| Inventory at three-year low; time for new launches On the back of rising transaction volumes and falling inventory, aggregate inventory levels for the Indian real estate sector halved in March 2010 from March 2009. Monthly residential sales volumes in the top six Indian cities are now up 2.5x from their trough.
With absolute stock levels also down 28%, pricing power is back with developers and property prices have risen 10% in the past three months. Post their 24% underperformance in the past six months on monetary tightening concerns, developers are now trading at 20-40% discount to their NAVs.
High absorption + weaker launches = falling inventory
Real estate inventory levels at 7-14 months of sales in March 2010 are now at a threeyear low, or at nearly half the peak levels of 18-30 months in 2Q09. Aggregate stock levels are down 28% to 282 mn sq ft, as the sector witnessed a smart demand pick-up that has outpaced new launches. With developers focusing on cash flows over the past year, the pace of new launches (in cities ex. Noida) has been much slower than absorption, as they have been waiting to exhaust the existing inventory before kick-starting a new launch cycle.
With a pickup in volumes and low inventory levels, we see developers accelerating their new project launches over the next 3-6 months. This should assuage investor concerns about volume growth built into management guidance and analyst forecasts.
Price momentum back
Property prices have risen by 10% in the past three months and average prices in major centres such as Mumbai, Gurgaon, Bangalore and Kolkata are back to pre-crisis levels. Prices in cities such as Noida, Greater Noida, Chennai and Hyderabad are still 20-35% below their 2008 peaks. While the trend from weighted-average prices may not reflect the true movement of property prices, a study of price trend for specific real estate projects also confirms this trend.
The upswing in prices is visible in primary as well as secondary sales, reflecting improved pricing power with developers. As we expect new launches from developers to accelerate, we are not building in large price increases. However, if there is any delay in pickup in new launches due to regulatory or other reasons, we could witness further upward pressure on prices.
City level trends stay mixed
Volumes and new launches in Mumbai have recently begun to slow down, as average prices are back to the pre-crisis peak. A similar picture emerges in Gurgaon. Prices in Bangalore are close to peak, but volumes are 40% lower, similar to Chennai. Inventory levels in Hyderabad have moderated 23% in the past nine months, but are still relatively high at 23 months of demand. New launches in Hyderabad and Kolkata (fairly stable prices and volumes) have been abysmally low in 1Q10. Unlike other cities, new launches in Noida and Greater Noida have outpaced absorption in 1Q10 by 80%.
Risks priced in; top picks – Unitech and IBREL
Even as sales volumes have been buoyant and property prices have picked up, Indian real estate stocks have dropped 20-30% in the past six months on concerns about monetary tightening. However, with inventory at a three-year low, we expect stronger volume growth and improved pricing power for developers. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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