Real Estate Q2FY21 Results Preview - Pre-sales recovery augurs well - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities

1QFY21 bottom made; gradual recovery to play out during 2HFY21: We are positively surprised by the pre-sales recovery momentum building up in the sector post the unlocks. Whilst the street was expecting a slow recovery towards normalcy, our channel checks dated 30th Sep 2020 suggested an accelerated recovery for the organised developers. Sobha reported pre-sales at 88% of pre-COVID-19 levels, and we expect similar 80-90% pre-sales recovery for the other South-based players. MMR/NCR recovery is expected to be lower at 60-70% of pre-COVID-19 levels. Stamp duty cut in MMR has brought fence-sitters to the negotiating table and should aid accelerated deal closures. The focus remains on completed projects, followed by under-construction projects of reputed Tier 1 developers in the respective macro market.

Annuity plays - retail recovering, office collections stable: Retail malls have reopened, and cinemas have been allowed to operate in some states. Most of the tenants have come back and resumed shops. About 80% of the mall area has opened as per government directives, and occupancies have reached 90- 95%. The F&B dine-in is now allowed and is helping aid footfalls. Our channel checks with leading unlisted mall operators suggest two more sale seasons (Diwali and Christmas/New Year) for the remainder of FY21E may help spur consumption. Non-essential footfalls have also started hitting malls and may aid consumption. Office, on the other side, continues to see strong collections of 95-98%, but clarity is awaited on how 'work from home' will impact overall office demand and vacancy. The pricing in the near term is expected to remain soft as owners try to retain tenants.

Lending resumes in office; retail malls funding concerns remain: Our channel checks with financial institutions suggest a slow resumption of office LRD lending. Retail LRDs continue to see limited interest due to concerns on rental recovery, valuation of asset and hence LTVs. We believe that whilst consumption is likely to improve QoQ, lenders await more data points before incremental lending to the sector. The parent will need to support the hospitality business. We believe our coverage universe will not go for OTR as it may lead to an increase in borrowing rate and loss of lenders confidence.

Markets share gains playing out, mortgage rates at an all-time low: The underlying low-interest rates and loss of confidence on unorganised players are aiding pre-sales of our coverage universe. Demand will continue to consolidate in few players in each micro market. Strong brand positioning, 5- 15% discount and lowest decadal mortgage rate shall aid residential recovery. Developers are focusing on monetising existing inventory; hence, launches may get deferred to next year. Cash flow management will be crucial; land acquisition/commercial Capex will get deferred.

Few developers to report losses, but quantum reducing: We expect Phoenix Mills and Brigade to report minor 2QFY21 losses on account of interest expense/depreciation. DLF may also report loss ex-DCCDL. Cashflows are expected to improve with a pickup in pre-sales and robust office collections. We don't see any stress on account of the hospitality business, and our coverage stocks should be able to support cash shortfall in the segment.

Recommendations and stock pick: We expect mixed-use plays to outperform pure plays as office segment is least impacted followed by residential, retail and hospitality. DLF, Brigade, Phoenix and Prestige Estates are our top sectoral bets. Oberoi may see delayed recovery on account of concentrated exposure to highly unaffordable Mumbai realty market.

Source : Equity Bulls

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