Absorption in the top 8 cities declined 11% y-o-y (year-on-year) year to date (YTD) May 2016 and 14% y-o-y for May, while launches declined 47% y-o-y (YTD) and 68% y-o-y for May. Total inventory outstanding at 1,119 million square feet (msf) is c34 months based on the past three months of the absorption rate. Most cities saw a decline in absorption month-on-month (m-o-m), and we believe any meaningful recovery would need positive incremental (m-o-m) numbers given the low base currently. For key cities, demand declined 23% YTD in Mumbai (down 27% in May) and 14% YTD in Gurgaon (down 23% in May). Southern markets continued to face pressure with Bengaluru witnessing a 12% YTD decline (down 6% in May) and Chennai declining 33% YTD (down 25% in May). Hyderabad looks positive YTD with an absorption rate of +16%, though this is down 2% y-o-y for May.
After the euphoria in the office space over the past couple of years, Private Equity funds are tapping into retail opportunities by investing in malls. The segment looks attractive in terms of valuations as cap rates exceed 11%, while existing office cap rates are as expensive as 8%. Fundamentally, with retail spending expected to pick up as the economy improves and e-commerce hype fades, malls might start seeing good consumption followed by positive rental reversions.
We reiterate our bearish call on the sector. Also, expectations of price cuts and the reluctance of developers to lower prices will likely prolong the stand-off and worsen cash flow.