By Karvy
Stock Broking Ltd...!
Karvy Stock Broking
Ltd recently met up with the Senior Real estate Professional heading Sales and
Marketing function at a leading developer in Bangalore to get a sense on the
underlying demand and competitive intensity amongst the developers in the
Southern Real estate Market.
Karvy Stock Broking
contact highlighted that the Southern markets continue to witness strong end
user buying as (he expects strong residential sales volumes pick up during
CY2013), prices remain stable / affordable, Quality varies across developers
though better than other regions and changing demographics may continue to help
absorb new supply.
Whilst he agreed that
real estate is a fantastic business to be in as
(a) demand remains
unending at a price
(b) it is s a
negative working capital business as money comes upfront
(c) and with high
margins IRR’s are fantastic at 20 % plus, yet few developers have been able to
deliver “Sqft” & “Wealth” to stakeholders.
We believe that
Realty business is well poised for a bullish change and likely beneficiary in
the longer term include SOBHA, Prestige Estates.
Demand continues to
remain bullish 55,000 to 60,000 houses sold annually, Villas supply at 20,000
units remain slow moving
Karvy Stock Broking
contact highlighted that the residential demand continues to remain buoyant
driven by recovery in IT / ITES which constitute nearly 55 to 60 % of residential sales.
Typical target
clientele include
(a) husband: wife in
27 to 35 years range, both working and with typical housing budget of Rs. 70
lakh to Rs. 1 Crore ,
(b) Families in the
Age profile - 35 to 50 years looking for house for their next generation &
(c) NRI’s. The prices
in Bangalore has remained stable and appreciation has been in line with
inflation (6 to 8 % yearly).
Plain Vanilla middle
income housing in Rs. 4,000-5,000 per square feet range remains as the best
performing segment. Villa projects have seen a marked slowdown in off-take as
ticket size of Rs. 5 lakh to Rs. 1 Crore has seen limited buying interest.
Most of these
projects are in North Bangalore where the infrastructure is yet to match up as
Electricity and Water availability remains a key concern for the incoming
households. These villa projects best remain as a second house option.
Quality and Execution
remains key factor in identifying new age winners
New age buyers are now
more aware and internet activism has provided a strong platform in the way end
users approach residential projects.
Leading portals like
“ real estate forum “ has first hand information from current buyers and
occupiers of the first phase of these residential projects.
Construction progress
is updated on the regular basis and grievances are addressed in joint meeting
of these buyers group with the developer’s marketing heads. In this scenario ‘quality’ remains
given and any developer faltering will find it difficult to enjoy price
premium. On larger strategy of building brand premium ‘execution’ plays a
paramount role as quicker delivery helps in creating strong brand equity and
helps in returning cash-flows to investors.
Never ending property
demand, negative working capital and 20 % + IRR – more of an eyewash than
reality ?
In Ideal World real
estate investments should deliver strong returns as any right project has a
(a) demand, (b)
financing is easy through customer advances & (c) high margins lead to 20
%+ IRR. Until now we have seen this scenario being more of an eye wash rather
than a reality. Shareholders activism and Lenders tightening liquidity over
last few quarters has seen some improvement in project execution.
In the past we have
seen profitable projects making losses as execution delays has played a key
role in margin erosion owing to fixed price nature of realty contracts
(Apartment prices doesn’t have any escalation).
We have seen 1 year
delay resulting in 5% erosion in Gross Margins, besides buyers adjust their
interest penalties against the advances demands.
Hence these delay
reflect poorly in the Balance Sheet as account receivable whilst no liabilities
is recorded on account of interest payable.
This last mile profit
eats into the project cash-flows hence the top line looks good the cash-flows
are ugly.
Shift from Monolithic
structures to large format projects – not backed by strong vendor and contractor
tie ups
Some of the
developers have faced quality / execution issues while transforming themselves
from being a Monolithic structure developers to developing Mega Townships /
Gigantic structures. Bigger structures require strong execution capability
& stricter cost controls on back of fixed price nature of apartments.
In the race of
protecting margins, developers have compromised on Quality of contractors and
Quality of Materials used in construction. Some instances we have seen Luxury
Projects being awarded to EPC Contractors who have traditionally done
Affordable Housing projects. This leads to a situation where buyers pay a high
price and in turn gets a product which is inferior and hence 2nd or / 3rd
Phases of the project doesn’t sell though Phase 1 was a success. Another reason
is that in order to get scale to fulfill “Market Cap” ambitions many developers
have not judiciously developed a strong Supplier or Vendors network.
Real Estate Industry
continues to be promoter driven, Second Rung Leadership missing in most
Organization
Karvy Stock Broking
Contact highlighted that most of the real estate companies continue to be
Promoter driven with family members involved in day-to-day decision making.
They do take advice from the second rung leadership which is mostly overturned
to suit Promoter line of thinking.
As the family tree
grows the question of “too many decision makers “ starts playing and results in
all kind of issues viz (a) difference in strategic thinking (b) Related Party
Transaction (c) no clear cut separation in roles & responsibility. This
ultimately leads to dilution in Promoter commitment to the Organization and
destruction in Shareholder value.
Historically, we have
seen these difference lead to periodic disintegration of Real Estate Companies
Balance Sheets as Families split through a separation and start new Realty
offshoots under the same brand name. This has resulted in very few financially
stable companies which have a long term standing & strong balance sheets.
We have done a
Competitive Mapping of the Southern Developers based on the above parameters –
SOBHA & PRESTIGE ESTATES emerge clear winners
Based on the
parameters discussed above we have done Competitive Mapping of the Southern
Developers. We have highlighted strength of the developers against these
factors and aggregate all these factors to arrive at future winners in the
Southern Realty Markets.
SOBHA & Prestige
Estate are dominant winners, whilst Sobha may have a slight edge over Prestige
Estate. Puravankara needs to quickly rethink its game if it has to bounce back.
Next few years markets may continue to support all developers but over next 2
to 3 years buyers will have a clear sense on the winner who ‘deliver’s on time
every time’ every ‘sqft’ and in-turn
create ‘wealth for minority investors’
By Mr. R. Murali
Krishnan Head Institutional Equity; 022 6184 4301; muralikrishnan@karvy.com
Mr. Parikshit
Kandpal, Real Estate Analyst; +91-22-61844311; parikshit.kandpal@karvy.com
Karvy Stock Broking
Limited
Hallmark Plaza, 7th
Floor,
Opp. Gurunanak
Hospital,
Bandra (E)
|Mumbai - 400 051
Board line -
91-22-6184 4300
Email: service@karvy.com
Media Contact:
Ms.
Monica Gupta - Adfactors PR Pvt Ltd
City Hall, Oasis
Complex, Kamala Mills Compound, Pandurang Budhkar Marg,
Lower Parel (West),
Mumbai - 400 013
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+91.22.67574444, Fax no. +91.22.67574488
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Email:
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