Seasonal slowdown in Gurgaon; Noida hit by farmers’ protest

26 September 2011

REAL ESTATE

Ground

Reality

NCR: Seasonal slowdown in Gurgaon; Noida hit by farmers’ protest

Commercial rentals strengthen in prime markets; near-term outlook stable

Gurgaon:

Residential absorption has moderated in 2Q and 3Q CY11, due to slowdown

in new launches and inauspicious buying season. Major price correction is unlikely,

but festive season could see discount offerings to boost demand.



Noida:

Both launches and sales have sharply declined due to farmers' protest over

land acquisition, and concerns of oversupply.



Commercial leasing:

Expect to remain strong at least till 4QCY11. Broadbased

vacancy level remains high, but prime markets in Gurgaon have witnessed rental

uptick.

Sector strategy:

Prefer stocks with prudent balance sheets and strong business models

such as Oberoi Realty, Prestige, Phoenix and Mahindra Lifespaces, or stocks with near-

term triggers like DLF, which offers play on deleveraging theme with valuation comfort.



NCR

In CY11, the real estate sector has been hit by several headwinds, both operational and

regulatory in nature. The outlook for many key markets has been dented due to (1)

plummeting sales volume, (2) delay in construction of existing projects, and (3) slower

launch of new projects.

NCR is a key real estate market. It (a) accounts for 30-40% of total sales volume/value of

top 7 cities, and (b) is home to major developers such as DLF, Unitech, Jaypee Infratech and

Anant Raj. For a 360

assessment of the prevailing ground reality in NCR, we met reputed

real estate consultants like JLL, a few real estate brokers, and sales team of a local developer.

We present our key takeaways.

Gurgaon: Residential absorption has moderated due to seasonal impact

Gurgaon witnessed moderation in residential sales volume in 2Q and 3Q CY11 after a

strong 1Q. This is largely due to slowdown in new launches and 2/3Q being seasonally

weak quarters due to inauspicious buying season, vacation, monsoon, etc. Nonetheless,

launches and sales are expected to witness revival over festive season.

Recent launches did reasonably well

e.g. DLF (plotted projects), BPTP, Unitech (South

Park, Anthea, etc). This is despite moderation in investor demand given multiple interest

rate hikes. (Typically, investor participation in Gurgaon is high at ~55% of total sales.)

Within residential projects,

demand for built-up floors has gained momentum recently

after transactions under this asset class have been brought under registration norms.

Infrastructure developments such as progress in Dwarka Expressway and proposed shifting

of toll base beyond Manesar augur well for upcoming projects in these locations.

Price correction is unlikely in existing projects;

still, newer launches during festive

season could offer discount to boost demand.

Sandipan Pal

(Sandipan.Pal @MotilalOswal.com); Tel: +91 22 3982 5436

Ground

Reality

Noida: Markets hit by multiple headwinds

Noida market, which accounted for ~70% of NCR launches in the past couple of years, has

seen a

sharp slowdown in key pockets

due to uncertainty over farmers’ protest over

land acquisition in Noida extension zone.

Noida has primarily been an end-user driven, price-sensitive market. Since 2QCY09, demand

for Noida projects has been driven by: (1) Wide difference in ticket sizes compared to

Gurgaon, and (2) Improved connectivity with Delhi. However due to an even higher pace of

new launches, the level of unsold inventory grew sharply.

Weak development of Noida

office market accentuated the oversupply situation.

Launch and progress in construction have also been impacted by (1) tightness in funding,

and (2) project unfavorable court verdict on land acquisition.

NCR market has a high share of top six cities' market

% of v olume

% of v alue

37 38

NCR launches and absorption have ebbed

Unit launches ('000)

A bsorption rate (%)

40%

30%

20%

10%

Unlike Mumbai, NCR witnessed a moderate slowdown due to lower difference in bid-ask spread of project price

Sales v olume (msf)

Inventory ask prices (INR/sf)

12,000

9,000

6,000

3,000

Sold prices (INR/sf)

Mumbai

Gap: 37%

Sales v olume (msf)

Inventory ask prices (INR/sf)

4,000

3,000

2,000

1,000

Sold prices (INR /sf)

NCR

Source: JLL/Bloomberg/MOSL

26 September 2011

Ground

Reality

Key supply pipeline

Project,

Area

Location

(sf)

Completed in 2QCY11

Spaze I-T

echPark

Gurgaon

1,400,000

Logix Technova

Noida

340,000

Completion over 2HCY11

Park View Business

Tower, Gurgaon

600,000

Ciel Square,

Gurgaon

270,000

Universal Business Park,

Gurgaon

250,000

Source: Industry/MOSL

Commercial leasing: Expect demand to be strong at least till 4Q2011

NCR market continued to witness strong leasing volume since 2Q2010, and

no major decline

in momentum is expected at least till US IT budget in Dec-11.

In 2QCY11, both total supply and demand in NCR remained at ~2msf each,

taking

total stock of office space to ~60msf, including ~32msf in Gurgaon and ~12msf in Noida. Of

the total absorption, Gurgaon accounts for 65-70% of leasing volume and Noida ~20%.

Gurgaon office space stock was expected to double over 3 years. But continued execution

delays imply that only 13-18msf of stock is likely to be completed over this period, including

~6msf in 2011.Likewise, Noida Expressway has several slow moving under-construction

projects, which commenced construction in pre-recession time.

Key leasing transactions over 1HCY11

Developers

Location Area(sf) Tenants

Gurgaon

Delhi

Gurgaon

180,000 Deloitte

200,000 Genpact

200,000 KPMG

100,000 Canon

80,000 Capgemini

200,000 IBM

180,000 Wipro

170,606 Accenture

Sector

BFSI

IT/ITES

Consulting

IT/ITES

BPTP i - Park

UnitechInfospace

DLF Building No. 10

DLF Building No. 5

Demand improvement drives up prime rental

Lease volume (msf)

Vacancy %( RHS)

Supply (msf)

Prime rental, INR/ sf /m ( RHS)

3.0

2.3

1.5

0.8

0.0

1QCY10 2QC Y10 3QCY10 4QCY10 1QCY11 2QCY11

Prime rental refers to DLF Cyber City

100

Spaze Tech Park

ASF SEZ

A-23, Mohan Coop

Unitech Infospace

Green Boulevard (3C) Noida

70,000 Nokia Siemens IT/ITES

Source: DTZ/MOSL

Gurgaon & Noida

commercial market:

A backdrop



Both Gurgaon and Noida

witnessed early demand

in commercial vertical

from IT/ITES sector.

Over time, Gurgaon

demand gain momentum

from telecom, banks,

small pharmaceutical

companies, and consumer

goods as well.

But Noida predominantly

remained IT and IT SEZ

driven, with some

presence of media

companies near sector

16A (CNB C, NDTV, TV18).

Gurgaon market

continues to be

dominated by several

large and mid-scale

developers such as DLF,

Vatika, Suncity and AIPL.

Major commercial players

in Noida are 3C and Logix

group.

Broadbased vacancy still high, but prime markets seeing rental

appreciation

Vacancy level at peripheral markets of Gurgaon and Noida stood at ~20% and ~42%,

respectively. In contrast, in the prime markets of Gurgaon such as DLF Cyber City (NH8),

Golf Course and MG Road vacancy level is single digit on the back of strong demand.

Over past 12 months, rentals at Cyber City improved to ~INR65/sf/month (~INR55/sf/month),

while projects by Vatika, Suncity, AIPL at Golf Course and MG road are commanding rentals

of INR85-95/sf/month. Prime markets of Gurgaon are expected to witness further

strengthening in rental value. Growth corridor such Sohna Road has prevailing rentals of

~INR55/sf/month followed by Manesar at INR18-40/sf/month.

Rentals at Noida are expected to remain stable with average range of INR30-40/sf/month

for IT companies and INR70-75/sf/month in Sector 16A, due to vacancy pressure.

Recent demand pattern suggests a strong preference towards Grade A office space. Key

leasing transactions in 2QCY11 include IBM at ASF SEZ (0.2msf) and Accenture at Unitech

Infospace (0.2msf).



26 September 2011

Ground

Reality

Report dated 21 Sep 2011

Sector view and strategy



We have recently downgraded earnings estimates and target prices of key Real Estate

stocks under our coverage. This reflects our multiple concerns on the sector: (1) tighter

bank funding norms, (2) delay in new launches, (3) slower broad based recovery in

commercial vertical, and (4) company-level overhangs.

Liquidity position will decide whether companies focus on growth or on de-leveraging.

Expect healthier players to add value-accretive assets, and others to go for faster

monetization of existing assets.

Prefer stocks with prudent balance sheets and strong business models such as

Oberoi

Realty, Prestige, Phoenix

and

Mahindra Lifespaces,

or stocks with near-term triggers

DLF,

which offers play on deleveraging theme with valuation comfort.

Weighted scores to screen preferred companies

Key Parameters

FY12E Funding gap

(Scale of 0-5)

Certainty of key catalysts

(Scale of 0-5)

Sales outlook

(Scale of 0-5)

DLF Unitech

High

HDIL

ARIL Prestige

Mahlife

Oberoi Phoenix

High

surplus

High

Godrej

IBREL

Prop

Minimal Moderate Moderate

surplus

deficit

surplus

High Moderate Moderate

Steady Moderate

High

Low

Medium

Low

Sluggish

Medium

High

Minimal Moderate

Minimal Moderate Moderate

deficit

surplus

deficit

surplus

High Moderate Moderate Moderate Moderate Moderate

Moderate Moderate Moderate Moderate

Medium Medium

Medium

High Moderate Moderate

Steady

High

Low

Steady Moderate

Medium

High

Low Moderate

Leverage on commercial

High

vertical (Scale of 0-5)

Comp. specific headwinds

Moderate

(Scale of 0-5)

Valuation (Upside %)

(Scale of 0-10)

Total score

Extracted from our report dated 21 September 2011

Comparative valuations

CMP

Company

DLF

Unitech

IBREL

HDIL

Anant Raj

Phoenix Mills

Mah Life

GPL

Oberoi Realty

Buy

198

215

294

222

FY13 Target

NAV price Upside EPS (INR/sh)

(INR)

270

134

145

255

451

782

290

157

(%)

36.3

55.5

81.0

45.0

64.0

18.6

53.6

22.1

30.6

72.5

FY12

9.5

2.5

5.0

23.2

5.9

7.8

33.7

23.8

15.7

7.9

FY13

11.1

3.4

6.7

27.8

9.9

11.4

48.9

35.4

26.2

10.6

300

192

207

138

280

564

782

325

184

P/E (x)

FY12

20.9

10.7

14.8

4.3

10.0

27.5

8.7

26.9

14.1

11.4

FY13

17.9

8.0

11.1

3.6

5.9

18.9

6.0

18.1

8.5

BV (INR/sh)

FY12

155

242

236

131

122

283

153

117

FY13

164

249

251

140

132

330

184

142

P/B (x)

FY12

1.3

0.7

0.3

0.4

0.5

1.8

1.0

4.2

1.9

1.3

FY13

1.2

0.6

0.3

0.4

1.6

0.9

3.5

1.6

ROE (%)

FY12

5.8

4.5

2.0

9.9

4.6

6.4

11.7

16.8

14.4

FY13

6.4

5.2

2.6

11.1

7.3

8.6

14.6

21.1

20.3

Rating INR INR/sh

Neutral 100

Neutral 640

Prestige

Buy

Prices as on 23 September 2011

1.1

11.6

14.1

Source: Company/MOSL

26 September 2011

Ground

Reality

Annexure

Recent residential launches in NCR

Project Name

Developer

Name

Achievers Builders

SRS Real Estate

B.C.C. Builder

KDP Infrastructure

Millenium Spire

BPTP

Imperia

M3M India

Unitech

BPTP

Earth Infrastructures

Uppal

Emaar MGF

SS Group

Era Landmarks

Anantraj Group

Baani Group

Logix Group

Sikka Group

Unitech

Location

City

Type

Current Price

Range

(INR/Sqft)

Achievers Gardenia

SRS Residency

Bharat City Township

Gharaunda Ph-2

Spire Wood

Park Generation

Maxco

Polo (Golf Estate)

Crest View (Wild

Flower County)

Astaire Garden Ph-3

Earth Iconic

Monsoon Breeze

Golf View Tower

Almeria

Era 86

Maceo Ph-2

Baani City

Center Apartments

Blossom Zest Ph-2

Kaamna Greens

UGCC Burgundy

Pali Road

Palwal

Indraprastha Yojna

Raj Nagar Extension

Sector 103

Sector 37

Sector 65

Sector 70

Sector 70 A

Sector 71

Sector

Faridabad

Ghaziabad

Gurgaon

Noida

Independent Floors

Apartment

Independent Floors

Apartment

Independent Floors

Apartment

5,500

1,390

2,300

2,000-2,375

3,250

3,500

3,250

11,600

5,000

4,235-5,000

8,600

3,700

4,400

5,500-6,000

2,850

2,545-2,950

8,500

2,850

Dec/2012

Aug/2015

Aug/2014

Mar/2013

Aug/2014

Jul/2014

Aug/2014

Dec/2014

Aug/2014

Jun/2014

Completion

Date

Sector-63

Sector 143

Sector 96

3,120

Aug/2014

7,345

Jun/2014

Source: Industry/MOSL

26 September 2011

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