,000/month from the Nov-Dec 2009 peak of 7,500/month.

-

125

250

375

500

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

NCR MMR

-

75

150

225

300

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Bangalore Chennai

Absorptions have plunged40-55% in the past threequarters




15/68

15|


Exhibit 18: Monthly sale registrations in Mumbai indicate a clear downward trend

3,000

4,000

5,000

6,000

7,000

8,000

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Mumbai sale registrations (3-mth avg)


Unfavourable macro environment rising inflation and interest costsThe Indian economy is currently characterized by inflationary trends - similar to that of

2008, though the increase in interest rates has been gradual this time. In the past 15

months, RBI has raised interest rates by 325bp, leading to an increase in funding costs

for both developers and consumers. For instance, SBI PLR has crossed its 2008 peak

reached levels not seen since 2005.

Exhibit 19: Macro-economi c environment 2008 vs. 2011

Source: RBI

Banks averse to lending to developersBanks, especially PSU banks, have become averse to lending to the sector after the

bribery-for-loan scam broke out in November 2010. So, not only have fresh loans

become hard to come by, refinancing of existing debt has also become difficult. This

has put pressure on companies to generate sufficient cashflows for repayment and to

avoid a debt trap. Interest rates have risen by 200-300bp in the past six months, putting

further pressure on profitability and stunting expansion plans.

New sale registrationsdown 34% from the peak

of Dec-09

(3.0)

-

3.0

6.0

9.0

12.0

Oct-05

Feb-06

Jun-06

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

WPI (%chg yoy)

4.0

7.0

10.0

13.0

16.0

(%)

Oct-05

Feb-06

Jun-06

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Repo rate SBI PLR

RBIs monetary tighteninghas increased fundingcosts for both buyers anddevelopers

Refinancing and freshloans have becomedifficult after thebribery-for-loan scam




16/68


Slowdown in approval processIrregularities in the approval and construction of Adarsh Housing Society (Mumbai) and

involvement of various approval authorities in the imbroglio led to serious doubts on the

authenticity of approvals, virtually holding up all new project approvals in Mumbai in

2HFY11. It has also had a cascading effect, with the diligence process becoming more

stringent in other cities too. Land acquisition troubles in the northern India have affectedsignificant number of real estate projects (especially in Noida and Greater Noida). Policy

inaction (lack of clarity on new CRZ policy, parking FSI, new development regulations

etc) has further added to the woes. As a result, multiple projects across cities have

been stuck awaiting approvals.

Exhibit 20: Many projects delayed/ stuck pending approvals

Company Projects Comments

DLF Indore, Gurgaon, Panchkula Planned launches in FY11 postponed to FY12 due to approval delays

DLF NTC Mills, Mumbai Awaiting approvals since 2009; lack of clarity on parking FSI policy

Sobha Gurgaon Villas Approvals received after more than a year wait

Sobha Chennai launch Approvals delayed due to change in government

Sunteck Realty Goregaon Launch delayed by 6 months due to delay in NOC

Sunteck Realty Mulund Awaiting environmental clearance since last 1 year

Oberoi Realty Mulund Awaiting environmental clearance since last 1 year

Oberoi Realty Worli Approvals recently received after more than 6 months delay

DB Realty Orchid Crown Stop work order since Jan-11 for lack of environmental clearance

IBREL Sky residential projects Stop work order since Jun-11 for lack of environmental clearance

HDIL Mumbai Airport Rehabilitation Awaiting clarity on rehabilitation eligibility criteria

Ackruti City Worli, Bandra projects Awaiting clarity on CRZ policy

Source: Company, Newspaper reports, IDFC Securities Research

Also visible from the trend in new launches (especially in MMR and NCR), which clearly

shows a constant month on month decline since Oct-10.

Exhibit 21: New launches (msf) witnessing a decline in t he past year

-

3.5

7.0

10.5

14.0

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Mumbai Thane Gurgaon Noida


Land acquisition issueshave hit a large number ofprojects in North India




17/68

17|


60

75

90

105

120

135

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

NCR Mumbai Chennai Bangalore

80

95

110

125

140

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Rebars domestic price (Rs/ton)

Input cost inflation profitability under stressRaw materials, including steel, cement, sand, bricks, etc, have seen significant price

escalation (20-50%) over the past few quarters. The sharp inflation in input costs has

severely impacted profitability across projects, with developers specializing in low/ mid-

income projects bearing the brunt.

The price of steel has appreciated by > 25% in the past year, with iron ore prices

having risen globally. Cement prices have increased from ~ Rs200/bag to Rs270-

280/bag (+ 30-40%) in the same period due to declining cement production.

The price of sand has more than doubled in the last one year owing to supply

constraints due to ban on sand mining in several states. Brick prices have also

increased from Rs12,500 to Rs24,000 /3000 units (31% hike).

Labor has become a huge constraint. Rural laborers are increasingly opting for the

Mahatma Gandhi National Rural Employment Guarantee (NREGA) scheme, which

guarantees 100 days of wage employment a year to a rural household whose adult

members volunteer for unskilled manual work.

While skilled labor is already in short supply, NREGA has led to shortage of

unskilled labor too, causing a sharp rise in labor cost (up from Rs250/day to

Rs325/day for unskilled labor).

Exhibit 22: Input costs have risen sharply i n the past year

While cement prices have risen due to declining production higher raw material prices have led to rise in steel prices


New land acquisition bill to increase cost of land as wellThe Cabinet has approved the Draft Land Acquisition Bill & the Relief and Rehabilitation

Bill (R&R) and the bill is likely to be tabled in Parliament in the winter session. The bill,

once passed, will increase the cost of acquisition significantly. This, in turn, would also

increase the overall prices of land across the country. While companies with large land

bank acquired and under possession will stand to benefit, we believe the new bill will

reaffirm developer confidence in buying and holding large land parcels and might entice

developers to increase investments in buying land parcels.

Developers of low-incomeprojects have been theworst hit by the rise ininput costs

Steel and cement priceshave risen by > 25% and30-40% in the past year

The NREGA scheme hasreduced availability oflaborers for construction

The Bill expected to betabled in Parliament in thewinter session




18/68


Regional diversities: Market no longer homogenous

Indias leading real estate markets include Mumbai Metropolitan Region (Mumbai,

Thane and Navi Mumbai), National Capital Region (New Delhi, Gurgaon, Noida, Greater

Noida and others) and South India (Bangalore, Chennai and Hyderabad). All these

markets have evolved over the last 6-8 years into much larger markets and are, now,

governed by their own set of dynamics which vary significantly across markets. Land

laws, being regulated by the respective states, are also diverse across regions. As a

result, analysing regional markets has become far more pertinent than evaluating pan-

India trends. Also, given the tedious approval process and dependence on local

authorities, developers have chosen to focus on regional markets than aiming for a pan-

India presence. Most listed players, save a few like DLF and Godrej Properties, have

presence in regional markets and have not shown an inclination to expand to other

regions.

MMR: Witnessed highest price increase; dull near-term outlookMumbai Metropolitan Region (MMR) contributes > 20% to Indias GDP and has the

highest per capita income (3x the countrys average). It enjoys the highest property

prices in India (~ 3x compared to other tier-I cities) as it remains sea-locked, with high

population density driving demand.

Key trends Property prices have risen to historical highs in the past two years. This has led to

~ 30% drop in sales volumes (3-mth average) in the past 12 months. Mumbai

sales registrations have also fallen 34% from Dec-10 highs.

Approval processes have slowed significantly in the past 2-3 quarters as a result

of the Adarsh scam and the Brihanmumbai Municipal Corporation (BMC)

proposing drastic amendments in approval guidelines to block loopholes (see our

report titled New building approval guidelines for Mumbai; negative for city

players, 25 July 2011).

Absorptions are shifting towards extended Mumbai (Thane and Navi Mumbai), led

by lower affordability levels in the city and growing supply in the former areas.

Outlook We believe a near-term price correction (10-25%) is likely in Mumbai city given the

~ 30% drop in volumes and increasing liquidity pressure on developers holding on

to inventory. We believe a price correction will unlock the strong latent demand

and drive absorptions.

However, if the deadlock over new construction guidelines continues, new

launches will be delayed and limit any significant price correction.

Most listed players have aregional focus and are notpushing for wider base

Volumes and registrationshave fallen by 30% and34% respectively in thepast two years

Absorptions are shifting tothe suburbs due to betteraffordability and supply

MMR enjoys the highestprices in the country




19/68

19|


Exhibit 23: Prices continue to rise in MMR; absorptions s how clear shift to Thane and Navi Mumbai


0

10

20

30

40

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

0

30

60

90

120Total absorptions (LHS) Availability (RHS)(msf) (Absorptions/qtr - msf)

-

10

20

30

40

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Mumbai Thane + Navi Mumbai MMR

(units absorbed - %mix)

61 57

43 38

2423

3435

1520 23 26

0

25

50

75

100

FY08* FY09 FY10 FY11

Mumbai Thane Navi Mumbai (msf absorbed - %mix)

61 5948 45

22 22

3030

17 19 22 25

0

25

50

75

100

FY08* FY09 FY10 FY11

Mumbai Thane Navi Mumbai

2,400

7,400

12,400

17,400

22,400

27,400

Jul-07

Sep

-07

No

v-07

Jan

-08

Ma

r-08

May-08

Jul-08

Sep

-08

No

v-08

Jan

-09

Ma

r-09

May-09

Jul-09

Sep

-09

No

v-09

Jan

-10

Ma

r-10

May-10

Jul-10

Sep

-10

No

v-10

Jan

-11

Ma

r-11

May-11

Jul-11

South Mumbai Central Suburb Mumbai Harbour Western Suburb Thane Navi Mumbai(Rs psf)




20/68


NCR: Investor-driven market; stable medium-term outlookOver the past few years, the NCR has grown to become the largest real estate market in

India. With almost negligible new supply in New Delhi, extended suburbs like Gurgaon,

Noida, Greater Noida, Faridabad and Ghaziabad have become large micro-markets,

with Gurgaon being the most preferred suburb. NCR is an investor-driven market, with

almost half the new supply being absorbed by investors. Also, supply is not a constraintgiven significant land available in these suburbs.

Key trends and outlook Gurgaon has seen sharpest price increase in the NCR (up 34% in past two years).

However, the market is showing initial signs of a slowdown, with investor interest

waning due to the high prices. We expect prices to correct by 10-20% in FY12. Prices in Noida and Greater Noida have not risen much due to significant new

supply in the past two years. Also, given the current farmer agitation over low

compensation for land, demand in the region has witnessed a sharp decline in the

past 1-2 quarters. We expect prices in Noida and Greater Noida to remain undersome pressure in the near term and be stable in the medium term.

Exhibit 24: Key tr ends in t he NCR market


0

10

20

30

40

(msf)

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

0

50

100

150

200Total absorpt ions (LHS) Availability (RHS)

169

117

137

139

168

0

75

150

225

300

FY08 FY09 FY10 FY11 4MFY12

0

45

90

135

180

(msf) (msf)New launches (LHS) Absorpt ions (LHS) Availability (RHS)

2,000

2,700

3,400

4,100

4,800

5,500

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Gurgaon Noida G.Noida Faridabad Ghaziabad

NCR has grown to be thelargest real estatemarket

with a large number ofsatellite micro-markets likeGurgaon and Faridabad

Gurgaon and Noida markets have seen the sharpest price rise in last one year

(Rs psf)




21/68

21|


Bangalore: The most sane market; steady growth outlookIn the past two years, Bangalore has remained the most sane markets in India. Being

the Information Technology (IT) hub of the country, real estate demand in Bangalore in

largely driven by the IT/ITeS sector which has seen strong growth post the economic

downturn.

Key trends and outlook Residential absorptions grew strongly by 36% in FY11 to 47msf.

Price appreciation was also steady (average of 7% yoy), keeping pace with

increase in income levels. Property values have, therefore, remained affordable.

Easy availability of land has kept supply flowing, limiting price appreciation

Demand has been led by strong traction in the IT/ ITeS sector after the end of the

last economic downturn. Most IT/ ITeS companies have strong hiring plans, with

Bangalore remaining the preferred destination.

While we expect prices and absorption to remain steady, any significant slowdown

in the IT/ ITeS sector (led by global slowdown and thereby cut in IT spending) will

negatively impact demand.

Exhibit 25: Key trends i n the Bangalore market


-

2

4

6

8

(msf)

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

-

22

44

66

88Total absorptions (LHS) Availability (RHS)

7470

62

52

66

-

17

34

51

68

FY08 FY09 FY10 FY11 4MFY12-

20

40

60

80New launches (msf) Absorptions (msf) Availability (msf)

2,400

2,800

3,200

3,600

4,000

Jul-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-11

May-1

1

Jul-11

NorthEast Region NorthW est Region SouthEast Region SouthW est Region

Demand largely driven bythe IT bounceback afterthe last downturn

We expect both pricesand absorptions to remainsteady in Bangalore

(Rs psf)




22/68


Commercial outlook healthy; only a few listed players

Huge investments limit number of playersGiven the substantial investment required upfront, only a few listed players (DLF,

Phoenix Mills, Anant Raj, Indiabulls Real Estate, Oberoi Realty, Prestige Estates) have

ventured into the leasing space. Most other companies still continue to focus on the

residential space.

Exhibit 26: Very few listed players have relevant share of revenues from lease income

9

11

13

18

18

80

0 30 60 90

Peninsula Land

Prestige

DLF

Oberoi Realty

Anant Raj

Phoenix Mills

Lease rentals - %of FY11 revenues

(%)

Source: Company

Experts believe leasing momentum will sustainMost property experts (JLL, Cusman & Wakefield, Colliers) believe that commercial

demand will remain healthy, led by a growing economy and stable environment for the

IT/ITeS sector (~ 50% of the total office demand). According to JLL estimates

(December 2010), office space absorption is expected to grow at a CAGR of 14.6%from CY10-13 (from 30.5msf in CY10 to 45.9m in CY13).

Exhibit 27: Absoprtions* to pick up both in office and retail segments

Source: JLL as of Jul-11; * across top 7 cities of India

Office space absorptions to grow at ~ 16% CAGR over 2010-13 with most markets moving into rent rising quadrant

JLL expects rentals torise in Mumbai,

Bangalore & Delhi-NCR

Office space absorptionto grow by 14.6% CAGRover CY10-13

Need for huge upfrontinvestments have keptmost players away fromthis segment




23/68

23|


Rentals, though, expected to remain stable as vacancy remains highRentals have not appreciated in CY10 in most markets, but are expected to improve as

excess supply gradually gets absorbed. In the past nine months, rentals for Grade A

office space in Gurgaon have been stable at ~ Rs60psf pm. Rentals in Chennai and

Hyderabad were also largely stable in FY11. JLL expects rents to increase in the

Mumbai, Bangalore and NCR markets while remaining stable in other tier-1 cities.

Exhibit 28: Rental outlook f or Mumbai and Bangalore stable in CY11E

Mumbai Bangalore

Source: JLL as of Jul-11

Rentals are expected to risein Mumbai, Bangalore andNCR and remain stable inother tier-1 cities




24/68


THE GOOD NEWS:A BUSINESS REVIVAL MAY BE NIGH

Long-term demand drivers are intact despite recent upheavals Unlike in 2008, developers are not fighting solvency battles and are much better

placed to find solutions A 10-25% cut in real estate prices, along with a rate cycle reversal, will be the magicpotion to nurse the sector back to health We believe a 10-25% cut in prices is inevitable and very likely in the near term Any recovery in business sentiment would drive a cyclical rebound in real estate

stocks; but we remain wary of the sustainability of this bounce

Long-term demand drivers intact

While multiple issues beset the sector, long-term macro demand drivers strong GDP

growth expectations and favorable demographics still favor developers promising

strong and sustained demand. An increasingly young population, rising urbanization,

higher disposable household incomes due to the rise in working population, and agrowing number of nuclear families have been increasing the number of those able to

afford a house.

Exhibit 29: Positive change in demographics to drive demand for housing

Source: CRISIL Research, McKinsey Research (2005), United Nations World Urbanization Prospects 2009

Approx. 50% of Indias population under 25 years of age Largest growth in working age population (1564 years) by 2020

One of the lowest urbanized developing economies and increasing nuclearisation of Indian families

(years)

25

3437 38

45

27

36 3739

47

28

37 3840

49

-

15

30

45

60

India China USA Russia Japan

2010 2015 2020

Urban population (% of total)

27 29

40

48

65 6669

81

0

22

44

66

88

Vietnam India China Indonesia Malaysia Japan US Korea

Change in working age population by 2020 (m)

495

294

159 130

34 30 16 14 11

-8 -10 -25

-150

0

World Asia Africa India South

America

North

America

Brazil China USA Japan Russia Europe

150

300

450

600

5.7

5.5 5.5

5.3

4.8

4.2

4.6

5.0

5.4

5.8

1971 1981 1991 2001 2006

Average household size

Increase in workingpopulation and growingnuclearisation bodewell for demand




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Healthier solvency will prevent another 2008

Volumes have suffered due to high property prices, cashflows stressed due to sharp

rise in interest burden, raw material and manpower costs, and the lending environment

tough; but we do not see the risk of another 2008-like collapse. We believe the

economy is stable (cautious but positive global outlook, GDP growth forecast of > 7%,

and a stable job environment) and developers are in much better shape (positive

operational cashflows, lower gearing levels compared to 2008 slowdown, and limited

investment in land in the past two years), which could buffer any demand erosion and

thereby prevent solvency concerns.

Global economic conditions uncertain, but not as bad as in 2008Disappointing economic data from the US (0.9% GDP growth in H1CY11, vs. 3.1% in

CY10) and a sovereign crisis in Europe in the past few quarters have raised concerns

over another recession in these markets and a slowdown in global GDP growth.

However, with a stronger financial system, improved balance sheets of banks,

corporates as well as households, we believe a freeze of the entire financial system as

seen in 2008 is unlikely.

Exhibit 30: GDP growth in developed markets USA UK, Euro zone and Japan

Source: Bloomberg, US Bureau of Economic Analysis, UK Office for National Statistics, Government of Japan

Indian economy much better placedWhile we are staring at slower GDP growth in FY12 (7.6%, vs. earlier estimate of 8.5%),

we see no threat of a financial meltdown or mass layoffs and salary cuts. The domestic

consumption story is intact, led by strong growth in the rural economy. Also, the job

environment is fairly optimistic, with relatively stable hiring plans across sectors,

including IT/ ITeS, financials and manufacturing.

-10

-6

-2

2

6

(%)

1QCY04 1QCY05 1QCY06 1QCY07 1QCY08 1QCY09 1QCY10 1QCY11

-6

-4

-2

0

2

4

1QCY04 1QCY05 1QCY06 1QCY07 1QCY08 1QCY09 1QCY10 1QCY11

UK Euro zone Japan(%)

High GDP growth rates andhealthier balance sheetsshould buffer impactof demand erosion

Stricter regulation, strongbalance sheets of banks,corporates and householdswill prevent another 2008

Indian consumption story isintact, helped by stronggrowth in rural economy androbust hiring across sectors




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Exhibit 31: Improving empl oyment outl ook and stable hiring p lans of Top 4 IT companies

Source: Manpower Research, IDFC Securities Research

GDP growth, despite some slowdown, remains strongThe ongoing monetary tightening to control inflation could result in some growth

slowdown, but we believe the impact will not be as significant to dampen the strongmacro outlook of the country. In 2008, while GDP growth had plummeted to ~ 6% for

three consecutive quarters, the current forecast is still a healthy 7.6% (revised

downwards from 8% earlier).

Exhibit 32: GDP growth has not f allen below 6% like in H2FY09

GDP growth had plummeted to ~6% for three quarters in FY09 GDP growth still healthy at >7%; only the pace has tempered


GDP (yoy %)

8.07.8

5.6

6.46.3

4.0

5.1

6.2

7.3

8.4

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10

GDP (yoy %)

9.4 9.38.9

8.3

7.8

7.4

4.0

5.5

7.0

8.5

10.0

Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

-

22,500

45,000

67,500

90,000

FY11 FY12E FY13E

TCS Infosys Wipro HCL Tech




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Exhibit 33: We expect GDP growth to remain above 7% in FY12

0.0

4.0

8.0

12.0

16.0

Q1FY06

Q3FY06

Q1FY07

Q3FY07

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Q1FY12

Construct ion GDP growth (%) Overall GDP growth (%)


Developers not as leveraged or distressed as in 2008An asset-liability mismatch led to serious solvency concerns for real estate players in

2008, when land costs were funded through short-term liabilities. In the past two years,

however, there has been no large-scale diversion of project inflows to land payments.

Also, most companies have raised fresh equity (QIP, warrants, etc) and used the

proceeds to bring down debt to reasonable levels from the peaks of 2008. Therefore,

we believe the developers ability to survive and compete for projects is not in question

in the current environment.

Exhibit 34: Gearing levels have fallen sharply

0.89

0.50

0.46

0.68

0.93

0.86

0.84

-

0.66

1.73

0.94

1.74

1.01

0.60

2.09

0.01

- 0.50 1.00 1.50 2.00 2.50

DLF

Unitech

HDIL

Sobha

APIL

Sunteck

GPL

Oberoi

Gearing - FY11 Gearing - FY09


Investments in land bank have been limitedMost developers, in the past two years, have been selling part of their land parcels

(mostly non-core; with limited development visibility) and using the cash to retire debt.

Total land area of most players (including DLF, Unitech, Sobha) have come down

substantially from 2007 highs through either partial sale or complete exit from various

projects. Also, new investments have been restricted to a) consolidation of existing

under-development parcels or b) acquisition of land with near-term development

visibility.

FY12 GDP growthexpected at 7.6%

Most developers have beenprudent buyers of land sincethe last downturn

and have limitedinvestments to land withnear-term developmentvisibility




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with focus shifting to expanding regional presenceDuring the economic boom of 2004-06, most developers aimed for a pan-India

presence to expand their operations and minimize concentration risk. This led to

rampant land acquisition (and higher debt) by players across the board - led by DLF

and Unitech. However, with land regulations subject to state laws and approval

processes driven by political influence, most developers either failed to launch projectsoutside their domicile or were stuck for various approvals. However, after the economic

downturn, most developers have been trying to exit or rationalize their land banks and

have increasingly focused on their home turfs for expansion. Among the listed real

estate players, only a few have a pan-India presence (DLF, Unitech and Godrej

Properties); but even for these developers, the domicile markets continue to account for

a substantial share of their total sales volume.

and reducing debt through higher realizations from non-core asset saleWith internal accruals failing to bring down gearing levels, developers including DLF,

Unitech, HDIL, Ansal Properties etc are actively looking to monetize non-core land

parcels/ built assets and utilize the proceeds to reduce overall debt levels. With high

interest cost hurting cashflows as well as profitability, developers are increasing

evaluating opportunities to exit investments with either long gestation period or limited

development visibility. While asset sales during the economic downturn found few

takers due to developer reluctance on cutting valuations, they are more flexible this time

and are willing to negotiate and close the deal rather than adopting a wait and watch

strategy.

Exhibit 35: Non-core asset sale plans of key real estate players

Companies Assets on the block

DLF Mumbai NTC Mill Land

Land parcels in Gurgaon, Chennai

Pune SEZ Noida IT Park

Aman Resorts chain

Life Insurance business

Unitech Land parcel in Thiruvanathapuram

SEZs and IT Park

HDIL Sold FSI in Andheri East, Goregaon (Mumbai) for >Rs10bn

To sell FSI in Vasai-Virar region

AnsalProperties To exit from two projects worth Rs3-4bn

Source: News reports, Company, IDFC Securities Research

Price and interest rate decline would boost absorption

Given the slowdown in absorptions, lack of funding alternatives available to developers,

and liquidity constraints, a reduction in prices seems to be the only option to maintain

business momentum and avoid a cash crunch. We believe a 10-25% price correction is

likely in the next 6-12 months in most markets. A reversal of the interest rate cycle would

be another key positive trigger. These factors, supported by the almost unleveraged

balance sheets and high savings rate (23%) of Indian households, will drive a near-term

turnaround in the sector.

Domicile markets stillcontribute the largest shareof sales of most developers

High interest costs haveforced builders to exit assetswith long gestation andlimited development visibility

We believe driving up saleswith price cuts is the onlyoption given low absorptionand liquidity constraints




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A 10-25% cut on the cardsProperty price hikes have clearly stopped and there are signs that developers are willing

to negotiate and offer discounts to buyers. Also, lower sales volumes are further hurting

liquidity of cash-strained players. We believe developers will be looking to tap seasonal

demand in the second half of the fiscal (festive season, bonus/ promotion cycles, etc)

and will likely reduce prices soon. We expect price cuts across avenues available tobuilders:

Reduction in prices at existing projects.

Launch of new projects at prices lower than those of existing projects.

Launch of new projects with smaller units, i.e, reducing ticket sizes to increase

affordability.

The lessons of 2008-09We take comfort in the real industrys response to the demand slump in 2008, which

forced real estate players to rationalize pricing across markets. Our analysis indicates

that in 1H09 most developers in Mumbai, Thane and Gurgaon cut prices by 15-40%,

which led to a sharp rebound (60-200%) in quarterly sales volumes from Dec-08 quarter

lows. Focus was on launch of new projects at lower prices as well as reduced unit sizes,

which led to a significant reduction in total cost of ownership. This stimulated demand

across markets and effectively marked the revival of the real estate industry after the

2008 slowdown.

Exhibit 36: Price corrections in 2009 resulted in a sharp jump in absorptions

Existing New

Region Location Type price price Correction Month Comments

Unitech

Woodstock Floors Gurgaon Sector 50 Floors 4,485 3,776 -16 May-09

Uniworld Resorts Gurgaon Sohna Road Villas 7,000 4,900 -30 Jun-09

Grande Noida Sector 96 Apartments 7,600 5,000 -34 Jul-09

DLF

The Magnolias Gurgaon DLF Ph V Apartments 10,500 8,000 -24 May-09

Capital Greens Ph I (NL) New Delhi Shivagi Marg Apartments 11,000 4,500 - Apr-09 1400 apartments

sold within a mth

Capital Greens Ph II New Delhi Shivagi Marg Apartments 4,500 6,750 50 Sep-09 1300 apartments

sold within a mth

Mumbai

Kalpataru Estates Mumbai Jogeshwari Apartments 10,000 8,000 -20 Mar-09

Oberoi Splendour Mumbai Jogeshwari Apartments 11,000 7,200 -35 Jun-09

Premier Residences (HDIL) Mumbai Kurla Apartments 8,400 5,750 -32 Mar-09 Launched at sharp

disc.to market price

Zenith (Gundecha) Mumbai Mulund Apartments 8,755 4,999 -43 Mar-09

RNA Auroville Mumbai Santacruz Apartments 25,700 16,000 -38 Aug-09

Dosti Acres Mumbai Wadala Apartments 11,600 8,291 -29 Mar-09

Raheja Acropolis Mumbai Chembur Apartments 8,850 7,400 -16 Jun-09


The sharp recovery in volumes in the markets that followed the price cuts is indicative of

the kind of demand elasticity that exists in the system for housing across the country.

Developers seem to beamenable to negotiation toexploit the festive season

15-40% cut in prices acrossMumbai, Thaneand Gurgaon led tosharp rebound in sales




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Exhibit 37: Increase in absorption (units per quarter) in Mumbai, Thane and Gurgaon in 1H09

-

3,500

7,000

10,500

14,000

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

Mumbai Thane Gurgaon

Source: PropEquity

We strongly believe that given the mounting cashflow challenges, a 10-25% cut inprices is on the cards over the next few quarters. We believe this will lead to a spurt innew launches and accelerate sales given strong latent demand at lower prices.

However, a reversal of the interest rate cycle, unaccompanied by a sharp reduction inreal estate prices, is unlikely to trigger a demand revival.Interest rates to peak by early-FY13Our strategy team believes that inflation will start to cool down from Nov-11 onwards as

a) high base effect kicks in (brent crude rose sharply in Oct-Nov 2010 from $80 to $95)

and b) adequate rainfall (monsoon 2% above normal) result in higher crop output and

thereby drop

Documents

Real Estate Sector - Oct11