>REAL ESTATE(FEBRUARY 2012): 50 bps cut = 3-4% price cut; not enough to attract demand

■ 50 bps cut = 3-4% price cut only
Our economist expects a 50 bps rate cut in 2QCY12. Developers are holding prices primarily hinged on this rate cycle turn for demand to return. However, our analysis shows a 50 bps rate cut equates to mere 3-4% reduction in cost of acquisition; which we believe will not be enough to attract demand.


■ Waiting for 100bps cut in FY13 might be too late
We believe, with poor cash flows, developers will disappoint the market on volume and cash flows in FY13 also if they decide to wait out for demand to return once a total of 100 bps is cut in FY13.


■ Time correction versus price correction
There seems a consensus opinion built-up around possibility of real estate prices under-going time correction rather than price correction. We believe the same is possible for affordable cities of Bangalore and Noida as prices remain stable in FY13 and 100 bps rate cut reduces cost by 7-8%. Developers in both cities are offering 3-4% discount to close deals. However, we believe the city of Mumbai will have to witness a double digit correction beyond the 7-8% reduction due to rate cuts. Anecdotal data shows discounts of 6-8% available depending on the project.


■ History says only price correction can do the trick
We believe the market will be disappointed with operational performance of real estate firms, if prices stay sticky leading to poor volumes. Past cycles show stock prices lag price correction but lead volume recovery by a quarter to two.


■ Volumes with sound realization remains critical
3QFY12 witnessed volume recovery but at lowered realization as developers continued their focus on affordable housing to weather tough market conditions. We believe new launches (mid-end to high-end) in core markets (at discounted prices) will help improve cash flows.


■ Current rally does not corroborate with physical market
We believe the current rally in real estate stocks could be overdone and recommend caution as the current rally led by global liquidity does not corroborate with the physical market trends wherein 1) sales volume continue to wilt, 2) unsold inventory remains high 3) balance sheets remain stretched 4) asset sale progress
slow 5) capital availability still tight and 6) execution has slowed.


■ Can buy fundamentals at dips
We like firms with sound balance sheet, annuity income and launch visibility; thus recommend BUY on Oberoi (C-1-7, Rs287.45) and Underperform: HDIL (C-3-9 Rs120), IBREL (C-3-8, RsV-3-8).


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