Rates, Regulation & Restrictions Equals Over-runs & Delayed Execution accompanied by falling price
Risks: High inflation and interest rates, sub 7% GDP
The persistent high inflation leading to mortgage rates higher than 12% and sub 7 % GDP growth could lead to sharper than expected cut in residential prices.
Residential: A sense of déjà vu; 15-20% correction ahead
We expect a challenging six months with low volumes followed by a 15-20% correction in prices. We are unlikely to see a steeper correction, which the stocks are already factoring in, as the economy continues to do well while developers in general are in better financial health unlike in 2008-09. A 15% correction in Mumbai will bring the rise in property prices of the last six years in line with income growth.
Commercial: Delay In Execution, Tight Liquidity
In Mumbai, we expect the commercial sector to outperform the residential in 2011 given the strong demand for office assets from financial and IT/ITeS sectors. Since rentals in most micro markets in Mumbai continue to be at the lows of 2009 (25-30% lower than the peak) the downside risk is also factored in. We believe supply concerns are overdone and expect further delay in completions, due to a tighter liquidity environment, to reduce vacancies to 10% (15% currently) by FY13.
Higher regulatory oversight to delay projects
The recent incidents of corruption in India have led to higher regulatory oversight, leading to delays in approvals with the real estate sector bearing the brunt of it. We believe the state government will be extra cautious in approving projects which may look to favor any particular developer. HDIL is likely to be the worst impacted due to delays in its flagship rehabilitation project at the airport.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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