Institutional Equities

Real Estate Sector

04 March, 2022

Residential - the cycle has turned; Office - cyclical upswing continues Amit Agarwal
Research Analyst
post covid amit.agarwal@nirmalbang.com
We hosted a call with Mr. Anuj Puri (Chairman – Anarock) to understand the current scenario in the Real Estate industry and
its future prospects. +91-22-6273 8033
The speaker endorsed our view that the Residential real estate cycle has turned favourable. At the start of the cycle, while
the sales volume had increased sharply, the price increase was muted and was primarily to compensate for the increase in
the construction cost. He sounded confident that office leasing would resume its upswing cycle, which was interrupted by
Covid-19.
The key highlights of the expert interaction are as follows:
(1) Continued strong growth in the sales velocity of the Residential sector witnessed over the past year indicates that it is
not driven by pent-up demand only.
Sector Update

(2) Sharp increase in enquiries shows strong growth in leasing of commercial real estate. Growth is primarily driven by
strong hiring in IT/ITES, opening up of the economy and resumption of office in hybrid mode across cities. The expert
highlighted that new supply is expected to be ~300mn sqft over the next 3-4 years and it can be easily absorbed by strong
demand from IT/ITES and Tech companies.
(3) Retail segment picked up in a phased manner on the back of under-penetration of malls, coupled with a favourable
population mix and lack of social gathering space in India.
(4) Rentals from retailers revived to pre-covid levels and collections remained strong (~95%) due to rise in footfalls in malls.
Residential segment
1. The share of value in under-construction projects has been increasing since CY2009: The speaker highlighted that the share of
value for under-construction real estate projects has been increasing since CY09. In absolute terms, the value of the real estate for
under-construction projects has started to increase from US$94bn in CY09 to US$251bn in CY21. There has also been a shift in product
mix in terms of Residential/Commercial from 49%/51% in CY09 to 84%/16% in CY21 due to a shift in consumer preference towards
spacious homes and rise in disposable incomes.
2. Shift in proportionate share of residential sales from NCR to MMR: We note that there has been a shift in the share of residential
sales from NCR to MMR. The NCR region contributed ~11% (Rs268.30bn) to overall residential sales whereas the MMR region
contributed 50% (Rs979.80bn) to overall residential sales. The fall in the share of residential sales of NCR is mostly due to following: (1)
The property prices in NCR remained low compared to MMR (2) Absence of investors and speculators from NCR markets. The speaker
believes that the MMR market will continue to grow, driven by the development of under-developed locations in Mumbai i.e. Kalyan,
Mumbra, Dombivali, etc. Furthermore, majority of the well-established developers are undertaking projects in these areas to grow their
volume as they can afford to offer apartments at lower prices compared to Central Mumbai as the cost of land is cheap here.
Also, investments from private equity funds in the realty market have declined from US$4,150mn in 9MFY21 to US$2,520mn in 9MFY22.
However, the speaker expects a recovery in PE investments in the real estate sector due to the rapid vaccination coverage, which will
lead to resumption of economic activities, and roll-out of PLI schemes.
3. Shift in consumer preference for spacious homes: The market witnessed a shift in consumer preference towards spacious homes
mainly due to (1) lower interest rates on housing loans at ~6-7% (2) Higher disposable incomes and (3) Steady property prices.
4. Demand is also coming from tier 2 and tier 3 cities –The Covid-19 pandemic prompted majority people to work from their
homes/home towns. In the process, they realized the need for owning a bigger/second home and therefore invested in properties in their
home towns given that prices there were steady and interest rates on home loans were also lower.
5. Shift in product mix from affordable housing to mid to high end segments: There has been a shift in the product mix from
affordable housing to mid & high-end segments. In percentage terms, the sales of affordable housing segment compared to overall sales
have declined from 44% in 1QCY19 to 27% in 4QCY21. On the other hand, the contribution of sales from mid income/high-end segments
grew from 32%/15% in 1QCY19 to 37%/24% in 4QCY21, which is mainly due to rise in disposable incomes and shift in consumer
preference towards spacious homes.
6. Supply in peripheral areas has been rising across cities: As stated above, demand for spacious homes is growing among consumers
and they are flexible enough to shift to ‘peripheral areas’ where property prices are reasonable compared to metros. Peripheral areas
have contributed ~67% demand among the new launches in the residential segment. Also, the average built-up area per apartment in
peripheral areas has increased from 960sq ft in 3QCY19 to 1,196sq ft in 4QCY21 due to robust demand for spacious homes.
7. Decline in unsold inventory due to strong housing demand: The unsold inventory across cities has declined from 6,73,200 units
(both under construction and completed units) in 2018 to 6,38,190 units in 2021.
8. Risk in development management and JV/JD models: The developers usually undertake sole projects which are small to mid-sized
ones. For some of the larger projects, the developers usually enter in JV/JD and development management contracts as the risk of timely
completion and compliance of RERA remains with primary developers but the reward is shared with partners.
9. Marginal price rise maintained/improves volume for residential players: The speaker stated that the developers have mostly
absorbed higher input costs. However, the sale prices of properties remain steady (up by only 2% in CY21), which supported the sales
volume in for residential realty companies. The speaker believes that geopolitical tensions and Russia-Ukraine war will lead to further
increase in commodities costs. Home buyers are flexible enough to accept 10% rise in property prices.
Further, Mr. Puri foresees that even if there is a demand-supply mismatch in some locations across cities, it will not result in any sharp
rise in residential prices since builders are concerned about losing buyers. He expects the trend of upswing in residential market to
continue over the next 2-3 years.
10. Increase in sales of reputable developers: The residential market witnessed consolidation from smaller developers to leading
developers since the latter enjoy strong brand loyalty, have track record of timely completion of projects and delivery of quality
apartments. Due to these factors, the share of residential sales from leading developers has increased from earlier 17% (pre-covid level)
to 30%.
Also, the demand for ready-to-move-in properties has declined from 46% at the time of the 1st covid wave to 32% now on the back of
higher property prices and lower inventory of ready-to-move-in properties. Majority of the consumers prefer homes in new launches,
which they can get at reasonable prices and their availability is also in abundance.
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Commercial Segment:
New leasing has picked up amid strong demand from IT and ITES: As depicted in exhibit 2, we observe that
the new leasing for office space, which was at 39.5mn sqft in 2019 declined to 22.1mn sqft in 2020 on account of
the remote working regime amid the covid-led crisis. However, leasing activities picked up in CY21 (~29.7mn sqft),
driven by (1) Work from office in hybrid mode following the rapid vaccination drive (2) Bulk hiring from IT/ITES and
Global Captive Centres. Due to the Covid-19 impact, Mr Puri has opined that net completion of office space
declined from 46.4mn sqft in CY19 to 34.3mn sqft in CY21.
Demand for office space is expected to revive and will absorb excess supply from the market: The speaker
feels that ~300mn sqft of office spaces are under-construction and the same in expected to be launched over the
next 3-4 years. However, the bulk hiring by IT/ITES and Tech companies will absorb the excess supply from the
market. Also, there will be shift in demand from Grade B/C developers to Grade A developers as flight to quality
will play a crucial part for corporates in their buying decisions.
Demand for office space is dominated by US companies: In terms of geographies, USA contributes the
highest in terms of office demand at (45%) followed by Indian corporates at 30% and Europe at 10%. Presently,
request for proposals (RFPs) from US companies are at ~20mn sqft. The higher demand from the US market for
office space is mostly due to good talent pool in India.
Rentals remain steady but vacancy increases drastically: The rentals for office space remain steady (they
have not fallen compared to the 2008 crisis), driven by resumptions in economic activities, offices being occupied
by sound corporates and new inquiries from Tech companies. However, the vacancy has increased from 5% (pre-
covid level) to 10-15%. Collections for Grade A office space remained strong and stood at ~95%
Strong demand for co-working space from start-ups and enterprise solution companies: Demand for co-
working space from start-ups and enterprise solution companies have started to pick up due to (1) Cost-saving
measures (leasing of office space only if the need arises) are undertaken by companies and (2) Pick-up in their
business activities with the opening up of the economy amid the rapid vaccination drive.
Retail segment
Leasing activities in malls declines from 8.5mn sqft in CY19 to 3.1mn sqft in CY21: Leasing activities in
malls declined from 8.5mn sqft in CY19 to 3.1mn sqft in CY21. However, the key retail customers such as
Reliance, Shopper Stop, Aditya Birla Fashion, Bata and Titan are aggressively looking to expand across cities.
Also, sales from key customers surpassed pre-covid levels in CY21. The expert opined that the retail segment will
grow at a faster rate compared to other developed nations due to under-penetration of malls in India, a favorable
population mix (younger population) with a desire for social gathering and lack of social gathering spaces in India.
Rentals recover to pre-covid levels: The revival in retail sales, driven by pick-up in business activities amid
opening up of the economy and strong demand (led by ongoing festive season) prompted mall owners to withdraw
discounts offered to retailers during covid-19. We note that rentals increased to pre-covid levels and majority of the
retailers are paying rent as per the minimum guarantee agreement.
E-commerce segment will have little impact on retail sales: The expert opined that e-commerce will have little
impact on offline retail sales. The factor which will support offline retail sales are (1) under-penetration of malls in
India (2) lack of social gathering spaces (3) favorable demographic mix (4) need for socializing among youth (5)
rapid urbanization and (6) higher disposable incomes.
Outlook – We maintain optimistic view on Real Estate: We maintain Buy on Real Estate given the following:
1. Office REIT demand is returning due to the start of offices in hybrid mode and strong hiring by IT/ITES.
(2) The beginning of the new upcycle in residential demand. The increase in demand is supported by
lower interest rates, low prices, quality infrastructure and high household disposable incomes. (3) Strong
demand for well run malls to continue given the under-penetration of malls in India, rapid urbanization,
increase in disposable incomes, favorable demographic mix and lack of social gathering spaces in India
(4) scale is building up in the residential segment, driven by gain in confidence among the home buyers
amid consolidation of market.
2. We maintain Buy on Real Estate companies (1). Sobha with a TP of Rs1,227 (2) Prestige with a TP of
Rs617 (3) Mindspace with a TP of Rs445 (4) Embassy with a TP of Rs463 (5) Nesco with a TP of Rs873
(6) Phoenix Mills with a TP of Rs1,279 and (7) Brigade with a TP of Rs619.

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Exhibit 1: Share of developers - Post structural changes, branded players’ dominance is rising

Source: Anarock

Exhibit 2: Covid derailed demand for office space Exhibit 3: Dominance witnessed from mid-income and high-
end segments in residential market

Source: Anarock Source: Anarock

3 Real Estate Sector

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Exhibit 4: Unsold inventory decreases by 19% from the previous peak of 2016

Source: Anarock

Exhibit 5: City-wise share of residential supply in peripheral areas in new launches

Source: Anarock

4 Real Estate Sector

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Exhibit 6: Covid derailed the leasing activity for the retail sector

Source: Anarock

Exhibit 7: Property prices increase modestly i.e. 2% in 2021 primarily due to rise in input costs

Source: Anarock

5 Real Estate Sector

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6 Real Estate Sector

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7 Real Estate Sector