Realty sector: Macquarie Cap positive on 5 stocks

In an interview with CNBC-TV18, Unmesh Sharma of Macquarie Capital Securities says he has an ‘outperform’ rating on Prestige Estate and DLF. He is also positive on Oberoi Realty, HDIL and Sobha Developer.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: Why are you most bullish on Bangalore? A: There are two things. We have been bullish on the volume story now and that is well recognised. I think the one big aspect that the market is missing is that the supply, which is suppose to come up and which has been announced, when we visited Bangalore, we found that a lot of those are not going to be delivered on time. That means that by the end of 2012, we may be in a situation where there is a shortage of good quality office space. That means for the first time in the cycle, after 2007, we may see a story of rent growth and hence cap rate compression. That makes us very excited about the players in the office space. That is why we have this outperform rating on Prestige. We have just written on the indirect way of playing the Bangalore market, which is the Ascendas India Trust listed in Singapore. Q: What are your thoughts on DLF? This entire year all the real estate stocks have outperformed, HDIL rallied 68%, Unitech is up about 50%, but DLF on the back of that Veritas report, when it come out it slumped quite a bit and hence has been quite the underperformer. What is your view on DLF? Given the fact that it has underperformed so much, does it make for a good buy at current levels? A: The bigger story in DLF will be one of asset sales. The debt is undoubtedly very high. We think, however, the stock has compensated for that. For the time being, we believe that as and when the news flow on the asset sales comes out it trades between range of Rs 180 to Rs 250, given that it is somewhere closer to the lower end of that. Tactically, we have an outperform rating on DLF. Having said that, for the stock to then go above Rs 250 and hence to become a structural buy we need to see a lot more launches and focus on free cash flows. At this time, we are waiting and watching for that. So, the next couple of quarters will be primary focus on asset sales and then let’s see how the launches go. Q: You began by saying that you see an improvement in rents and demand in Bangalore market. What are the plays, is it only Ascendas or what would be the domestic plays there? A: I think the direct play on the Bangalore market with focus on the commercial space is Prestige. That has rallied quite a bit from the bottom. But we think from even without upgrades, it gives at least 50% upside from current levels. It has been our favourite stock now since December. The first 50% rally that we have seen is just the start. Indirectly, there is also a benefit for Sobha, while they do not directly play in the commercial space in terms of building and holding assets. We still think that the trickle down effect of people getting hired and hence buying houses is also there. The only difference between the two as I can see is valuation. I think that at these current levels between the two stocks, Prestige definitely is a lot more attractive even though we do like Sobha as well. _PAGEBREAK_ Q: You have also done some research on Mumbai market has panned out and over there according to you the trend has directly shifted from the central business district that’s Nariman Point directly to Bandra Kurla Complex (BKC). It bypassed something like Lower Parel where Indiabulls Real Estate primarily has its assets. What is your views on Indiabulls now? A: There are two things on Mumbai. We were quite excited in January when we upgraded the Mumbai market, not because prices are cheap and hence people are buying houses, but more in terms of the fact that approvals has started to come through with the new DCR rules in play. One problem has been the lack of realistic pricing in the market, but the other has also been lack of approvals. So, on that part, we have turned positive. Indiabulls did rally as a result which we think is fair. Having said that, after the 50-60% rally that, we have seen in the stock we are now more concerned about two fundamental things in case of Indiabulls. One is the story where the big shift from CBD has happened into BKC and we just need to go out to see that. That is why the rents in Lower Parel today are half of where you have incremental space being leased in BKC. The other is that on lot of their residential launches there seems to be a slowdown in terms of construction activity maybe the company is coming up with how to adjust the parameters of the project under the new parking laws and DCR and floor space index (FSI). So, we will wait and watch. For the time being, we remain negative on the stock, we need to see more clarity on fresh leasing either in Lower Parel which we cannot foresee in the next two quarters and on further residential sales. So, we will wait and watch, but for the time being we are negative on the stock. Q: The entire Mumbai realty space has been a story of poor demand. We have just got a 50 bps rate cut and some of the banks which actually lend to the retail housing have cut rates, I meant banks like ICICI. Does that provide any trigger at all? There are a bunch of plays even in the residential housing space. HDIL, Oberio, Orbit, IBREL, Ajmera, Godrej, none of these are buys for you? A: We think that the 50 bps, when it trickles down to the consumers, is not enough to offset for the unrealistic pricing that we see in the city centres. If that was the case, prices have gone up much more. Then if you look at it from an EMI perspective, the impact of what has happened on pricing around 2007 till today versus what interest rates can compensate for is quite low. That means that the correction in prices definitely has to happen. We don't actually need to give numbers to prove that prices in Mumbai are unaffordable. Having said that, there are some players in residential and HDIL and Oberoi are two plays which we like. There are two reasons. One is that both companies have shown interest in launching projects at reasonable prices. You just have to visit one or two of the launches of HDIL 18 months ago to see how many people use to stand in line to buy because they were willing to give a 15-20% discount to the current market prices. Similarly, in case of Oberoi with the Esquire project where they give it at a discount. So, as long as the intention is there, there are struggles in terms of adjusting to new DCR rules, but I think that the intention to generate cash flow is what we are looking for. Amongst Mumbai players, these are the only two players where we have seen that they are very serious about doing so. That is why only two players in Mumbai where we have the positive view which is Oberoi and HDIL. Q: In the short-term, which stocks do you think in the coming earning season might positively surprise? A: We are not expecting the earning season to be very exciting. To a large extent, the Mumbai scenario has improved, but it’s an expectation, the launches have not hit the market. So, we don’t see any positive surprise on that front. The commentary on outlook for the next year is key. We think that we are looking for incremental positive news flow on asset sales by DLF which is where we could see some action happening. The other would be debt reduction in case of HDIL. So, the plays on results would be these two other than that we are not expecting anything big to come out of the result season.