In spite of two successive Covid waves in India in CY20 and CY21, listed developers have weathered the storm remarkably well and sector consolidation has accelerated along with balance sheet de-leveraging. In CY21, the clear winner was the residential segment with a combination of low mortgage rates, stable residential prices, strong salary/hiring growth in the IT/ITeS sector, and continued Work-from-Home driving demand. While annuity assets across offices, malls and hotels saw a muted CY21 performance, green shoots are visible from Oct’21 in the form of increased office leasing, recovery in mall consumption to pre-Covid levels and improved hotel occupancies.
Barring any third Covid wave disruption across India, we expect residential housing demand to sustain in CY22 and annuity asset plays to see recovery to pre-Covid levels. While the 59% CY21 YTD returns in the BSE Realty Index factors in these positives to a large extent, we remain bullish on the medium-term outlook for the sector. Top picks: DLF, Oberoi Realty, Embassy REIT, Phoenix Mills and Brigade Enterprises.
Cracker of a festive season, residential outlook remains bright: While initial expectations were for new residential launches to commence from Oct’21 to coincide with the beginning of the festive season, the waning of the second Covid wave, record low mortgage rates and strong hiring/salary growth in the IT/ITes sector led to developers pre-poning many launches to Aug-Sep’21 which saw strong buyer demand. As per our checks, the momentum has carried into Q3FY22, and we expect developers to post record sales booking numbers in H2FY22 led by new launches.
We believe that owing to healthy balance sheets, access to capital and many unlisted, weaker developers being shunted out of the market, the market share of large organised developers is set to grow further in the next 2-3 years. Most developers in the listed space have aggressive launch plans from H2FY22 and are looking to grow at a double-digit sales value CAGR over the next 2-3 years. We estimate the pan-Indian residential market share for our coverage universe to grow from 25% in FY21 to 31% in FY24e.
Office leasing recovery on the cards from CY22: While vacancy levels may remain flat in Q4CY21, we expect this trend to reverse from Q1CY22e (Jan’22 onwards) with the improved pace of vaccinations across India, select corporates recalling employees to offices and gradual pick-up in international travel. While the jury is still out on the eventual outcome of the back-to-office plans of corporates, we model for pan-India net absorption of 18.5msf in CY21 (11.5msf achieved in 9MCY21) and build in a recovery in CY22e with net absorption of 26.8msf.
Mall consumption showing green shoots in festive season: While rental waivers may result in mall owners incurring ~30% rental loss at the industry level in FY22e, consumption levels in Q3FY22 during the festive season range between 80-100% of pre-Covid levels. With resumption of Food and Beverages (F&B), gaming and multiplexes, mall rentals may revert back to 90% minimum guarantee from Q4FY22 as consumption stabilises to pre-Covid levels heading into FY23e.