Survival is the key - Q4FY20 Results Preview - Real Estate - HDFC Securities

COVID-19 hits hard: Real estate has been badly hit by the COVID-19 pandemic with urban areas (key markets) turning into containment zones severely impacting movement and site visits. Real Estate is touch and feel product and hence the lockdown will continue to impact pre-sales. Residential segment is worst hit as construction activities have come to a halt, demand has significantly eroded (led by expectation of job losses) as market is largely end user driven.

Income producing assets: Offices minimal impact, Malls worst: Our channel checks with leading Real estate consultants, lending Banks and Developers suggest office as asset class is least impacted. Though concerns remain on Rentals repricing lower. Occupancy may get impacted as disruption like 'Work from Home' may drive 'Offshoring Wave 2'. Early estimates suggest 10-15% shift to work from home whilst some large corporate are talking of 25% shift to work from home. Malls are worst impacted as the consumption is now limited to essentials and owing to high fixed cost structure of Retailers, their paying capacity is limited. Few developers have offered rent waivers till Lockdown period while others are giving pricing on Rev share/deferrals.

Curious case of what happens to mall pricing: Our channel checks suggest that Mall Operators will have to take a hit and business models will undergo a change. The pricing will shift to Rev share with slab wise rates/sqft of consumption. Initially the operators will make lower yields upto breakeven point of consumption/sqft until they reach normalized level. Post normalized level they will start recouping the incentives given to retailers at lower rack rates. Other options being worked out is adjusting the 6months rental advance security deposit partly against the fixed costs/debt servicing of the operator, which may be later get recouped as retailers consumption picks up.

Outlook on interest rates, Real estate prices: Whilst the mortgage rates are lowest in India now with SBI offering 7.15%, other Banks/Financial institution rates are still higher. Large NBFCs expect further 20-25% cuts in the Real estate prices along with fiscal incentives like Stamp duty waivers. This shall aid demand recovery. The market may consolidate in the hands of select large organized developers with strong balance sheet and access to bank funding. JDA/JV model will continue and land buying will take a back seat. Launches will get deferred and focus will be on completing existing unsold area. We expect 25-30% dip in volumes for FY21E and ~20% pricing correction.

COVID-19 lockdown drives sharp cut in our FY21/22E estimates: We have factored in delay in residential units delivery to buyers resulting in deferral of CCM based revenue booking. We have cut our FY21/22E EPS estimates across coverage universe by 15-65%. During 4QFY20E we expect aggregate Rev/EBIDTA/APAT YoY de-growth of 21.5/21.5/30% for our coverage universe. We have also recalibrated our NAV lower on account of (1) Likely 10-20% cut in residential realization (2) Cap rate expansion by 100-150bps to 9-9.5% (3) Rental growth compression to 3% vs 5% earlier and (4) Hotel ARR correction by 20-25% with lower occupancies.

Recommendations and stock picks: We upgrade Brigade and Prestige Estates to BUY (from ADD earlier) post the recent stock price corrections. We maintain BUY ratings on all other stocks. We prefer DLF, Prestige Estates and Oberoi Realty given well balanced mix of Residential and Office assets and robust balance sheet. PEPL recent Rs 9bn fund raise gives BS comfort.

Source : Equity Bulls

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