Emkay upbeat on Bangalore real estate

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Emkay upbeat on Bangalore real estate

Emkay Global Financial Services has come out with its report on Bangalore real estate. As per the research firm Bangalore provides many options in terms of project choices in any given area and there is negligible product differentiation among the top developers.

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Emkay Global Financial Services has come out with its report on Bangalore real estate. As per the research firm Bangalore provides many options in terms of project choices in any given area and there is negligible product differentiation among the top developers.

Bangalore real estate is well placed to reap sustained demand

• Bangalore city's residential demand is dominated by an immigrant salaried employee class working in the IT sector, with a high probability to purchase property by taking a loan.

• The property buying decision of this class is mainly determined by two aspects - 1) affordability quotient, which takes into account the current affordability situation of the buyer and 2) the job security sentiment, which is based on whether the buyer is comfortable about the stability of his future income to service the home loan.

• The location of the project and the quality of construction are not that important a criteria as Bangalore provides many options in terms of project choices in any given area and there is negligible product differentiation among the top developers.

• Interest rates, although an important parameter in determining the current affordability, is not that critical as most of the buyers are highly educated and informed. They are aware that the change in loan interest cost is cyclical. The change in property prices during economic cycles has a more profound impact on the buyer's financial strength than change in interest rates.

2008 pricing, 2011 purchasing power
The Bangalore real estate market, unlike Mumbai and NCR, has not seen a steep increase in prices when compared to peak prices of early 2008. The change in prices is very much inflationary and hence, provides a strong affordability quotient. While the mid-segment housing prices are marginally up 4.1%, the high segment is still 6.3% away from the peak. As against the same, NCR mid-segment is 29.1% & high-segment 27.1% and Mumbai midsegment is 12% & high-segment 1.3% above their 2008 peaks.

Bangalore's stable office space absorption provides positive signal to the local industry's health, positively impacting buyers' sentiments
We believe the strength of an industry is measured initially by the demand and absorption of commercial space because any industry would initially curb its expansion plans and layoff its employees as the last resort. But if the demand for the commercial space in the city is high, it indicates that the industry in that city is doing well which in turn, leads to better sentiments in terms of job opportunities, prospects and security. These positive sentiments lead to high discretionary spending (with some time lag when it comes to property purchase). In Bangalore, we are witnessing a healthy and stable absorption in office space. The vacancy levels are also seeing a downtrend and are lowest post the 2008-09 cris is. Along with buying of property, the hiring of India's large five IT companies is also on an upswing after a stagnation, which adds to healthy outlook of the IT sector. Also, the fixed compensation has improved over the last two years, increasing the purchasing power and hence, the affordability quotient.

Bangalore City's property registration data shows strong resilience post-crisis
Bangalore property registration data has shown strong growth post-crisis and is also much above its early 2008 peak number. This data goes well with our argument that with 2011 purchasing power at 2008 pricing, the demand for property would rem ain healthy. The sharp movement in registration in CY11 is predominantly due to the significant new launches during that period. The southern region of the city is seeing maximum traction as developers are also focusing and launching projects in this region- mainly comprising of Sarjapur Road & Kanakpura Road. SDL currently has three residential projects in this region while PEPL has one residential project and two office spaces. The other region which is seeing huge traction is Hebbal as it is clos er to Manyata Tech Park and also equidistant from CBD and airport. SDL has launched Sobha City, which is behind Manyata Tech Park while PEPL does not have any on-going projects in this area.

Housing supply could outpace demand in the near term
Bangalore real estate market has witnessed huge launches recently, which have led to strong sales bookings in the city. Post downturn, the city developers stayed at bay by launching few projects and instead, concentrated on reducing the huge inventory pile up from their launches made in 2008. With these inventories getting cleared, most of the developers have aggressively launched projects in Q2FY12.

Expect positive demand in Bangalore housing market given the uptick in key determinants of property buying - affordability quotient and promising job environment. We are equally positive on the office space segment of the city's real estate, but are negatively biased on the retail and hospitality segment owing to oversupply scenario. Concerns: High inventory scenario on continuation of aggressive residential launches leading to lower net cash generation for the developers. We initiate coverage on Prestige Estates with a HOLD rating and a target price of Rs 81 and have a Accumulate rating on Sobha Developers with a target price of Rs 272.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment