>REAL ESTATE (ICICI SECURITIES)

GUARDED OPTIMISM

Based on our interaction with MD & CEO of ICICI Home Finance Company, Mr Rahul Mallick, we believe the residential segment will script a recovery in ’10. However, office and retail segments are fraught with oversupply, and might only improve after two years. Developers have been able to wade through short-term liquidity concerns. Prices have corrected 5-20%, dipping to December ’07 levels and could consolidate hereon although with a marginal drop. Delinquencies in corporate and retail lending are low and home loan rates can drop 75-50bps further. Overall, industry dynamics have improved, but advice guarded optimism.

■ Residential transaction volumes better. As per our interaction, there is significant demand uptick in new mid-income housing projects. Developers are restructuring new projects to better align with ground realities. In case of revival, residential segment would be the first to improve. Latent demand at the right price point is strong, with most of the demand from end users. Developers who have cut prices to match the market reported best sales in the past three months.

■ Existing inventory to cause pain since demand is sluggish given that repricing is difficult in residential projects with more units sold, due to cancellation risk. Developers will have to face agony in the next 2-4 quarters to absorb existing inventory, wherein net cash inflow is lower; this could lead to construction delay in existing inventory.

■ Developers’ ability to hold inventory is improving as per Mr Mallick – Small- and mid-sized players have liquidity; only large-sized players have overextended themselves on credit. Developers who had bought property more than 24 months ago have benefitted, but those who had bought land in the past two years are in trouble. Most developers have reduced prices only in Q4FY09 to revive sales momentum and are mulling asset liquidation and other measures to raise capital.

■ Do not expect significant defaults by developers. Developers are under stress, but only short-term liquidity is a concern with long-term cashflow manageable. Developer financing is unaffected, with restructuring limited. Many are raising capital via assets sales, tapping vulture investors, private equity investors, high net worth individuals (HNIs) and through secondary markets.

■ Pan-India price correction within 5-20%. Q4FY09 was the first quarter when prices declined 5-20% across India and ~40% from the peak in some places. Prices have reached December ’07 levels and could consolidate hereon although with a marginal drop. Mr Mallick expects prices to come down to ’07 levels in most cities and even reduce to ’05 levels in some cases.

■ Home finance companies (HFCs) are tightening lending standards on income coverage and cashflow adequacy. Expect home financing to grow +10% in FY10E. At present, loan-to-value (LTV) is within 70-80% and it might inch up if prices correct. Home loan rates might reduce 75-50bps further. Refinancing has picked pace. Defaults on home loans have been lower then expected.

■ Commercial segment to remain insipid. As per Mr Mallick, due to oversupply, the commercial segment may remain in the downturn for the next 2-3 years. Bangalore and Hyderabad would feel the maximum pain. Mr Mallick stated that vacancy rates are now at +10% from 5% and could touch a high of 20%.

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