Angel expects residential volumes to flat for realty in Q1

Angel Broking has come with its June quarterly earning estimates for real estate sector. According to the research firm, Mumbai real estate prices have increased significantly over the past few quarters, that too at a much faster rate than other key cities, and have been accompanied by falling absorptions. In our opinion, the increase in prices can be attributed to declining launches seen over the past few quarters, for which uncertainty due to development control regulation (DCR) in Mumbai and slow approval process has played an important role, thus leading to fewer launches. However, with new DCR rules in place, we expect launch activities to significantly improve over the coming quarters. Prices in Mumbai have rallied by 80% since the end of 2009, followed by Pune (30%) and Chennai (20%).

For 1QFY2013, we expect residential volumes to report flat to moderate growth on a sequential basis on account of weak demand due to high interest rates and elevated property prices, especially in Mumbai and NCR. We are of the opinion that a 10-15% price cut in Mumbai can lead to significant demand revival in Mumbai. Revenue of real estate companies is expected to be largely driven by execution of existing projects, though execution delays remain a cause of concern. Inventory levels are expected to remain high in Mumbai and NCR. Cost increase has been moderated
Around 70% of the construction cost comprises material (steel and cement) and labor costs. Although cost overruns have been a cause of concern for real estate developers in the past, they seem to be moderating now. For instance, in 1QFY2013, cement price increased slightly to ~Rs 290/bag from ~Rs 270/bag in 1QFY2012; steel prices, on the other hand, remained more or less stable at Rs 42,886/tonne in 1QFY2013 vs. Rs 42,250/tonne in 1QFY2012. During 1QFY2013, the BSE Realty Index underperformed the Sensex by 6.3%, following the strong performance of the sector in 4QFY2012. MLife, which remains our top pick in the sector, outperformed the sector by 8.6% and Sensex by 2.3%. In our coverage universe, Anant Raj was the weakest performer, down 17.9%, followed by DLF, which fell by 1.6%. We expect MLife to continue to outperform the sector given its strong fundamentals. Outlook and valuation
India's Realty Index is currently ruling near its lifetime low seen in 2008. However, things are better than 2008 with respect to project visibility, cash flow, net debt-equity and growing disposable income. Further, refinancing of loans from the banking sector will give some respite to developers in the  falling volume scenario. Having said that, we believe absorption and not price appreciation will drive residential growth over the next six quarters. Amidst this scenario, new launches have been more rewarding for developers who have launched projects at a 10-15% discount to prevailing market rates. Further, high inventory is still hampering commercial recovery, especially in the office space with vacancy rates still elevated in key cities, but we do not expect the commercial space to deteriorate further, given the falling number of launches in the space. Although the situation is now much better than that in 2008, high debt levels, falling absorptions and high inventory remain a challenge for the sector. We remain selective and highlight MLIFE as our top pick in the sector.

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