Edelweiss Report PDF

Real Estate
The Charge of the Consolidating Brigade

September 04, 2019
Parvez Akhtar Qazi Archit Ranka

+91 22 4063 5405 +91 22 4063 5523 Edelweiss Securities Limited
parvez.qazi@edelweissfin.com archit.ranka@edelweissfin.com
Real Estate
Executive Summary
India’s housing market has been in the doldrums for long,
battered by muted sales, piling inventory, stagnant-to-falling
prices and an acute liquidity crisis. However, an
unprecedented consolidation wave is sweeping through
India’s realty sector. This is driving outsized market share
(Click here for gains for organised developers while leaving smaller players
video clip) struggling to survive—the number of developers plunged
about 46% between 2011–12 and 2017–18. While residential
launches have been subdued due to regulatory changes and liquidity crisis,
absorption has started to inch up spurred by improving affordability;
consequently, inventory levels have corrected by 11 months since CY17.
Moreover, burgeoning demand has led to a steady fall in office space
vacancies since CY13 (down 620bps), leading to booming rentals. With
demand and supply moving in tandem, we expect good times to sustain for
the segment.
Meanwhile, a softer interest rate regime would not only raise affordability,
but also boost stock valuations due to a leg-up in profitability in the wake of
reducing cost of capital. We believe increasing preference for smaller ticket
size units (<500sft and 500-1,000sft units) burnishes prospects of companies
with exposure to affordable/aspirational housing. Accordingly, we upgrade
Godrej Properties to ‘BUY’ and retain ‘BUY’ on Sobha & Brigade Enterprises.
We have a ‘BUY’ on DLF considering its revamped balance sheet and robust
annuity portfolio. We like Oberoi Realty’s and Sunteck Realty’s rising
exposure to annuity assets, but valuation concerns thereof compel us to
downgrade them to ‘HOLD’.
Consolidation wave to burnish organised players’ fortunes

Muted sales, piling inventory, stagnant-to-falling prices and an acute liquidity crisis have
crippled India’s housing market. However, amidst the carnage, a confluence of factors—
regulatory actions (demonetisation, RERA, GST), rising brand consciousness/aspirations
amongst home buyers and funding constraints for tier 2/3 players—is leading to rapid
consolidation in this historically fragmented industry; the number of developers has
plummeted a whopping ~46% between 2011-12 and 2017-18. Hence, we envisage the
share of top-10 developers in housing demand across major cities to touch ~50-60% (20-
40% currently) over the medium term. We expect the consolidation theme to play through
in the commercial segment as well, wherein the top-4 players now own more than 20% of
office stock. This paradigm shift, which is resulting in disproportionate market share gains
for organised developers, implies that bigger players will grow handsomely despite the
overall crisis in the industry.
Worse over for organised residential players, commercial on cloud nine

The past few years have been tough for the housing space with plunging demand (CY17
demand down ~32% from peak), rising inventory and stagnant prices. However, we believe,
the worse is over for organised players (even though recovery will be gradual) given: a)
steady improvement in house affordability (best in past two decades); b) pick up in demand
1 Edelweiss Securities Limited

Real Estate
since CY17; c) correction in inventory level (down by 11 months since CY17); d) declining
interest rates (mortgage rates lowest in more than a decade); and e) waning competition.
The commercial realty segment is booming with falling vacancies (down for five
consecutive years since CY13, down 620bps since CY13 at all India level) and surging
rentals, leading to institutional funds pouring in. With demand and supply moving in tandem,
we expect sustenance of the good times for the segment.
Our preferred segments/geographies to play

Over CY08-18, the share of <500sft units and 500-1,000sft units in overall demand has
jumped ~450% and ~80%, respectively, even as premium residential sales continue to be
tepid. Hence, we believe, focus on affordability is key for sales revival. Consequently, we
prefer developers in the affordable/ aspirational housing segments. Southern cities, with
lower land prices and developers’ emphasis on mid-income housing, are much better placed
compared to NCR as far as industry dynamics are concerned. Western regions (MMR, Pune)
fall in between these two extremes.
Top picks: We prefer companies with diversified geographical/segmental footprint and

presence in the affordable/aspirational housing segment like Godrej Properties (BUY),
Sobha (BUY) and Brigade Enterprises (BUY). We believe Sunteck Realty (HOLD) is on the
right path of diversifying its segmental presence, but needs to boost its portfolio size to
sustain growth trajectory. DLF (BUY) and Oberoi (HOLD) are battling to improve sales of
their premium residential products; their lean balance sheets and sharpening focus on
annuity assets provide comfort, but a ramp up in residential sales is vital for growth
traction.
Valuation methodology
We value stocks using the DCF methodology and believe demand revival will result in
discounts to NAV to narrow going ahead; rising consolidation leading to ease of prevalence
of JDA/JV model will lead to option value for future project addition gaining currency. While
stocks have been volatile in the past, we believe changing business models (integrated
businesses) will curb volatility in the future. We believe a softer interest rate regime will
boost stock valuations due to a leg-up in profitability in the wake of reducing cost of capital
Table 1: New valuation framework for realty companies

Current valuation framework Proposed valuation framework
Discount to Discount to
Company RECO CMP (INR) WACC (%) NAV (%) WACC (%) NAV (%) TP (INR) Upside (%)
DLF BUY 164 12.0 10 11.0 10 238 45.5
Godrej Properties BUY 900 12.0 5 11.0 0 1,088 20.9
Oberoi Realty HOLD 541 11.5 5 11.0 5 590 9.2
Sunteck Realty HOLD 451 12.0 10 11.0 0 494 9.5
Sobha BUY 535 13.0 15 12.0 10 670 25.3
Brigade BUY 198 13.0 20 12.0 15 252 27.2
Source: Edelweiss research
Key risks
Key risks to our thesis are: (a) slower-than-expected pace of industry consolidation; (b)
economic disruption which could hinder demand by adversely impacting income growth or
lead to broad-based liquidity crisis; and (c) sharp price cuts in the realty market due to
distress sale of units by developers to shore up liquidity.

Sector Update
Contents
Executive Summary .................................................................................................................. 1
Investment Thesis .................................................................................................................... 4
A typical real estate cycle – Howard Marks ........................................................................... 15
Residential: Worse Over, But A Long Way To Go ................................................................... 16
Light At The End Of The Tunnel ............................................................................................. 23
Housing: Hyderabad Well Placed, NCR Struggling ................................................................ 41
Commercial: In Fine Fettle ..................................................................................................... 74
Office: Bengaluru, Hyderabad On A Strong Footing .............................................................. 83
Retail Space: On its way up .................................................................................................. 107
Fund Flow To Sector Improving ........................................................................................... 112
Companies
DLF ....................................................................................................................................... 126
Godrej Properties ................................................................................................................. 139
Oberoi Realty ....................................................................................................................... 154
Sobha ................................................................................................................................... 169
Brigade Enterprises .............................................................................................................. 182
Sunteck Realty...................................................................................................................... 198

Real Estate
Investment Thesis
Consolidation changing contours of the industry
The realty space in India is battling tough times. Despite nascent demand recovery over the
past year, inventory levels remain high. Regulatory changes, by ushering transparency,
formalisation and accountability, have increased capital requirement of the business. On top
of this, the liquidity crisis over the past year has knocked the wind out of the sails of many
tier 2/3 developers. Consequently, the industry is facing the spectre of developer defaults,
stalled projects and price crash.
With ‘survival of the fittest’ playing out in the industry, the big theme that has emerged is
that of consolidation which is happening across residential as well as commercial segments.
The top 9 cities in India have witnessed a massive consolidation with the number of
developers falling a whopping ~46% between 2011-12 and 2017-18. The fall has been a
massive ~70-75% in Gurugram, Noida and Chennai markets and more than 55% in Bengaluru
and Hyderabad.
Chart 1: Significant consolidation in India’s property market

800 80.0
Decline in developers (%)

Number of developers
640 64.0
480 48.0
320 32.0
160 16.0
0 0.0
Gurugram
Chennai
Bengaluru
Hyderabad
Mumbai
Pune
Kolkata
Noida
Thane
2011-12 2017-18 % Decline in number of developers (RHS)

Source: PropEquity, Edelweiss research
Note: For 2011-12, data from January 2011 to December 2012 has been considered
For 2017-18, data from January 2017 to December 2018 has been considered

Sector Update
Chart 2: Share of top developers in launches rising Chart 3: Top developers gaining market share in demand
75.0
Share of top 10 developers in
100.0

80.0 60.0
absorption (%)
launches (%)
60.0 45.0
40.0 30.0
20.0 15.0
0.0 0.0
Gurugram
Gurugram
Chennai
Chennai
Bengaluru
Hyderabad
Bengaluru
Mumbai
Hyderabad
Mumbai
Pune
Pune
Kolkata
Noida
Kolkata
Noida
Thane
Thane
2011-12 2017-18 2011-12 2017-18

Between 2011-12 and 2017-18, while the share of top 10 developers in overall launches has
almost doubled, it has improved by a fourth in total demand. We envisage the share of top
10 developers in housing demand (currently at 20-40% across most major cities) to touch
~50-60% over the medium term due to consolidation.
Chart 4: Consolidation underway in commercial realty market as well

75
Office stock (msf)
60
45
30
15
0
Ascendas
Mapletree
Brookfield
Xander
Allianz
CPPIB
Blackstone
GIC
Office stock (msf)

Source: Anarock, Edelweiss research
Trend in the commercial market has been similar. The top 4 financial institutions (along
with their developer partners) now own more than 20% of the office stock in India. With
institutional money flowing in (through PE/REITs), big developers are only going to become
bigger going ahead.
Overall, we believe, even if the overall realty industry takes some time to revive, bigger
players will grow handsomely by virtue of market share gains spurred by consolidation.

Real Estate
Multiple factors, same result: Significant gains for organised developers

In the residential space, regulatory actions like demonetisation, RERA and GST are leading to
formalisation of the sector. These developments have had far reaching consequences. For
e.g., focus on execution and project delivery under RERA has led to average time taken
from project launch to complete construction up to the first floor declining drastically
from 21 months before 2016 to just six months now. We expect organised developers with
access to modern construction technologies to thrive in this environment.
The need to get all approvals before project launch and fear of penalties in case of a miss in
project delivery timelines is weeding out non-serious players leading to market share gains
by organised developers.
Chart 5: Many realty developers facing acute cash flow stress Chart 6: Credit to realty developers has taken a hit
5,000 660 49%
Net disbursals by NBFCs/HFCs to

YoY
realty developers (INR bn)

4,000 544 fall
3,000
(INR bn)
428
Cash
2,000 312
flow
gap
1,000
196
0
debt/interest
Income from
Residential
80
Total debt
commercial
repayment
FY19E
EBITDA
FY14
FY15
FY16
FY17
FY18
Annual
assets
Net disbursals by NBFCs/HFCs to realty developers

Source: Liases Foras, Edelweiss research Source: RBI, NHB, JLL, Edelweiss research
Note: Annual repayment has been calculated assuming four years’ loan repayment period and interest rate of 13% per annum
Another factor hastening consolidation is the liquidity crisis faced by tier 2/3 realty
developers. RERA has reduced cash fungibility across projects, increasing capital
requirements. Over the past few years, NBFCs had emerged saviours for realty developers
with outstanding credit by NBFCs/HFCs to real estate developers jumping more than 4x
from INR640bn in FY12 to ~INR2,600bn in FY19E.
However, the NBFC crisis has choked funding lines to the realty space. As per JLL, in FY19,
net disbursals by NBFCs/HFCs to real estate developers declined by almost half to
~INR260bn from about INR510bn in FY18. Consequently, smaller developers are facing cash
flow stress, compelling them to exit the sector. We expect the share of NBFCs in overall
funding to the realty sector to stagnate at the current level. Developers will have to turn to
banks, private equity and REITs for their funding needs. Again, bigger developers will have
an edge as far as fund availability is concerned.
As far as the commercial segment is concerned, the entry of PE players/financial

institutions has altered market dynamics fundamentally. With sources of funding
congregating around bigger developers present in this funding-intensive sector, supply of
commercial space has become streamlined.

Sector Update
Rentals have appreciated over the past few years due to low vacancies; in the traditional
fragmented realty industry, this would have led to developers rushing in to cash this
opportunity with a surfeit of projects. As a result, the demand-supply scenario would have
taken a turn for the worse.
However, due to industry consolidation, demand and supply have moved in tandem over
the past few years. Going ahead as well, supply is expected to be calibrated and in line with
demand. Consequently, industry dynamics are expected to remain healthy. While it is early
days, we believe this segment will start acquiring the traits of an oligopolistic industry in
the long run.
Residential segment over the hump

The past five years have been characterised by slowing demand (CY17 demand across seven
major cities down 32% from peak), rising inventory levels, stagnant prices and stalled
projects in the residential space. During this period, the number of completed units within
unsold inventory has increased (up ~6x between CY11 and CY18), which signifies weak
absorption in the system. At the same time, lack of confidence in project delivery by
developers has led to customers preferring ready-to-move-in flats (share in sales up ~4x
between CY11 and CY18), leading to strained cash flows for developers.
Chart 7: Uptick in demand, finally Chart 8: Inventory levels have corrected from their peak
550,000 50 75 CY17
Number of units
440,000 40 60
CY17
Inventory months
CY17 CY17 CY17

Months
330,000 30 45 CY17 CY17

220,000 20 30 CY14
110,000 10
15
0 0
0
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19 *
Chennai
Bengaluru
India
Hyderabad
Pune
NCR
Kolkata
MMR
New Launches
Total Absorption
Unsold Inventory months (RHS) Peak inventory months H1CY19 inventory months
Note: * H1CY19 data is for trailing twelve months (TTM)
Note: Year denoting the peak inventory level has been shown
Nevertheless, we believe, the worse is over (even though recovery will be gradual) given
steady improvement in house affordability (best in past two decades), pick-up in demand
and correction in inventory levels (down 11 months since CY17).
In fact, inventory levels in the industry may be overstated; this is because there are a large
number of stalled projects which may not see the light of the day due to issues with
developers, NBFC liquidity problem, etc. When one adjusts the unsold inventory in the
country for such stalled projects, the amount of unsold inventory falls to ~0.61mn units at
H1CY19 end. Consequently, the inventory overhang reduces to ~25 months, which paints a
better picture for the overall housing market than earlier believed.

Real Estate
Chart 9: Inventory levels fall when adjusted for stalled projects Chart 10: SBI’s home loan rate lowest in more than a decade
800,000 35 14.0
Inventory (months)
640,000 28 12.0
(Units)
10.0
480,000 21
(%)
8.0
320,000 14
6.0
160,000 7
4.0
Mar-12
Mar-13
Mar-14
Mar-15
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-16
Mar-17
Mar-18
Mar-19
0 0
Overall Adjusted for stalled
projects
Unsold inventory Inventory overhang SBI Home loan rate
Source: PropEquity, Edelweiss research Source: SBI, Edelweiss research
A combination of factors like lower house sizes, stable prices, rising income levels (income
growth has outpaced house price growth since CY10) and falling interest rates have led to
significant improvement in affordability over the past few years. We believe, the focus on
affordability is key as far as cracking the code for sales revival is concerned.
Chart 11: Significant improvement in affordability Chart 12: Rising share of <1,000sft units in absorption
House price to income ratio (x)
100.0
12.5
10.0 80.0
Absorption split (%)
7.5
60.0
5.0
40.0
2.5
0.0 20.0
Chennai
Hyderabad
Ahmedabad
Bengaluru
Pune
Mumbai
NCR
Kolkata
0.0
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
2010 2018 <500 501-1000 1001-1500 1501-2000 >2000
Source: Knight Frank, Edelweiss research Source: Prop Equity, Edelweiss research
This is buttressed by the fact that the past few years have seen a pronounced tilt towards
smaller ticket sized units amongst consumers (over CY08-18, the share of <500sft units and
500-1,000sft units in overall demand has catapulted ~450% and ~80%, respectively). At the
same time, premium residential sales have been tepid across the board.
Consequently, we expect affordable and aspirational housing segments to gain better

traction going ahead; premium residential segment, on the other hand, will continue to
face challenges. As far as various markets are concerned, Southern cities are much better

Sector Update
placed compared to the NCR market which is still in the doldrums. MMR is somewhere in
between these two extremes.
Fig. 1: State of India’s property market

All India MMR NCR Bengaluru Hyderabad Chennai Pune Kolkata
Residential
Commercial
Commercial segment thriving

The commercial realty space’s journey has been exact opposite of the residential segment. It
faced challenges of rising vacancies and falling rentals (down 20% plus between CY07 and
CY10) prior to CY13. Since then, demand has caught up with supply, which has been measured.
Consequently, vacancies have moderated (declining for five straight years since CY13,
down 620bps since CY13 at all India level) and rentals have surged (up 40-50% in Bengaluru
and Hyderabad since CY13). Rising interest in flexible office space (up almost 50% p.a. since
CY16) has added another growth dimension to demand for commercial space in the country.
Chart 13: Vacancies have been on downward trend Chart 14: Vacancies in most cities peaked prior to CY16
45 25 45 CY15
Vacancy levels (%)
36 CY15
39 22
Vacancy rates (%)
27 CY13
33 19 CY12 CY12 CY13
(msf)
18 CY14
27 16 CY13
9
21 13
0
Chennai
Hyderabad
Bengaluru
India
Pune
NCR
Kolkata
MMR
15 10
H1CY19
CY19E
CY20E
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Absorption (msf) Supply (msf)

Vacancy levels (RHS) Peak Vacancy H1CY19 Vacancy
Source: JLL, Cushman & Wakefield, Edelweiss research
Note: Year denoting the peak vacancy level has been shown
With demand and supply expected to be finely matched going ahead as well, we expect
good times for the segment to sustain (vacancies expected to stabilise at 14-15% at all
India level). This is leading to financially strong developers like DLF, Oberoi Realty and
Sunteck Realty looking to increase their presence in this segment.
Akin to the residential segment, Southern cities again hold sway in the commercial segment,
enjoying low vacancy levels. The NCR market (except for Gurugram-CBD) continues to
struggle; MMR, again, is somewhere in between.

Real Estate
Buoyancy in retail segment

Fortunes of the retail space have turned around in the current decade with demand rising
(due to booming consumption), measured supply from developers and closing of unviable
malls. Consequently, vacancies have declined (down ~500bps since CY11) and rentals have
improved.
Chart 15: Vacancies in retail space have declined Chart 16: Number of ‘superior malls’ is less
18 25.0 50.0
Supply and absorption (msf)
Mall quality split (%)

14 20.0 40.0
Vacancy levels (%)

10 15.0 30.0
6 10.0 20.0
10.0
2 5.0
0.0
Chennai
(2) 0.0
Hyderabad
Bengaluru
India
Pune
Mumbai
NCR
Kolkata
CY19F
CY20F
CY15
CY18
CY09
CY10
CY11
CY12
CY13
CY14
CY16
CY17
New completion Net absorption

Vacancy (RHS) Superior grade Average grade Poor grade
Consolidation is also playing out in the retail space; with the proportion of ‘superior grade’
malls quite low, most cities have limited number of malls which are performing well. Going
ahead, demand and supply are expected to move in tandem; as a result, rental growth
should remain healthy and vacancy levels will continue to remain robust.
Institutional fund flow to real sector on an upswing

The domestic property space is estimated to have attracted USD30bn institutional
investments over the past decade (CY08-18E) with ~70% of it pouring in over the past five
years (CY14-18E). While the residential space attracted bulk of the investments over CY08-
13, the office space has held sway since then.

Sector Update
Chart 17: Institutional investments rising in property space Chart 18: Split of ~294msf REITable office space by city
6.0 Pune Mumbai
11% 17%
4.8
3.6
(USD bn)
NCR
2.4 14%
Bengaluru
33%
1.2
Chennai
0.0
13%
CY18E
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17 Hyderabad Kolkata

Institutional investments 11% 1%
Source: JLL, Edelweiss research
With commitments from platform funds/JVs having already crossed USD7bn, the fund flow
is expected to be robust in the future as well. Emergence of new instruments like REITs is
also expected to improve fund availability in the sector since almost 60% of the overall
Grade A office stock in India has the potential to become part of a REIT. Overall, ~294msf
of office space will be eligible for REIT and can attract potential investment of USD35bn.
Improving fundamentals to prop up valuations

We continue to value property stocks using DCF methodology. With absorption in the realty
segment taking a hit over the past few years, most developers were trading at significant
discount to their project valuations (NAV). Simultaneously, land bank valuations had
suffered a deep gash since the conversion of land bank in to cash flows (either through
project development or outright sale) had become difficult. With demand now showing
signs of revival and developers focussing on monetisation of existing land bank, we expect
discounts to NAV to narrow going ahead.
Table 2: New valuation framework for realty companies

Current valuation framework Proposed valuation framework
Discount to Discount to
Company RECO CMP (INR) WACC (%) NAV (%) WACC (%) NAV (%) TP (INR) Upside (%)
DLF BUY 164 12.0 10 11.0 10 238 45.5
Godrej Properties BUY 900 12.0 5 11.0 0 1,088 20.9
Oberoi Realty HOLD 541 11.5 5 11.0 5 590 9.2
Sunteck Realty HOLD 451 12.0 10 11.0 0 494 9.5
Sobha BUY 535 13.0 15 12.0 10 670 25.3
Brigade BUY 198 13.0 20 12.0 15 252 27.2
At the same time, rising consolidation is going to lead to higher prevalence of the
partnership (JDA/JV) model between developers and land owners. Consequently, capital
intensity of the business as far as land acquisition is concerned is likely to reduce.

Real Estate
A combination of sales revival and ease of project accretion means that option value for
future project addition will gain currency. We are already seeing this in Godrej Properties,
which has proven its mastery in portfolio accretion, having added ~71msf projects in the
past three years. We believe other developers with healthy balance sheets and a proven
track record of partnerships will also get a leg up in valuations.
Chart 19: Soft interest rate regime to give a leg-up to valuations

50.0 10.0
40.0 8.0
Repo rate (%)

(x) 30.0 6.0
20.0 4.0
10.0 2.0
0.0 0.0
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-19
Feb-18
Aug-08
Aug-09
Aug-11
Aug-12
Aug-13
Aug-15
Aug-16
Aug-17
Aug-19
Aug-10
Aug-14
Aug-18
BSE Realty Index P/E Repo Rate (RHS)
Source: Bloomberg, Edelweiss research
While stock performance has been volatile in the past, we believe changing business models
(with many companies moving towards an integrated business mix) will curb volatility in
future, both in terms of operating performance and stock trajectory. This should address
some of investors’ concerns regarding this cyclical sector.
Outlook: Making of a success story; patience is key

We envisage monumental changes in the realty sector. The emergence of consolidation as
the leitmotif will alter the growth dynamics for organised developers fundamentally. We
expect these developers to continue to grow handsomely even if the larger market growth
is lower or even flat.
With overall weak economic sentiments, we expect consumers to remain cautious in taking
large bets on the sector. Consequently, we expect smaller size unit in affordable and
aspirational segments to garner bulk of the demand (a trend which has already been gaining
traction over the past few years). We expect the slowdown in the premium residential
segment to continue for a while and hence remain circumspect about this space.
We also believe geographical diversification will become imperative to sustain growth for
larger players over the long run. Some of the organised developers are already nearing ~3-
4% market share in their home markets. While they can still gain incremental market share
therein, venturing in to other markets will make it easier for them to sustain their growth
trajectory.

Sector Update
Historically, most developers have found it difficult to replicate their success outside their
home markets. However, we believe, growing formalisation of the sector along with
regulatory overhaul will make it less difficult for developers to make a mark in new
territories.
Consequently, we prefer developers like Godrej Properties, Sobha and Brigade which have
presence in affordable/aspirational segments and multiple markets. We believe, Sunteck
Realty is on the right path of diversifying its segmental presence, but needs to boost its
portfolio size to maintain growth trajectory. DLF and Oberoi are battling to improve sales of
their premium residential products; their lean balance sheets and sharpening focus on
annuity assets provide much needed comfort.
Fig. 2: How we see the sector playing out

Particulars 0-1 years 1-3 years 5+ years
Consolidation
Demand
Supply
Interest rates
Prices
Valuations 0-25% 0-25% (-10 to +5%)

Beneficiaries GPL, Sobha, BEL, DLF, Oberoi
Sunteck
In the near term, we believe prices will remain stable and stocks will be driven by volume
growth. We believe GPL, Sobha, Brigade and Sunteck will perform well in this scenario. We
expect prices to rise over the medium term when the demand-supply equation becomes
favourable. We believe, DLF and Oberoi with ready stock of properties will benefit more
during this period.
Companies covered in this report

Godrej Properties (Mcap: INR227bn; CMP: INR900; TP: INR1088; BUY)
Godrej Properties (GPL) has emerged as the sole truly pan-India developer by achieving
significant scale in all major markets in the country. Its brand name and leadership status in
the Development Management (DM) model has led to its project portfolio expanding at a
dizzying pace. While surging growth has brought challenges in the form of cash flow strain,
repeated fund raise and expensive valuations, we believe GPL remains the best bet to play
the industry consolidation in the medium to long term.

Real Estate
DLF (Mcap: INR382bn; CMP: INR164; TP: INR238; BUY)

DLF has embarked on a new growth path, characterised by a lean balance sheet, improving
cash flows and a revamped business model in Devco. Its steadily growing rental portfolio
will be boosted by completion of under development assets and upward revision in rents for
expiring leases. While the company is sitting on a robust development pipeline (in the Devco
and rental arm DCCDL), the pace of liquidation of its ~INR110bn unsold inventory will be a
key determinant of the stock trajectory, in our view.
Oberoi Realty (Mcap: INR197bn; CMP: INR541; TP: INR590; HOLD)
Oberoi Realty (OBER) has created a niche with a robust brand name in the premium
residential segment in Mumbai, strong annuity assets and a lean balance sheet. While the
company’s residential sales momentum has been sluggish over the past few years and may
continue to remain so in the near term, a changing business mix with increasing exposure to
annuity assets is a significant positive. We believe, the pace of residential sales will
determine the stock’s trajectory going ahead.
Sobha (Mcap: INR51bn; CMP: INR535; TP: INR670; BUY)
Sobha has consolidated its position as a premier realty developer by dint of its strong brand
name, healthy execution skills and efficient cash flow management. It is on a steady growth
path, aided by robust fundamentals of its mainstay Southern realty market; in addition, its
varied product offerings have helped it capture changing customer preferences adequately.
We believe, it remains an attractive bet to play the industry consolidation theme.
Brigade Enterprises (Mcap: INR40bn; CMP: INR198; TP: INR252; BUY)

Revival in sales momentum, high quality rental assets and strong brand credentials are key
positives for Brigade Enterprises (BEL). Its burgeoning lease portfolio will benefit from the
healthy outlook for commercial realty space, while the residential segment is likely to
provide growth capital for the annuity businesses. We believe, the company’s ability to
manage its leverage level and leasing trajectory for under construction assets will be key
stock catalysts.
Sunteck Realty (Mcap: INR66bn; CMP: INR451; TP: INR494; HOLD)
Sunteck Realty (SRL) has created a niche by successfully straddling the entire spectrum of
realty projects. Its diversification in the affordable housing and commercial realty segments
will: (a) insulate it from the sluggish sales traction in the luxury realty space; and (b) provide
cash flow stability through development of rental assets. Pick up in sales in BKC & ODC
projects and launch of Naigaon Phase II are key drivers of the stock, in our view.

Sector Update
A typical real estate cycle – Howard Marks

 Bad times constrain both the level of building activity and availability of capital
 Gradually the cycle turns
 Better economic times lift demand for premises

 With supply low (owing to few buildings starts during the soft period that now
come on stream), the supply-demand picture tightens and, hence, rents and sale
prices tend to rise
 The economics of real estate ownership improves, reviving developers’ eagerness
to build
 Better times and improved economics make providers of capital optimistic; they
begin to lend more readily
 Cheaper, easier financing raises pro forma returns on potential projects, adding to
their attractiveness and increasing developers’ desire to pursue them
 Higher projected returns, more-optimistic developers and more generous providers
of capital fuel building-starts
 The first set of completed projects encounter strong pent-up demand; they are
leased up or sell out quickly, generating handsome returns for developers
 The good returns – plus each day’s increasingly positive headlines – cause still more
buildings to be planned, financed and approved
 Cranes fill the sky (and additional cranes are ordered from the factory, but that’s a
different cycle)
 It takes years for the buildings started later to be completed; in the interim, the
first ones to open eat into unmet demand
 The period between the start of planning and the opening of a building is often long
enough for the economy to transition from boom to bust; projects launched in
good times often open in bad times, meaning their space adds on to vacancies,
putting downward pressure on rents and sale prices
 Unfilled space, hence, hangs over the market
 Bad times, thus, again depress building activity and availability of capital

Real Estate
Residential: Worse Over, But A Long Way To Go

Performance of India’s residential segment has been distinctly chequered over the past
decade. While the first half (till CY13) had been characterised by reasonable demand
uptick, absorption was sluggish during the second half. Launches have been on a
downward trend over the past few years singed by muted demand and regulatory
issues (RERA, demonetisation, GST). Inventory levels, despite the improvement over the
past few quarters, are still high, necessitating further improvement in demand before
the market sees an uptrend. We believe, such a situation is, at least, a couple of years
away. Nevertheless, consolidation in the sector implies bright outlook for organised
players even if the picture for the sector as a whole is still muddled.
India: CY18 harbinger of hope

Demand for real estate, after a India’s realty space has been in the doldrums for much of the past few years. Dwindling
prolonged decline, finally picked sales and rising inventory levels have taken the sheen off what was a booming sector prior
up in CY18, fuelling hope that the to CY13.
worst is behind
Chart 20: All India launches and absorption trend
550,000 45
440,000 36
(Number of units)
(Months)
330,000 27
220,000 18
110,000 9
0 0
H1CY19 *
CY08
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY09
CY10
CY11
New Launches Total Absorption Unsold Inventory months (RHS)

Inventory overhang has been
finally settling over past few Source: PropEquity, Edelweiss research
quarters Note: * H1CY19 data is for trailing twelve months (TTM)
However, demand finally perked up in CY18; this has fuelled hopes that the sector’s
fortunes are reviving, finally. We take a look at the sector’s journey over the past decade.

Sector Update
Chart 21: All India price trend

6,000 50
4,800 40
(Months)
3,600 30
(INR/sft)
2,400 20
1,200 10
0 0
Q1-2008
Q3-2009
Q3-2010
Q1-2011
Q1-2012
Q3-2013
Q3-2014
Q1-2016
Q1-2017
Q3-2017
Q3-2018
Q3-2008
Q1-2009
Q1-2010
Q3-2011
Q3-2012
Q1-2013
Q1-2014
Q1-2015
Q3-2015
Q3-2016
Q1-2018
Q1-2019
Price Trend Inventory Overhang (Months) - RHS
 CY08-10: The realty segment was booming during this period; launches as well as
absorption remained robust during CY08-10. While launches in CY10 jumped ~160% vis-
à-vis CY08, demand catapulted ~85%.
Demand and supply are

Due to strong demand, inventory months declined from 16 in CY08 to ~14 in CY10.
significantly down compared to the While prices fell ~9-10% YoY in CY09 due to aftershocks of the Lehman crisis, they
peak in CY10
regained mojo in CY10; hence, realisations at CY10 end were flat compared to CY08
levels.
 CY11-H1CY19: CY10 had clocked peak demand of ~3,60,000 units. Since then,
absorption declined continuously till CY14. After a brief respite in CY15, demand
resumed downwards trend and bottomed at ~2,50,000 units in CY17, down ~32% from
peak. The declining trend was finally reversed in CY18 when demand rose ~14% YoY.
Chart 22: Demand has declined across the board Chart 23: Demand fell in all cities, except Pune
400,000 CY10 75,000
320,000 CY15
(Units absorbed)
60,000
Units absorbed
240,000 45,000
CY12
160,000 CY10 30,000 CY17
CY10
CY15
80,000 CY13 15,000
0 0
India MMR NCR Bengaluru Kolkata Chennai Hyderabad Pune
Peak demand H1CY19 demand* Peak demand H1CY19 demand*
Note: Year denoting the peak demand has been shown
* H1CY19 data is for trailing twelve months (TTM)

Real Estate
Decline in launches: Akin to demand, launches too peaked in CY10 at ~5,00,000 units. After
a fall in CY11, launches rose again in CY12. However, this proved to be a false dawn.
Launches have declined steadily every year since then and clocked just ~2,00,000 units in
the 12 months ending H1CY19, down ~61% from peak.
Chart 24: Launches have declined across the board Chart 25: Fall in launches across cities
600,000 80,000 CY15
CY10
Units launched
64,000
Units launched
480,000
360,000 48,000 CY12
240,000 CY10 32,000 CY12

CY10 CY15
120,000 CY13 16,000
0 0
Peak launches H1CY19 launches* Peak launches H1CY19 launches*

Note: Year denoting the peak launches has been shown
Inventory build up: Launches outpaced demand between CY10 and CY16, leading to
persistent inventory build up. Inventory months surged from around 14 in CY10 to around
37 in CY16 and peaked at ~42 months in CY17.
Chart 26: CY17 marked peak of inventory levels Chart 27: Inventory situation has improved since CY17
75 CY17 50 CY17
CY17
(Inventory months)
60 40
Inventory months
CY17
CY17
45 CY17 30
CY14
CY17
30 20
15 10
0 0
Peak inventory months H1CY19 inventory months* Peak inventory months H1CY19 inventory months*
Note: Year denoting the peak inventory level has been shown

Sector Update
The trend was finally arrested in CY17 and CY18 when demand finally outstripped supply; as
a result, unsold inventory declined from ~0.9mn units in CY16 to ~0.8mn units in CY18 and
further to ~0.76mn units at H1CY19 end. While weak demand led to inventory months rising
YoY in CY17, pick up in absorption since then has led to inventory months improving to ~34
in CY18 and 31 at H1CY19 end.
Stalled projects: While referring to inventory build up, one has to be mindful of the fact that
a large number of projects are stalled on account of developers facing liquidity issues. There
is a high likelihood that some of these projects will not see the light of the day. While some
of the units in these projects have been sold, there is still substantial unsold inventory.
Considering that customers are obviously going to stay away from such projects, unsold
units in these projects should ideally be adjusted in the overall unsold inventory in the
country.
Chart 28: Unsold inventory falls when adjusted for stalled projects
800,000 35
Inventory (months)
640,000 28
(Units)
480,000 21
320,000 14
160,000 7
0 0
Overall Adjusted for stalled projects
Unsold inventory Inventory overhang

When one does so, the amount of unsold inventory in India falls to ~0.61mn units at H1CY19
end. Consequently, the inventory overhang reduces to ~25 months, which paints a better
picture for the overall housing market than earlier believed.
Muted price appreciation post CY13: Despite a steady increase in unsold inventory months
since CY10, prices continued to rise. However, the pace of price appreciation has differed
materially across the years.

Real Estate
Chart 29: House price appreciation has been muted over past few years
13.0
8.0
Price growth (%)
3.0
(2.0)
(7.0)
(12.0)
Q3-2009
Q1-2010
Q3-2010
Q1-2011
Q1-2013
Q3-2013
Q1-2014
Q1-2016
Q3-2016
Q1-2017
Q1-2019
Q1-2009
Q3-2011
Q1-2012
Q3-2012
Q3-2014
Q1-2015
Q3-2015
Q3-2017
Q1-2018
Q3-2018
YoY price growth
During CY10-13, prices posted ~9% CAGR. However, over the past three and five years
(ending CY18) prices have posted mere ~1.5% and 2.3% CAGR, respectively.
Share of ready units in unsold
inventory and sales has catapulted
Ready unsold inventory piling up: Weak demand has meant that the proportion of units
over past decade
remaining unsold even at the time of project completion has risen steadily; between CY11
and CY18, this number has risen ~6x.
Chart 30: Rising share of ready units in unsold inventory Chart 31: Share of completed units in sales on the rise
15.0 30.0
12.0 25.0
9.0 20.0
(%)
(%)
6.0 15.0
3.0 10.0
0.0 5.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
All India All India

Customers preferring completed units: Another trend which has steadily gained currency
over the past few years is customers’ proclivity to buy ready-to-move in units rather than
under construction units. The proportion of ready units sold in total sales has jumped ~4x
between CY11 and CY18. We see it as customers trying to safeguard themselves against
project execution risks which had led to many projects getting stalled during construction
stage or units being handed over for possession much later than the originally promised
date.

Sector Update
Burgeoning preference for smaller units: An analysis of the absorption trend across India
reveals rising preference for smaller ticket size units. Customers are gravitating towards 1 or
2BHK units compared to 3 or 4BHK units; similarly, the share of <500sft or 500-1,000sft units
in overall absorption is increasing at the expense of larger units.
Chart 32: Rising share of 1/2BHK units in absorption

100.0

80.0
60.0
40.0
20.0
0.0
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
1 BHK 2 BHK 3 BHK 4 BHK 5 BHK 6 BHK
Share of 1BHK units in overall Source: PropEquity, Edelweiss research

absorption has nearly tripled
between CY08 and CY18 The proportion of 1BHK units in overall absorption has nearly tripled between CY08 and
CY18 to ~28%. While the proportion of 2BHK units in demand has remained stable at ~42-
43%, there has been a sharp fall in proportion of 3BHK units sold—from ~39% in CY08 to
around 25% in CY18.
Chart 33: Share of <1,000sft units in absorption rising

100.0
80.0
60.0
Proportion of <500sft units has
jumped more than 4x between
CY08 and CY18; that of 500- 40.0
1,000sft units has surge a
whopping 80% during the same 20.0
period
0.0
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
<500 501-1000 1001-1500 1501-2000 >2000

Similarly, there has been a shift towards smaller unit size (<1,000sft), especially since CY13.
While the proportion of <500sft units has grown more than 4x between CY08 and CY18, that
of 500-1,000sft units has increased from ~24% to 44% during this period. On the other hand,
the proportion of 1,000-2,000sft units has declined by more than a third to ~39%.

Real Estate
Outlook: While things have improved since CY17, inventory continues to remain high at
around 31 months. The pick up in absorption over the past year is encouraging. However,
demand needs to gain further traction for inventory to trend down. Simultaneously,
launches need to be range bound to ensure that the nascent demand recovery leads to
inventory liquidation.

Sector Update
Light At The End Of The Tunnel

While the residential realty market is still facing some headwinds and has just
recently started witnessing some green shoots of recovery, we believe the sector is
definitely set for an uptrend. With improving house affordability due to a confluence
of factors such as rising income levels, stable house prices, reduction in house size
and falling interest rates, we believe housing demand is set for a gradual uptick. In
addition, regulatory actions (demonetisation, RERA, GST) and tightening liquidity
(which is leading to reduced competition) are triggering unprecedented consolidation
in the industry. Co-living spaces are set to provide another growth opportunity for
developers. We believe, all these factors will fuel healthy sales growth for organised
realty players, particularly those in the affordable and aspirational housing segments.
After years of tepid absorption, CY18 finally resulted in some hope for the realty industry as
demand perked up. While it’s still early to term it a revival, we believe we are definitely near
the end of the down cycle rather than the middle. We believe, a host of factors will improve
House affordability in India has fortunes of organised realty developers, even if the overall market takes longer to recover.
improved considerably and is the
best in two decades currently These factors include rising affordability, attractive/better suited product offerings from
developers, regulatory developments (demonetisation, RERA, GST) and tightening liquidity
(amidst rising funding requirement of the sector). We believe, these will spur sales of
organised developers. We discuss these in detail below.
1) Best in two decades house affordability to boost sales

One of the major factors which had hurt housing demand post CY09-13 was the rising
ticket size of houses. This was a result of strong price appreciation (9% price CAGR over
this period) and projects with larger unit size (3/4BHK rather than 1/2BHK) launched by
developers. However, over the past five years, a combination of muted price
appreciation, lower interest rates, rising income levels and smaller unit size have
significantly improved affordability. In fact, the house-to-income ratio currently is the
best in the past two decades.
Chart 34: Improving house affordability

6.0
Declining affordability
Steady improvement
House price to income ratio (x)
5.0
in affordability
4.0
3.0
2.0
1.0
0.0
2002
2003
2005
2006
2009
2010
2013
2016
2017
2001
2004
2007
2008
2011
2012
2014
2015
2018
House affordability
Source: HDFC, Edelweiss research
Note: Affordability equals property price divided by annual income based on customer data of a large metro city

Real Estate
This improvement in affordability is across the board and not restricted to a few cities.
Chart 35: Mumbai has seen biggest improvement in affordability since CY10
12.5
House price toincome ratio (x)

House affordability has improved 10.0
considerably in Mumbai since
CY10; similar trend in Kolkata
7.5
5.0
2.5
0.0
Mumbai NCR Bengaluru
2010 2016 2017 2018
Chart 36: Affordability has improved significantly in Kolkata since CY10

6.0
House price toincome ratio (x)
4.8
3.6
2.4
1.2
0.0
Pune Chennai Hyderabad Kolkata Ahmedabad
2010 2017 2018

Source: Knight Frank, Edelweiss research
The Knight Frank Affordability Benchmark is 4.5x the average household income.
Considering this, only Mumbai with House Price to Income ratio of 7 and NCR & Hyderabad
with a ratio of 5 are still above the benchmark; all other cities are already below the
benchmark.
We analyse the factors behind improvement in affordability in detail here:
 Muted house price appreciation: Increase in property prices has been muted over the
past few years. While prices had posted 9% CAGR over CY10-13, increase in house
prices has been only 1.5% and 2.2% (CAGR) over the past three and five years (ending
CY18), respectively.
Over the past decade, house price appreciation has trailed income growth across all
cities in India.

Sector Update
Chart 37: Income growth has outpaced house price growth since CY10
12.0
House price growth has trailed
CAGR over 2011-18 (%)

income growth in all cities over the 9.8
past decade with Mumbai seeing
the highest difference in growth 7.6
rates
5.4
3.2
1.0
Bengaluru
Hyderabad
Chennai
Delhi-NCR
Kolkata
Mumbai
Pune
Household income growth Residential price growth
Mumbai has witnessed the maximum difference between the trajectory of income and
house price growth over the past decade, followed by Pune and Chennai.
Chart 38: Consumer price inflation has outpaced index of residential price growth across most cities
Index of residential price growth (x)
60.0
48.0
36.0
24.0
12.0
0.0
Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q3-2018
Q4-2018
Q1-2019
Q2-2019
Q1-2013
Q2-2013
Q3-2013
Q4-2013
Q1-2014
Q2-2014
Q3-2014
Q4-2014
Q1-2015
Q2-2015
Q3-2015
Q4-2015
Q1-2016
Q2-2016
Q3-2016
Q4-2016
MMR Bengaluru NCR CPI inflation (urban)

Source: CMIE, Edelweiss research

Real Estate
Chart 39: Residential price growth trails CPI inflation in all cities, except Hyderabad
Index of residential price growth (x)
100.0
80.0
60.0
40.0
20.0
0.0
Q2-2013
Q3-2013
Q4-2013
Q1-2014
Q2-2015
Q3-2015
Q4-2015
Q1-2016
Q2-2016
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q1-2013
Q2-2014
Q3-2014
Q4-2014
Q1-2015
Q3-2016
Q4-2016
Q1-2017
Q2-2017
Q3-2018
Q4-2018
Q1-2019
Q2-2019
Pune Hyderabad Chennai Kolkata CPI inflation (urban)
Source: CMIE, Edelweiss research
Similarly, increase in house prices has trailed consumer price inflation for most cites
CPI inflation has outpaced house over the past few years. It is only in Hyderabad where the reverse has been true.
price growth in most cities since
CY12  Lower interest rates: Softer interest rate regime in the past few years (along with
stagnant property prices) has been a key driver of improved affordability of home
buyers.
Chart 40: SBI’s home loan rates have declined post CY11
15.0
13.0
11.0
(%)
9.0
7.0
5.0
Mar-06
Mar-07
Mar-08
Mar-10
Mar-12
Mar-14
Mar-17
Mar-18
Mar-05
Mar-09
Mar-11
Mar-13
Mar-15
Mar-16
Mar-19
SBI Home loan rate

Source: SBI, Edelweiss research
Declining interest rates and Softer mortgage rates have brought EMIs down, making house purchase more
reduction in ticket size of homes by
affordable for home buyers.
developers have improved
affordability
 Smaller ticket size: With customers staying away from large ticket size purchases,
developers have reduced the size of houses (area) over the past few years. This has
incentivised buyers by reducing the ticket size of their purchase.

Sector Update
Chart 41: Reduction in unit size of homes offered by developers

2,000 30.0
Reduction in unit size (%)

1,600 24.0
Averageunit size (sft)
1,200 18.0
800 12.0
400 6.0
0 0.0
MMR NCR Bengaluru Pune Chennai Hyderabad Kolkata
Unit size - 2015 (sft) Unit size - 2018 (sft) Unit size reduction (RHS)
The maximum reduction in unit size has been in MMR; this is not surprising as MMR
has historically had the biggest issue in terms of affordability from a buyer’s
perspective. As per Knight Frank, the house price-to-income ratio in Mumbai was 11 in
CY10—highest amongst all major cities in the country. Consequently, the reduction in
unit size also needed to be highest in the city in order to make them more affordable
for buyers.
Affordability to improve further going ahead: A combination of all these factors means
that house affordability has been continuously improving and is forecasted to sustain in
the future as well. We take a look at the Home Purchase Affordability Index (HPAI)
prepared by JLL.
Chart 42: Improvement in affordability to continue

Home purchase affordability index (x)
250.0
200.0
150.0
100.0
50.0
0.0
Mumbai Delhi-NCR Bengaluru Pune Chennai Hyderabad Kolkata
2011 2013 2018 2019E 2020E 2021E
Note: HPAI is the ratio of the average household income to the eligible household income
Eligible house income = minimum income that a household should earn in order to qualify for a home loan on a 1,000sft apartment at the
prevailing market price

Real Estate
As the chart shows, rising interest rates between CY11 and CY13 had led to decline in
affordability across all cities in India.
Also, Mumbai has witnessed the biggest improvement in affordability since CY11; yet, it
remains the most unaffordable city in the country for house purchase. Even till 2021,
the average household income will continue to fall short of the minimum income
required to purchase a 1,000sft apartment.
2) Regulatory actions accelerating pace of consolidation

Over the past few years, the government has taken various actions which have
hastened the pace of consolidation in the industry. These include RERA,
demonetisation and GST implementation. We analyse these in detail:
 Demonetisation: In November 2016, the Government of India announced
demonetisation of all INR500 and INR1,000 bank notes and issued new INR500 and
INR2,000 notes in exchange of the demonetised bank notes. One of the major
motives behind this move was to curb the menace of unaccounted money.
Historically, residential real estate was believed to be one of the preferred asset
classes for deployment of black money and some proportion of sale consideration
Demonetisation has been a
in real estate transactions was made using cash (may be black money).
significant step towards
formalisation of the realty sector
As a result of demonetisation, the existing stock of black money was hit, which
choked the flow of money to the real estate sector. While this was positive for
organised realty players who deal mostly in white money, unorganised developers
for whom the cash component used to be higher, took a bad beating.
As per Knight Frank estimates, demonetisation resulted in notional revenue loss of

INR226bn for the realty industry in India’s top 8 cities.
Chart 43: Notional revenue loss due to demonetisation

Notional revenue loss (INR bn)
100
80
60
40
20
0
Hyderabad
Bengaluru
Ahmedabad
Kolkata
Chennai
Mumbai
Pune
NCR
Notional revenue loss

Source: Knight Frank, Edelweiss research

Sector Update
More importantly, this exercise sent a signal that the government was serious
about formalisation of the economy at large; measures such as demonetisation,
promotion of digital payment modes, introduction of GST, among others, were
steps in achieving a permanent shake-up of the economy rather than one-offs.
Consequently, it forced the realty industry to become more transparent and adopt
better governance practices, all of which are going to lead to consolidation in the
sector.
 RERA: Perhaps the most important development which is going to spur
consolidation in the sector is the implementation of the Real Estate Regulatory Act
(RERA). It contains provisions like:
o Maintaining 70% of sale proceeds in an escrow account for each project: This
reduced cash fungibility significantly, increasing the working capital
RERA implementation has ushered requirement of the business.
consolidation in the realty space by o Restricting project launches till all approvals are received: This stopped the
improving transparency, reducing practice of ‘pre-launch’ which used to be a major source of funds for
cash fungibility and focussing on developers to meet pending approval costs and marketing costs. As a result,
execution timelines capital intensity of the business increased.
o Better transparency: This was achieved via making projects specific
information available to the general public through compulsory registration
on RERA website.
o Significant penalties on developers in case of divergence from timelines /
development plan by increasing the cost of non-adherence, smaller/non-
serious/one-time players were discouraged from entering the realty
development space.
Implementation of RERA has had far reaching consequences such as:

o Significant increase in developers’ capital requirements: By reducing cash
fungibility across projects, RERA has led to higher funding requirement for
developers. This is positive for organised/listed players who have better
access to capital than smaller companies.
o Focus on getting approvals and execution: By ensuring that projects are
launched only once all approvals are in place, RERA has forced developers to
focus on execution. In addition, the threat of penalties in case of project
delays has led to greater emphasis on project delivery.
This is reflected in speed up in execution, as per data collated by Liases Foras.

Its data for 41 cities indicates that the average time taken to complete
construction work up to first floor after launch of a project has dipped
significantly post RERA. Currently, developers are taking an average of six
months to complete work up to first floor slab; before 2016, this period used
to be 21 months.

Real Estate
Chart 44: Reduction in time between project launch and first floor slab
20
16
Time taken (months)
12
0
MMR NCR Bengaluru Pune Chennai Ahmedabad Kolkata Hyderabad
2016 (Pre RERA) 2017 (RERA implementation) 2018 (Post RERA)

Source: Liases Foras, Edelweiss research
There has been a uniform trend across cities of reduction in time taken
between project launch to first floor slab post RERA. With focus shifting to
execution, bigger and organised developers with access to modern
construction technologies will benefit handsomely.
o The move towards better transparency has meant that fly-by-night operators have
been compelled to either exit the space completely or tie up with organised
players through the JDA/JV route for developments of their land banks.
The introduction of RERA is thus going to lead to significant consolidation in the sector.
 GST: Another factor which will fuel consolidation in the realty space is the
introduction of GST. With customers not having to pay GST on completed units,
from a perception point of view, buyer’s have started preferring ready-to-move in
GST is another step towards units rather than under- construction ones. This incentivises the developer to
formalisation of the sector and will complete construction fast to accelerate the pace of sales. We believe, organised
benefit organised developers developers with access to modern construction techniques have a better potential
for faster execution than unorganised peers.
In addition, while reducing the rates of GST recently, the government has mandated
that 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI, long-
term lease (premiums)) should be purchased from registered vendors. Any shortfall in
purchases according to these norms will be levied a reverse tax of 18%; tax on cement
purchased from unregistered entities will attract 28% duty.
By making it mandatory for developers to purchase 80% of raw material from

registered vendors, the government is trying to formalise the realty sector. Registration
of more vendors in the future will constrain black money transactions.
We believe, organised developers will once again be beneficiaries of this compared to

unorganised developers.
Thus regulatory actions in the form of demonetisation, RERA and GST have significantly
enhanced the pace of consolidation in the sector. This is positive for organised players as it
has burnished their growth prospects at the expense of unorganised counterparts.

Sector Update
3) Rising capital intensity of business weeding out weak players

Over the past decade, funding intensity of the realty business has jumped significantly;
this is partly due to slowdown in sales and partly due to regulatory changes like RERA.
As a result, leverage levels in the industry have shot up.
Chart 45: Leverage in realty space has catapulted over past decade
9,000
7,200
5,400
(INR bn)
3,600
1,800
0
Sales Unsold inventory Debt
CY09 CY18
Over CY09-18, sales have jumped 56%; on the other hand, unsold inventory has
catapulted ~370%. Consequently, overall debt levels have zoomed ~230%.
With slowing sales and rising debt levels, developers are facing serious cash flow issues.
Existing cash flows for developers (from residential sales as well as income from
commercial assets) are insufficient to service the debt burden.
Chart 46: Realty developers facing acute cash flow stress

5,000
4,000
(INR bn)
3,000
Cash
2,000 flow
gap
1,000
0
Residential EBITDA Income from Annual Total debt
commercial assets debt/interest
repayment
Source: Liases Foras, Edelweiss research

Note: Annual repayment has been calculated assuming 4 year loan repayment
period and interest rate of 13% per annum

Real Estate
Consequently, many developers are facing solvency issues. With a significant gap
between cash inflows and outflows, developers are at the mercy of lenders to help
them stay afloat. Weaker developers, which are not getting funding support, are exiting
the space due to liquidity issues.
4) NBFC liquidity crisis another enabling factor

Singed by rising stressed assets, incremental bank funding to commercial real estate
(CRE) developers has reduced to a trickle over the past few years.
Chart 47: Growth of bank credit to CRE has been muted

2,500 50.0
YoY growth in bank credit (%)

Bank credit (INR bn)
2,000 38.0
1,500 26.0
1,000 14.0
500 2.0
0 (10.0)
FY08
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY19
FY09
FY14
Bank credit to CRE (LHS) YoY growth in bank credit to CRE (%)
Source: RBI, Edelweiss research
In such a scenario, NBFCs had emerged saviors for developers by taking up the mantle
to meet the latter’s funding requirement.
Chart 48: Rising NBFC/HFC exposure to realty developers

3,000 60.0
Outstanding credit to realty
2,400 48.0
developers (INR bn)
Share of NBFC/HFC (%)

1,800 36.0
NBFC/HFC contribution to funding
of realty developers has been 1,200 24.0
rising even as banks have taken a
backseat
600 12.0
0 0.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E
Banks NBFC/HFC % share of NBFC/HFC (RHS)

Source: RBI, NHB, JLL, Edelweiss research

Sector Update
The outstanding credit by NBFCs/HFCs to real estate developers jumped by more than
4x from INR640bn in FY12 to ~INR2,600bn in FY19E. The growth was particularly high
in FY17 and FY18 when the outstanding credit surged 44% and 29% YoY, respectively
i.e., quantum of exposure of NBFCs/HFCs to developers surged ~85% in a span of mere
two years between FY16 and FY18.
With the financially strong developers still being able to get funding from banks or
through commercial papers (CPs) and debentures (NCDs), it is the tier 2/3 developers
which are more dependent on NBFC funding.
Chart 49: Developers with weaker credit rating more dependent on NBFC funding
AA rating A rating BBB rating
NBFCs
3%
NBFCs
25%
Banks Banks
42% 37%
Banks
52% NBFCs
NCDs/
CPs NCDs/ 60%
NCDs/
55% CPs
CPs
23%
3%
Source: ICRA, Edelweiss research
ICRA estimates that ~39% of the loans from NBFCs/HFCs to developers which are rated
‘BBB’ might need to be refinanced in FY20; this proportion is just around 15% for ‘A’
rated developers. Thus, financially weaker developers do need significant funding
support from NBFCs to carry out their operations.
Unfortunately for these weak developers, NBFCs have started facing significant liquidity
issues over the past couple of quarters, post the IL&FS crisis. Consequently, the flow of
incremental credit to CRE has declined to a trickle. Not only are new sanctions hard to
come by, some NBFCs have even started delaying release of funds for existing
sanctions. Consequently, developers have started facing significant funding crunch.

Real Estate
Chart 50: Net disbursals by NBFC/HFC to realty developers plummeted in FY19

600
Net disbursals by NBFCs/HFCs to

realty developers (INR bn)
500
49% YoY
400 fall
300
200
100
0
FY14 FY15 FY16 FY17 FY18 FY19E
Net disbursals by NBFCs/HFCs to realty developers

Source: RBI, NHB, JLL, Edelweiss research
As per JLL, in FY19, net disbursals by NBFCs/HFCs to real estate developers plunged by
almost half to ~INR260bn from ~INR510bn in FY18.
In addition, a recent circular from the National Housing Bank (NHB) to HFCs is further going
to impact liquidity for realty developers. The circular asks HFCs to:
Liquidity crisis at NBFCs has choked
funding to realty developers and  Desist from offering schemes in which developers service loans on behalf of borrowers
will trigger another round of i.e. interest subvention schemes; and
consolidation in the realty sector  Ensure that disbursement of loan tranches to developers is strictly as per the status of
construction and no upfront disbursal is made in case of incomplete projects.
 To put in place a well-defined mechanism for monitoring the progress of construction
of housing projects and obtain borrowers' consent before releasing payments to
developers.
As a result, liquidity for developers is getting strained seriously. Our interaction with lenders
and other industry participants indicates that the liquidity crisis is going to lead to another
round of consolidation in the realty industry. Developers with high leverage may find it
difficult to raise incremental funds, thereby limiting their ability to bring new projects to the
market. This is likely to curtail supply from tier 2/3 developers in the market in the future.
In addition, the chances of existing projects getting stalled have also increased as NBFCs
have started taking more time to disburse funds. Also, competition for land acquisition/JDAs
etc., will dip as focus of tier 2/3 developers will shift towards completion of existing projects
rather than new acquisitions.
In addition, customers are likely to gravitate towards developers with strong brand names
where the ‘comfort’ on project delivery is higher.
As a result, organised developers, especially those with low leverage, will benefit
significantly from the NBFC liquidity issue.

Sector Update
We believe, the share of NBFCs in the overall funding to the realty sector will stop rising
going ahead. Developers will have to turn to banks, private equity and REITs for their
funding needs. Again, bigger developers will have an edge as far as fund availability is
concerned.
The proof of the pudding is in eating it

With a multiplicity of factors supporting consolidation in the industry, it is time to look at
whether consolidation is already underway or is it sometime away.
As per PropEquity, the top 9 cities in the country have witnessed a massive consolidation
with the number of developers falling a whopping ~46% between 2011-12 and 2017-18.
Chart 51: Significant consolidation underway in India’s property market

800 80.0
(Number of developers)
Decline in developers (%)

640 64.0
480 48.0
320 32.0
160 16.0
0 0.0
Gurugram
Chennai
Bengaluru
Hyderabad
Mumbai
Pune
Kolkata
Noida
Thane
2011-12 2017-18 % Decline in number of developers (RHS)

In markets like Gurugram, Noida, and Chennai, the fall in the number of developers has
been ~70-75%. Bengaluru and Hyderabad too have seen the number of developers fall by
more than 55% during this period.
With a number of developers falling by the wayside, it is natural that those left standing will
gain in terms of market share. Across these nine cities, the share of top 10 developers in
units launched has almost doubled between 2011-12 and 2017-18.

Real Estate
Chart 52: Market share gain underway for top developers

100

80
launches (%)
60
40
20
Bengaluru
Hyderabad
Gurugram
Kolkata
Noida
Chennai
Thane
Pune
Mumbai
2011-12 2017-18
During this period, all the cities have witnessed the top 10 developers gaining market share
(in terms of units launched), though the extent is different across cities. Gurugram and
Thane have witnessed this share more than doubling, while Bengaluru, Chennai and Kolkata
too have seen the share rising by a significant amount. Mumbai and Noida too have seen
~50% jump in the market share of top 10 developers.
Like launches, top 10 developers have gained market share in demand as well, though the
extent of gain is lower than in supplies. Still, the share of top 10 developers in demand has
increased by a fourth over this period.
Chart 53: Top developers gaining market share in demand

75
62
absorption (%)
49
36
23
10
Gurugram
Chennai
Bengaluru
Hyderabad
Mumbai
Pune
Kolkata
Noida
Thane
2011-12 2017-18

Sector Update
Like was the case with launches, Gurugram and Thane have witnessed the maximum
increase in the share of top 10 developers in demand as well. Bengaluru and Chennai are
next in line as far as the increase in quantum of share is concerned, followed by Mumbai
and Hyderabad.
The trend remains the same when one looks at supply and demand in individual markets
over the period. We take a look at the NCR market and analyse the share of top 10
developers in launch and absorption over the past decade.
Chart 54: Consolidation pace in NCR market has surged post CY16
Top 10 developers' launch share (%)

60.0 60.0
Top 10 developers' demand share (%)

Pace of consolidation
48.0 increases post CY16 48.0
36.0 36.0
24.0 24.0
12.0 12.0
0.0 0.0
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY18
CY17
Share in launches Share in demand (RHS)
Note: Data is in terms of units
The chart proves that consolidation in the NCR realty space is already underway; the share
of top 10 developers in launches, which was at an average of ~25% over CY10-14, has now
more than doubled to 55%. Similarly, the share of top 10 developers in demand, which was
~22% over CY10-14, is now approaching the 50% mark.
A similar phenomena plays out when one looks at the Bengaluru market and the share of
top 10 developers in launch and absorption over the past decade.

Real Estate
Chart 55: Pace of consolidation in Bengaluru market has surged post CY16

55.0 45.0

47.0 39.0
39.0 33.0
31.0 27.0
23.0 21.0
15.0 15.0
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Akin to the NCR market, consolidation in the Bengaluru realty space is also underway; the
share of top 10 developers in launches, which was at an average of ~24% over CY12-16, has
now surged to ~45%. Similarly, the share of top 10 developers in demand, which was ~22%
over CY12-16, is now approaching the 40% mark.
The MMR market behaves slightly differently compared to NCR and Bengaluru markets as
far as consolidation is concerned.
Chart 56: Share of top 10 developers in launches in MMR market has surged post
CY14

39 31
33 26
26 21
20 17
13 12
7 7
CY10
CY11
CY12
CY14
CY15
CY16
CY17
CY18
CY13


Sector Update
The share of top 10 developers in launches has been steadily rising since CY14; since then,
the share has jumped from ~16% to ~32% now. Share of top 10 developers in demand, on
the other hand, catapulted over CY15-17 (almost doubling over this period) before falling in
CY18. Nevertheless, with rise in the share of top 10 developers in launches, it is but a matter
of time before their share in absorption too picks up.
Chart 57: Share of top 10 developers in launches on the rise in other cities as well
75.0

60.0
launches (%)
45.0
30.0
15.0
0.0
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Pune Chennai Hyderabad Kolkata
When one looks at other cities, the same trend plays out; the share of top 10 developers in
launches has been rising steadily, especially over the past few years. In Chennai, in fact, it
has almost trebled over the past three years. Pune and Kolkata have also witnessed
significant improvement in the share of top 10 developers during this period.
Thus, it is clear that consolidation in the industry has been on an uptrend. We believe, this
will result in outsized gains for organised developers in the industry.
Co-living: New growth avenue

Co-living is emerging as an interesting concept in India. It is being given a boost by changing
demographics, convenience, technological advancements and financial considerations. We
analyse the dynamics of this space:
 India has inherent strengths as far as the co-living space is concerned: India’s
millennial population at ~450mn is more than a third of its overall population. This
share is estimated at more than 40% of the population by 2025. As per JLL, the
country’s urban population is set to increase by ~150mn over the next 15 years. These
factors have helped India become the trailblazer of co-living in the Asia Pacific region.
 Significant market for co-living in India: As per JLL, the existing capacity of organised
players in the co-living market in India stands at ~0.11mn beds across the top 7 cities.
Going ahead, the supply of beds by organised co-living players is expected to catapult
more than 5x to ~0.54mn by 2023. With surging supply, demand too is expected to
grow in tandem to ~0.47mn beds. As a result, the country’s co-living market is expected
to clock a strong 17% CAGR in the next five years to become a nearly INR1tn market.
Co-living penetration is expected to rise from the current 2.6% to nearly 8.3% by 2023.

Real Estate
 Co-living makes great economic sense for developers as well as consumers: As per
Anarock, rental yields offered by co-living spaces can be as much as 8-11% compared to
the current average yield of 1-3% in residential properties. In addition, co-living spaces
can also reduce the consumer's average cost of living by as much as 10-15% with
optimal real estate utilisation and economies of scale.
 Co-living space attracting attention of developers and investors: Buoyed by the
improving prospects of the co-living space, developers as well as investors have turned
their attention towards the space. Start-ups like NestAway, OYO Living and CoHo as
well as developers like Brigade have significant plans for this space.
Investments in this space are also rising. News reports indicate that there are 42 co-
living start-ups in the country, which have cumulatively raised ~USD151mn in venture
capital funding since CY16. These include companies like NestAway, Zolo, Stay Abode,
Stanza Living, which have raised funds in the past. Recently, shared living provider
Colive has raised INR630mn in Series A funding led by the Salarpuria Sattva Group.
Warburg Pincus is going to partner Lemon Tree Hotels to create a co-living platform.
The US-based WeLive (owned by WeWork) is expected to venture in to India this year
with the Embassy Group. Likewise, CP Developers has tied up with StayAbode Ventures
to set up Asia’s largest co-living property in Bengaluru.
Thus, we believe, co-living will add another dimension to the growth prospects of the realty
sector.

Sector Update
Housing: Hyderabad Well Placed, NCR Struggling

While there are common strands running across the residential segment in various
cities, each city has its own dynamics. The defining characteristic of the MMR market
is the high ticket size, the impact of which is evident in the divergent performance of
Mumbai and Thane cities. The NCR market is still struggling to find its feet after the
realty boom went bust. The South-side story, led by Bengaluru and Hyderabad, is
better compared to Northern counterparts with Hyderabad having the lowest
inventory levels of any major city in India.
India’s housing market has undergone significant changes over the past decade, particularly
city-wise performance. Not only have supply and demand risen and then declined, the
contribution of various cities in these two parameters itself has changed materially over the
past 10 years.
Chart 58: Largest dip in launches in NCR

550,000
440,000
Launches (units)
330,000
220,000
110,000
H1CY19*
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
MMR Bengaluru NCR Pune Hyderabad Chennai Kolkata
Note: * TTM data for H1CY19 has been used
For example, a decade ago, MMR was the largest market in India in terms of launches,
followed by NCR. While MMR continues to be the largest market even today as far as the
number of units launched is concerned, Bengaluru and Pune have leapfrogged ahead of
NCR.
MMR’s contribution stood around 30% of overall launches in the country a decade ago, and
While launches have declined this share has held ground. On the other hand, NCR, whose share had skyrocketed during
across the board, NCR has been hit CY08-10 and had in fact emerged as the largest market in CY10, currently has just around
the hardest 10% share in all India launches. The reverse is true for Bengaluru, which has seen its share
almost double over the past decade to ~19%.

Real Estate
Chart 59: While NCR’s share in launches has declined, MMR has maintained its share
100.0
City wise launch split (%)

80.0
60.0
40.0
20.0
0.0
H1CY19*
CY08
CY10
CY11
CY13
CY14
CY15
CY16
CY18
CY09
CY12
CY17
Note: TTM data for H1CY19 has been used
While NCR’s share in launches has
dipped the most, Bengaluru’s has Chart 60: Decline in demand has been highest in NCR; situation mixed in other cities
improved 400,000
Housing demand (units)
320,000
240,000
160,000
While demand in NCR has been hit 80,000

the hardest, Pune and Bengaluru
have seen some increase 0
H1CY19*
CY08
CY09
CY10
CY11
CY12
CY14
CY15
CY16
CY17
CY13
CY18
As far as demand is concerned, NCR has been the biggest loser over the past decade.
Demand in Bengaluru and Pune, on the other hand, has increased (in CY18 and 12 months
ending H1CY19 compared with CY08).

Sector Update
Chart 61: MMR’s share in absorption improved at the expense of NCR

100.0
City wise demand split (%)

80.0
60.0
40.0
MMR’s share in demand has
20.0
jumped over the past decade
largely at the expense of NCR
0.0
H1CY19*
CY08
CY09
CY10
CY12
CY13
CY14
CY16
CY17
CY11
CY15
CY18
In terms of share in absorption, the biggest gainer has been MMR—share improved almost
8% over the past decade. Currently it contributes a third of the housing demand compared
to a fourth 10 years ago. This has come largely at the expense of NCR, whose share has
fallen to 11-12%.
MMR and Pune still struggling with old unsold inventory

As far as unsold inventory is concerned, the ageing pattern differs widely across various
cities. MMR and Pune have a significant amount of unsold inventory pending for more than
three years. As far as MMR is concerned, this could be a function of large ticket size
inventory which is finding it difficult to find a buyer long after project completion.
Chart 62: Chennai has largest proportion of ready units in unsold inventory
100.0
Age of unsold inventory
80.0
60.0
MMR and Pune have a large 40.0

amount of unsold completed
inventory more than three years 20.0
old
0.0
NCR MMR Bengaluru Pune Hyderabad Chennai Kolkata
RTM <1 Year 1-2 Years 2-3 Years >3 Years

Real Estate
On the other hand, Hyderabad has the lowest amount of unsold inventory that is more than
three years old.
As far as ready unsold inventory is concerned, Southern cities have a much higher share
compared to their Northern counterparts. Chennai has the highest share of ready-to-move
in inventory with ~30% unsold inventory coming in this category.
Southern cities have greater
share of ready unsold inventory MMR: CY18 brings a glimmer of hope
MMR, the biggest housing market in India, has seen muted demand for much of the past
few years. Apart from overall weak sentiments in the realty space, what has also hurt the
MMR market is the relatively higher ticket size of units. Amidst this, demand at last picked
up in CY18, fuelling expectations that the worse is behind. We take a look at the journey of
the realty industry in MMR over the past decade.
Chart 63: Launch and absorption trend in MMR

160,000 50.0
128,000 40.0
Number of units
Inventory rose sharply in MMR

over CY10-17, before correcting
(Months)
96,000 30.0
in CY18
64,000 20.0
32,000 10.0
0 0.0
H1CY19 *
CY08
CY09
CY11
CY12
CY13
CY14
CY15
CY16
CY18
CY10
CY17
New Launches Total Absorption Inventory Overhang (Months) - RHS
Note: *TTM data for H1CY19 has been used

Sector Update
Chart 64: Launch and absorption trend in Mumbai

40,000 60.0
Number of units
32,000 48.0
(Months)
24,000 36.0
16,000 24.0
8,000 12.0
0 0.0
H1CY19 *
CY08
CY09
CY10
CY12
CY14
CY16
CY17
CY18
CY11
CY13
CY15
Chart 65: Launch and absorption trend in Thane

100,000 40
80,000 32
Number of units
(Months)
Inventory levels in Thane are lower 60,000 24
than Mumbai due to relatively
40,000 16
affordable unit sizes
20,000 8
0 0
H1CY19 *
CY08
CY09
CY10
CY11
CY12
CY14
CY15
CY16
CY17
CY13
CY18

Prices (INR/sft) Prices (INR/sft) Prices (INR/sft)
0
1,400
4,200
5,600
2,800
7,000
0
10,000
2,000
4,000
6,000
8,000
0
12,000
16,000
20,000
4,000
8,000
Q1-2008
Q1-2008 Q1-2008
Real Estate
Q3-2008
Q3-2008 Q3-2008
Q1-2009
Q1-2009 Q1-2009
Q3-2009
Chart 66: Price trend in MMR
Chart 68: Price trend in Thane

Q3-2009 Q3-2009
Chart 67: Price trend in Mumbai

Q1-2010 Q1-2010
Q1-2010
Q3-2010 Q3-2010
Q3-2010
46
Price Trend
Price Trend
Price Trend
Q1-2011 Q1-2011
Q1-2011
Q3-2011 Q3-2011 Q3-2011
Q1-2012 Q1-2012 Q1-2012
Q3-2012 Q3-2012 Q3-2012
Q1-2013 Q1-2013 Q1-2013
Q3-2013 Q3-2013 Q3-2013
Q1-2014 Q1-2014 Q1-2014
Q3-2014 Q3-2014 Q3-2014
Q1-2015 Q1-2015 Q1-2015
Q3-2015 Q3-2015 Q3-2015
Q1-2016 Q1-2016 Q1-2016
Q3-2016 Q3-2016 Q3-2016
Q1-2017 Q1-2017 Q1-2017
Q3-2017 Q3-2017 Q3-2017
Inventory Overhang (Months) - RHS

Q1-2018 Q1-2018 Q1-2018
Q3-2018 Q3-2018 Q3-2018
Q1-2019 Q1-2019 Q1-2019
Edelweiss Securities Limited

0
0
0
10
20
30
40
50
27
36
18
45
15
30
45
60
75
(Months) (Months) (Months)

Sector Update
CY08-10: Post 2008, the global financial crisis led to a tight liquidity and high interest rate
environment. This impacted the real estate sector as well; prices in MMR declined ~18%
between Q3CY08 and Q2CY09.
By CY09 end, pressures due the liquidity crisis began to ease; hence, launches and
absorption increased YoY in CY09 and CY10. Also, the inventory overhang, which had
H1CY19 launches (TTM) in MMR increased to almost 18 months in CY09, declined to 15 months by CY10 end. Prices, which
were the lowest in the past had bottomed in Q2CY09, started recovering in CY10, even though a full-fledged recovery
decade; demand, on the other happened only in CY11.
hand, had bottomed in CY17,
before rising in CY18 The pricing scenario was completely different in Mumbai and Thane. While prices in Thane
at CY10 end were broadly flat compared to Q1CY08, those in Mumbai had risen ~27%.
Inventory overhang in Mumbai at CY10 end at ~20 months, though higher than the ~14
months in Thane, was still comfortable.
CY11-H1CY19: During CY11-16, absorption remained range bound between ~88,000 and
~99,000 units (MMR demand had peaked in CY10 at ~1,07,000 units). Absorption bottomed
in CY17 at ~86,000 units (~19% below CY10 peak) before rising in CY18.
As far as launches are concerned, they eclipsed demand for each year between CY10 and
CY17; consequently, there was a huge inventory pile up. Inventory months surged from
around 15 months in CY10 to around 45 months in CY17.
With inventory piling up, developers cut down on launches post CY12, which partially
arrested the rate of inventory growth. The total number of units launched in CY17 was
around 36% lower compared to CY12 figure.
Launch activity in CY17 and CY18 was further impacted by factors such as demonetisation,
RERA and GST implementation. Consequently, in CY18, launches declined sharply and were
at the lowest levels in the past 10 years. Launches have declined further in the 12 months
ending H1CY19 with their quantum being less than half compared to CY15 and more than
60% down compared to the peak in CY10.
With launches declining since CY17 end and demand rising, unsold inventory declined from
around 320,000 units in Q4CY17 to ~290,000 units by Q4CY18 and further to ~2,75,000 units
by H1CY19 end. This was the first time that absolute inventory levels declined YoY since
2008. Inventory months too fell from a high of 45 in CY17 to 34 in H1CY19.
Stalled projects: There are close to 0.1mn units in MMR in stalled projects; Mumbai and
Thane contribute ~36-37% of these units. Of these 0.1mn units, more than half are unsold.

Real Estate
300,000 40
240,000 32
Inventory (months)
(Units)
180,000 24
120,000 16
60,000 8
0 0
Unsold inventory Inventory overhang (RHS)
Adjusting for these units, the amount of unsold inventory in MMR falls to ~2,20,000.
Consequently, the inventory overhang reduces to ~27 months.
Price movement: Despite increase in unsold inventory levels since CY10, prices continued to
Adjusted for stalled projects, rise. During this period, average price rose from ~INR5,000/sft to INR8,500/sft plus in 12
inventory overhang in MMR is ~27 months ending H1CY19. However, the rate of increase has slowed down significantly CY13
months onwards. While prices clocked 10% CAGR over CY10-13, property prices have returned just
5% CAGR over CY13-18 and a measly 2% CAGR return over CY15-18. This has resulted in lack
of investor interest.
Mumbai versus Thane prices: The demand-supply scenario in Mumbai and Thane has been
divergent. While launches in Mumbai peaked only in CY15, Thane had seen the peak of
supply in CY12 itself as a result of which inventory build up has been lower here.
Prices in MMR have continued to
remain sticky despite weak
Similarly, the gap between supply and demand has been much higher in Mumbai compared
demand
to Thane. This has meant that the inventory situation in Thane is better compared to
Mumbai.
The result is seen in the divergent paths of property prices in the two cities—after 12%
CAGR in prices in Thane over CY10-13, CAGR over CY13-18 has been a respectable 4.4%. On
the other hand, after 10% CAGR in prices in Mumbai over CY10-13, it was mere 3% over
CY13-18.
Demand slowdown evident in rising unsold units: As far as MMR is concerned, the
proportion of units remaining unsold even at the time of project completion has grown 5x
between CY11 and CY18. A major reason behind this trend is the high ticket sized units
which have found few takers.

Sector Update
Chart 70: Rising share of ready units in unsold inventory Chart 71: Share of completed units in sales on an uptrend
12.5 30.0
10.0 24.0
7.5 18.0
(%)
(%)
5.0 12.0
6.0
2.5
0.0
0.0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18
MMR MMR
Similarly, the proportion of ready units sold in total sales has risen by almost 2.5x between
High ticket size has led to ready-to- CY11 and CY18. Again, this is likely due to lack of confidence amongst buyers as far as
move in units still remaining project delivery timelines are concerned.
unsold in MMR
Preference for smaller units visible: Over the past decade, there is a clear trend of
preference for smaller ticket size houses in MMR.
Chart 72: Rising demand for 1BHK units in MMR

100.0
80.0
60.0
40.0
Demand for 1BHK units is rising in
MMR considering the higher-than- 20.0
average pricing in the region
0.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18

The share of 1BHK units getting absorbed has more than doubled over the past decade; they
now contribute more than half of the demand in MMR. This has been accompanied by a
decline in demand for 2 and 3BHK units.

Real Estate
Chart 73: Rising share of <1,000sft units in demand in MMR

100.0
80.0

60.0
40.0
20.0
Buyers are increasingly opting for
smaller sized units in the region 0.0
<500 sft 501-1000 sft 1001-1500 sft 1501-2000 sft 2000+ sft
Similarly, while the share of <500sft units has more than doubled during CY08-18, that of
500-1,000sft units has improved by more than 30%. This has been accompanied by a decline
in share of 1,000-1,500sft units.
Outlook: While there was an improvement since CY17, inventory continues to remain high
at around 34 months, which remains a concern. Further improvement in demand, which fell
in CY16 and CY17 before picking in CY18, is key and critical for price recovery. Also, the
launch pace will remain a key monitorable as more than the increase in absorption it was
the steep fall in launches in CY18 which had led to better inventory situation at CY18 end.
An increase in launch activity with sluggish demand can keep inventory levels elevated and
pressurise prices.

Sector Update
Bengaluru: Amongst better placed markets

Bengaluru, while following the trend in the country as a whole, is still one of the better
performing markets. The reason is the relatively lower gap between demand and supply in
this region. Both these parameters for the city bottomed in CY17 before improving in CY18.
We analyse the realty space performance in Bengaluru over the past decade.
Chart 74: Launch and absorption trend in Bengaluru

100,000 40
Number of units
80,000 32
(Months)
60,000 24
40,000 16
Launches and demand in 20,000 8

Bengaluru peaked in CY13 and
bottomed in CY17 0 0
H1CY19 *
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Chart 75: Price trend in Bengaluru

6,000 40
4,800 32
Prices (INR/sft)
(Months)
3,600 24
2,400 16
1,200 8
0 0
Q1-2008
Q1-2009
Q3-2010
Q3-2011
Q3-2012
Q3-2013
Q3-2014
Q3-2015
Q3-2016
Q3-2017
Q3-2018
Q3-2008
Q3-2009
Q1-2010
Q1-2011
Q1-2012
Q1-2013
Q1-2014
Q1-2015
Q1-2016
Q1-2017
Q1-2018
Q1-2019

CY08-10: Absorption as well as launches declined YoY in CY09 due to tightening of liquidity
in the market. This also led to some pressure on prices, which declined more than 10% YoY
in CY09.
However, launches as well as absorption recovered in CY10. This was also accompanied by
marginal recovery in prices, which gathered pace post CY10. During this period, inventory
months increased from ~15 in CY08 to ~17 in CY09, before falling again to ~15 in CY10.

Real Estate
CY11-H1CY19: This period can be broken in to two separate timeframes—CY10-13 and

CY14-H1CY19.
During CY10-13, launches and demand continued to rise steadily, achieving their peak in
CY13. With demand trailing supply, inventory months rose, but they were at a still
Post CY13, demand and supply
comfortable ~20 months by CY13 end.
declined sharply in Bengaluru,
before recovering in CY18
Post CY13, the sector faced some tough times with supply and absorption falling for four
straight years and bottoming in CY17. While launches in CY17 were more than 75% below
the peak in CY13, demand during the year was lower by around 42% compared to CY13.
Falling demand meant that inventory months crept up steadily to ~36 months by CY17 end.
The trend finally reversed in CY18 with launches as well as demand improving YoY. While
launches rose a whopping ~91%, absorption inched up 21%. Consequently, inventory
months declined to ~29 in CY18. After improving in CY18, launches declined in the 12
months ending H1CY19; however, demand continued to improve. Consequently, unsold
inventory declined to ~1,02,000 units at H1CY19 end, almost 20% lower compared to the
peak in CY15. Inventory months fell to 27 at H1CY19 end.
Stalled projects: There are close to 18,000 units in Bengaluru which are unsold and belong
to stalled projects.
125,000 30
100,000 24
Inventory (months)
(Units)
75,000 18
50,000 12
25,000 6
0 0
Adjusting for these units, the amount of unsold inventory in Bengaluru falls to ~84,000 units.
Consequently, the inventory overhang reduces to ~22 months, which is not high.
Price movement: Despite unsold inventory levels rising steadily since CY10, prices continued
their upwards trend. During CY10-13, prices posted ~11% CAGR. However, the pace of price
appreciation declined post CY13. While prices clocked 3% CAGR during CY13-18, they
improved mere 2% CAGR over CY15-18.
Preference for ready units has increased: Bengaluru has followed a similar trend as far as
proportion of ready units in sales and unsold inventory is concerned.

Sector Update
Chart 77: Rising share of ready units in unsold inventory Chart 78: Increasing share of completed units in sales
15.0 35.0
12.0 28.0
9.0 21.0
(%)
(%)
6.0 14.0
3.0 7.0
0.0 0.0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18
Bengaluru Bengaluru
The proportion of ready units in unsold inventory has grown 5x between CY11 and CY18.
Similarly, the proportion of ready units sold in total sales jumped almost 4x between CY11
Price appreciation has moderated and CY18.
in Bengaluru; share of ready units
in unsold inventory has also Preference for smaller units: Over the past decade, there is a clear trend of preferring
increased smaller ticket size houses in Bengaluru.
Chart 79: Demand for 1BHK units in Bengaluru gaining ground

100.00
80.00
60.00
While demand for 1BHK units has
jumped, that for 3BHK units has 40.00
declined in Bengaluru
20.00
0.00
CY08
CY09
CY10
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY11

The share of 1BHK units getting absorbed has risen by 5x over CY08-18. This has been
accompanied by a decline in demand for 3BHK units.

Real Estate
Chart 80: Rising share of 500-1,000sft units in demand in Bengaluru

100.0
80.0

60.0
40.0
Demand for 500-1,000sft units in 20.0

Bengaluru has improved over the
past decade 0.0
CY08
CY09
CY10
CY12
CY13
CY15
CY16
CY17
CY18
CY11
CY14
Similarly, the share of 500-1,000sft units in demand has tripled during CY08-18. They now
contribute almost one-fourth to the overall demand in Bengaluru. This has been
accompanied by a decline in share of units greater than 1,500sft.
Outlook: With overall demand-supply scenario improving since CY17, inventory months
have declined to ~27. Sustenance of the demand pick up witnessed over the past year is
crucial for inventory months to decline further. Provided there is no sharp increase in
launches, we expect the Bengaluru market to recover within a couple of years.

Sector Update
NCR: Improvement lately, but a long way to go

NCR has been amongst the worst performing realty markets in India in recent years. A crash
in supply & demand, high inventory overhang and unfinished/stalled projects have been the
hallmark of the NCR realty market over the past few years. While there are some green
shoots visible lately, it will take a long time before the market returns to normalcy. We take
a look at the journey of the realty industry in NCR over the past decade.
Chart 81: Launch and absorption trend in NCR

200,000 75
160,000 60
Number of units
(Months)
120,000 45
80,000 30
40,000 15
NCR’s inventory had reached a
whopping ~69 months in CY17
0 0
before correcting to ~56 months at
H1CY19 *
CY08
CY10
CY11
CY12
CY14
CY15
CY16
CY17
CY09
CY13
CY18
H1CY19 end; demand has been
outstripping supply since CY14

Chart 82: Launch and absorption trend in Gurugram

30,000 75
Number of units
24,000 60
After falling for six straight years
(Months)
till CY17, absorption finally picked 18,000 45
up in Gurugram in CY18. Despite
this, inventory levels remain high 12,000 30
at ~53 months at H1CY19 end
6,000 15
0 0
H1CY19 *
CY08
CY09
CY11
CY12
CY13
CY14
CY15
CY18
CY10
CY16
CY17


Real Estate
Chart 83: Launch and absorption trend in Noida

65,000 75
With ~60 months of inventory at 52,000 60

H1CY19 end, Noida is still in
Number of units
doldrums. Demand fell for eight 39,000 45
(Months)
consecutive years starting C11;
26,000 30
CY18 absorption was mere ~9% of
the peak in CY10 13,000 15
0 0
H1CY19 *
CY08
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY09
Chart 84: Price trend in NCR
6,000 75
4,800 60
Prices (INR/sft)
(Months)
3,600 45
2,400 30
1,200 15
0 0
Q1-2008
Q3-2010
Q1-2011
Q3-2011
Q1-2012
Q3-2014
Q1-2015
Q3-2015
Q1-2016
Q3-2018
Q1-2019
Q3-2008
Q1-2009
Q3-2009
Q1-2010
Q3-2012
Q1-2013
Q3-2013
Q1-2014
Q3-2016
Q1-2017
Q3-2017
Q1-2018

Sector Update
Chart 85: Price trend in Gurugram
8,000 80
6,400 64
Prices (INR/sft)
(Months)
4,800 48
3,200 32
1,600 16
0 0
Q3-2008
Q1-2010
Q1-2011
Q3-2011
Q3-2012
Q1-2014
Q1-2015
Q3-2016
Q3-2017
Q1-2018
Q1-2019
Q1-2008
Q1-2009
Q3-2009
Q3-2010
Q1-2012
Q1-2013
Q3-2013
Q3-2014
Q3-2015
Q1-2016
Q1-2017
Q3-2018
Chart 86: Price trend in Noida

7,500 100
Prices (INR/sft)
6,000 80
(Months)
4,500 60
3,000 40
1,500 20
0 0
Q1-2008
Q3-2008
Q1-2010
Q3-2010
Q1-2012
Q3-2012
Q1-2014
Q3-2014
Q1-2016
Q3-2016
Q1-2018
Q3-2018
Q1-2009
Q3-2009
Q1-2011
Q3-2011
Q1-2013
Q3-2013
Q1-2015
Q3-2015
Q1-2017
Q3-2017
Q1-2019
Price Trend Inventory Overhang (Months)
CY08-10: The global financial crisis did not impact the NCR market where launches and
demand continued to skyrocket. To a large extent, this was driven by speculative activity in
the realty market. While supply catapulted ~5x between CY08 and CY10, demand surged
~3.5x in the same period. Aided by high demand, inventory levels were at a lowly ~11
Prices in NCR posted ~13% CAGR
months at CY10 end. Prices had remained in a narrow band during this period.
between CY10 and CY13 despite
rising inventory levels, signifying
This was the period when absorption was skyrocketing in Gurugram and Noida markets.
speculative activity in the market
Consequently, inventory levels were at just ~12 months in Gurugram and an even lower ~6
months in Noida at CY10 end.
CY11-H1CY19: The NCR market went in to a tailspin post CY10 with launches and absorption
falling off the cliff. Supply declined for seven straight years and touched a low of ~15,300
units in CY17, down 90% plus from the CY10 peak.

Real Estate
Demand also fell for four consecutive years till CY14, recovered a bit in CY15 and then
continued to fall in CY16 and CY17. Absorption in CY17 at ~29,000 units was ~80% lower
Supply and demand rose ~40% and compared to the peak demand in CY10.
~26%, respectively, YoY in CY18 in
NCR market With launches surpassing demand, absolute inventory levels continued to rise till CY14. Even
though absorption outpaced supply during CY14-17, muted demand meant that inventory
months continued to worsen, touching ~69 in CY17.
CY18 finally improved with supply and demand rising ~42% and ~18% YoY, respectively; with
demand improving, inventory level fell to ~54 months by CY18 end. However, the market
again faced a setback in the 12 months ending H1CY19 when demand and supply declined
YoY; with weak demand, inventory months again rose to 56 at H1CY19 end.
Stalled projects: Close to 0.2mn units in NCR belong to stalled projects; of these, more than
70% belong to Noida and Greater Noida markets. As far as unsold units in the NCR market
are concerned, there are close to 46,000 units with almost half of them belonging to the
Greater Noida market.
160,000 60
128,000 48
Inventory (months)
Adjusted for stalled projects, NCR’s
(Units)
inventory levels decline from 56 96,000 36

months to ~38 months in H1CY19
64,000 24
32,000 12
0 0
Unsold inventory Inventory overhang

Adjusting for these units, the amount of unsold inventory in NCR falls to ~0.1mn units.
Consequently, the inventory overhang reduces to ~38 months, which though high is still
lower than the earlier thought 56 months.
Price movement: Prices in NCR followed the trend in other markets. Despite constantly
rising unsold inventory levels, prices returned a CAGR of ~13% between CY10 and CY13 due
to feverish speculative activity. Since then, price appreciation has been muted with
realisation posting 2% CAGR between CY13 and CY18 and 3% CAGR between CY15 and
CY18.
As far as the Gurugram market is concerned, demand peaked in CY11 and then declined
consecutively for six years, before finally rising in CY18 and in 12 months ending H1CY19.
Weak demand (H1CY19 TTM absorption being more than 70% lower than peak) has meant

Sector Update
that inventory levels remain high at ~53 months. The market’s weakness can be gauged
from the fact that there has been virtually no price appreciation during CY13-18.
The situation is even worse in the Noida market. Demand consistently fell for seven years
Buyers’ confidence in the realty
since the peak in CY10, before rising in CY18 and H1CY19 (TTM); CY18 absorption was more
space has been shaken in NCR as a
than 90% lower compared to the peak. Inventory months peaked at 74 in CY17 and remain
result of developer defaults.
high at 60 in H1CY19. Prices at CY18 end were actually lower than they were five years ago,
Proportion of units remaining
highlighting the acute stress in the market.
unsold at the time of project
completion jumped 17x between
Worst hit market in terms of stalled projects: The NCR market has been worst hit as far as
CY11 and CY18
unfinished projects are concerned with many developers facing liquidity issues. As discussed
earlier, close to 0.2mn units belong to projects which are stalled. This has impacted buyers’
confidence in delivery of projects as well as overall buyers’ sentiments.
15.0 30.0
12.0 24.0
9.0 18.0
(%)
(%)
12.0
6.0
6.0
3.0
0.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
0.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
NCR NCR
Therefore, the proportion of units remaining unsold at the time of project completion has
jumped 17x between CY11 and CY18. Similarly, the proportion of ready units sold in total
sales has catapulted ~27x between CY11 and CY18.
Preference for smaller units: Over the past decade, there is a clear preference for smaller
ticket size houses in NCR.

Real Estate
Chart 90: NCR—Demand for 1BHK units up, down for 4BHK units
100.0

80.0
60.0
40.0
20.0
0.0
CY08
CY09
CY10
CY11
CY12
CY14
CY16
CY17
CY18
CY13
CY15
The share of 1BHK units getting absorbed has risen 3x over CY08-18. This has been
accompanied by a decline in demand for 4BHK units.
risen, that for 4BHK units has
declined in NCR
Chart 91: NCR—Demand for small size units up, declined for 1,500sft plus units
100.0
80.0
60.0
40.0
Demand for <1,500sft units in NCR

20.0
has improved over the past decade
0.0
<500 sft 501-1000 st 1001-1500 sft 1501-2000 sft 2000+ sft

NCR has seen rising demand for units less than 1,500sft in all categories i.e. <500 sft, 500-
1,000sft and 1,000-1,500sft. On the other hand, absorption of units greater than 1,500sft
has declined during CY08-18.
Outlook: While there was an improvement since CY17, absorption remains low and
inventory levels at ~56 months are the highest amongst major cities, and therefore, remain
a major concern. Pick up in demand, which in H1CY19 (TTM) was only ~25% compared to
peak in CY10, is key for improvement in inventory overhang and price recovery. We believe,
this is going to take some time and hence the NCR market is likely to remain sluggish in the
medium term.

Sector Update
Pune: Improving fundamentals

The Pune market has performed similar to the Bengaluru market. Hence, it has been
comparatively less volatile on the demand front. Like Bengaluru, demand in Pune bottomed
in CY17, before improving in CY18. We analyse the city’s performance over the past decade.
Chart 92: Launch and absorption trend in Pune

80,000 40
Number of units
Launches and demand peaked in 64,000 32
CY15 in Pune market
(Months)
48,000 24
32,000 16
16,000 8
0 0
H1CY19 *
CY08
CY09
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY10
CY18
Chart 93: Price trend in Pune

6,000 50
4,800 40
Prices (INR/sft)
Months
3,600 30
2,400 20
1,200 10
0 0
Q1-2008
Q1-2009
Q3-2009
Q3-2010
Q1-2011
Q1-2012
Q3-2012
Q3-2013
Q1-2014
Q3-2015
Q1-2017
Q3-2018
Q3-2008
Q1-2010
Q3-2011
Q1-2013
Q3-2014
Q1-2015
Q1-2016
Q3-2016
Q3-2017
Q1-2018
Q1-2019

CY08-10: CY09 saw a marginal YoY decline in absorption as well as launches. Prices too
remained broadly stable during this period.
Launches as well as absorption recovered in CY10. Prices too started upwards march, rising
~11% YoY in CY10. As a result of improving demand, inventory levels declined from ~17
months in CY08 to ~15 months in CY10.

Real Estate
CY11-H1CY19: This period can be broken in to two separate timeframes—CY10-15 and

CY15-H1CY19.
During CY10-15, launches and demand rose, though at different trajectories. Launches grew
steadily and reached a peak in CY15. Demand grew for two years till CY12 and then declined
in CY13; it again rose for the next two years, peaking in CY15. With launches exceeding
demand consistently, inventory levels rose steadily and touched ~27 months by CY15 end.
Launches in Pune market declined
consistently for three years till Since CY15, launches declined continuously, hitting a low of ~40,500 units in CY18 (down
CY18, before rebounding in ~45% from peak). Launches bounced back in the 12 months ending H1CY19 to 43,000 units.
H1CY19 (TTM). Demand, on the Absorption, on the other hand, fell till CY17 before improving in CY18 and H1CY19 (TTM).
other hand, was the highest in the H1CY19 TTM demand is the highest over the past decade. Declining demand led to
decade in H1CY19 (TTM) inventory levels creeping up to ~35 months in CY17, before a reversal of the absorption
trend led to inventory months improving to ~21 months in H1CY19.
Stalled projects: Pune market has relatively less issues as far as stalled projects are
concerned. There are close to ~12,400 units which are unsold and belong to stalled projects.
110,000 24
Adjusted for stalled projects, 104,000 22
Inventory (months)
inventory in Pune declined to ~18
(Units)
months at H1CY19 end 98,000 20
92,000 18
86,000 16
80,000 14

Adjusting for these units, the amount of unsold inventory in Pune falls to ~96,000 units.
Consequently, the inventory overhang reduces to ~18 months.
Price movement: Despite unsold inventory levels rising steadily since CY10, prices continued
to rise, posting 8% CAGR over CY10-13. Since then, the pace of price appreciation has been
muted; with the three and five years’ CAGR (ending CY18) at mere ~2% each.

Sector Update
16.0 35.0
13.0 28.0
10.0 21.0
(%)
(%)
7.0 14.0
4.0 7.0
1.0 0.0
CY12
CY14
CY16
CY11
CY13
CY15
CY17
CY18
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Pune Pune
Demand slowdown evident in rising unsold units: As far as the proportion of ready units in
sales and unsold inventory are concerned, Pune has followed the trend in the rest of the
country. The proportion of ready units in unsold inventory jumped 4x between CY11 and
CY18. Similarly, the proportion of ready units sold in total sales nearly tripled between CY11
and CY18.
Preference for smaller units: Over the past decade, there is a clear trend of preference for
smaller ticket size houses in Pune.
Chart 97: Rising demand for 1BHK units in Pune

100.0
80.0
jumped, that for 3BHK units has

60.0
declined in Pune
40.0
20.0
0.0
CY08
CY10
CY11
CY13
CY14
CY15
CY16
CY17
CY18
CY09
CY12

The share of 1BHK units getting absorbed has more than doubled over CY08-18. This has
come at the expense of falling share of 3BHK units.

Real Estate
Chart 98: Surge in demand for <500sft and 500-1,000sft units in Pune
100.0
80.0

60.0
40.0
Demand for smaller sized unit has 20.0

risen significantly in Pune
0.0
CY08
CY10
CY11
CY13
CY14
CY16
CY17
CY09
CY12
CY15
CY18
There has been a quantum jump in demand for smaller unit size in Pune. While absorption
of <500sft units has catapulted ~12x (on a low base) between CY08 and CY18, that of 500-
1,000 sft units has improved ~70% during the same period. This has come at the expense of
falling share of 1,000-1,500sft units, whose contribution has fallen by two thirds.
Outlook: Post the demand improvement since CY17, inventory months have dipped to ~21.
If launches continue to remain contained and demand improves further, one could expect
the Pune market to perform better going ahead.

Sector Update
Other markets: Mixed trend

As far as other markets like Hyderabad, Chennai and Kolkata are concerned, the realty
sector’s performance has been mixed. The current situation in these cities also differs
markedly from each other.
Hyderabad market has the best inventory situation amongst major cities in the country.
Kolkata, on the other hand, still has high inventory levels since demand continues to decline.
The Chennai market is somewhere in between with demand and supply broadly moving in
tandem over the past few years. We analyse the realty space performance in these cities
over the past decade in brief below.
Chart 99: Launch and absorption trend in Hyderabad

30,000 30
24,000 24
With fall in supply being higher
Number of units
than in demand since CY17 in

18,000 18
(Months)
Hyderabad, inventory levels have
declined 12,000 12
6,000 6
0 0
H1CY19 *
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Chart 100: Launch and absorption trend in Chennai

50,000 50
40,000 40
Number of units
(Months)
30,000 30
Pick-up in demand has led to
inventory improving significantly 20,000 20
since CY17 in Chennai
10,000 10
0 0
H1CY19 *
CY08
CY09
CY10
CY11
CY12
CY13
CY15
CY17
CY14
CY16
CY18


Real Estate
Chart 101: Launch and absorption trend in Kolkata

25,000 50
Number of units
20,000 40
Inventory in Kolkata has
continued to remain high as a 15,000 30
(Months)
result of tepid demand
10,000 20
5,000 10
0 0
H1CY19 *
CY08
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY09
Chart 102: Price trend in Hyderabad
6,000 30
5,000 25
Prices (INR/sft)
4,000 20
(Months)
3,000 15
2,000 10
1,000 5
0 0
Q1-2008
Q1-2009
Q1-2010
Q1-2011
Q3-2012
Q3-2013
Q3-2014
Q3-2015
Q1-2016
Q1-2017
Q1-2018
Q1-2019
Q3-2008
Q3-2009
Q3-2010
Q3-2011
Q1-2012
Q1-2013
Q1-2014
Q1-2015
Q3-2016
Q3-2017
Q3-2018
Price Trend Inventory Overhang (Months)
Chart 103: Price trend in Chennai

6,000 50
4,800 40
Price (INR/sft)
(Months)
3,600 30
2,400 20
1,200 10
0 0
Q1-2008
Q3-2008
Q1-2009
Q1-2015
Q3-2015
Q1-2016
Q3-2016
Q1-2017
Q3-2017
Q1-2018
Q3-2018
Q1-2019
Q3-2009
Q1-2010
Q3-2010
Q1-2011
Q3-2011
Q1-2012
Q3-2012
Q1-2013
Q3-2013
Q1-2014
Q3-2014


Sector Update
Chart 104: Price trend in Kolkata

4,500 60
3,600 48
Prices (INR/sft)
(Months)
2,700 36
1,800 24
900 12
0 0
Q1-2008
Q3-2008
Q3-2009
Q3-2010
Q1-2012
Q1-2013
Q1-2014
Q3-2014
Q3-2015
Q3-2016
Q3-2017
Q1-2018
Q1-2019
Q1-2009
Q1-2010
Q1-2011
Q3-2011
Q3-2012
Q3-2013
Q1-2015
Q1-2016
Q1-2017
Q3-2018
CY08-10: Launches in all the three cities declined YoY in CY09. Absorption also fell YoY in
Hyderabad and Pune, but rose in Chennai. However, recovery was not far as supply as well
as demand improved in CY10 in all the three cities.
Demand has eclipsed supply in

As far as prices are concerned, the trend was similar across the cities. Prices declined in
Hyderabad and Chennai since
CY09 vis-à-vis CY08, before rising YoY in CY10. However, the level of price movement was
CY16. Kolkata, on the other hand,
different across cities. While in Chennai prices at CY10 end were broadly flat compared to
witnessed this phenomenon after
the start of CY08, they were lower in Hyderabad compared to the beginning of CY08 and
a gap of nine years only in CY18
~15% higher in Kolkata over the same period.
CY11-H1CY19: While the past few years have broadly played out similarly for all the three
cities, the period over CY10-15 saw different trends for individual cities.
As far as Hyderabad is concerned, while launches peaked in CY12, demand peaked in CY17.
Since then, both have fallen. Due to the relatively less gap between supply and demand,
inventory levels in the city have remained at between 19 and 26 months for most of the
period, before falling further to 18 months at H1CY19 end.
In Chennai, demand and supply peaked in CY12 and then declined, bottoming in CY17. CY18
saw a revival of sorts in both these parameters; launches again declined in H1CY19 (TTM),
but absorption continued to gather pace. With demand weakening, inventory levels rose
steadily till CY17, touching 43 months, before improving to 31 months in CY18 and further
to 26 months in H1CY19.
In Kolkata also, launches and demand peaked in CY15. Supply as well as demand has
declined steadily since then. With demand being weak, inventory levels have remained high
at ~46 months at H1CY19 end.
Stalled projects: The problem with stalled projects is less of an issue in Hyderabad
compared to Chennai and Kolkata.

Real Estate
Chart 105: Stalled projects less of an issue in Hyderabad Chart 106: Stalled projects not a big issue in Chennai
35,000 20 45,000 30
Inventory (months)
33,500 19 36,000 24
Inventory (months)
(Units)
(Units)
32,000 18 27,000 18
30,500 17 18,000 12
29,000 16 9,000 6
27,500 15 0 0
Overall Adjusted for stalled Overall Adjusted for stalled
projects projects
Unsold inventory Inventory overhang (RHS) Unsold inventory Inventory overhang (RHS)
Source: Cushman & Wakefield, Edelweiss research
Chart 107: Unsold inventory in Kolkata after adjusting for stalled projects
60,000 50
Inventory (months)
48,000 40
(Units)
36,000 30
24,000 20
12,000 10
0 0
The Hyderabad market has less than 4,000 units which are unsold and belong to stalled
projects. Adjusting for these, the inventory overhang reduces to just 16 months, which is
healthy.
Prices have continued to
strengthen in Hyderabad in a clear On the other extreme is Kolkata where close to 10,000 units are unsold and belong to
departure from the trend in other stalled projects. Even after adjusting for these, inventory level remains high at 37 months.
cities
The Chennai market is somewhere in between. Here also, ~8,600 units are unsold and
belong to stalled projects. After adjusting for these, inventory level falls to ~21 months.
Price movement: As far as prices are concerned, Hyderabad stands as an outlier compared
to other cities, having clocked 7% CAGR each over the past three and five years. For
Chennai, the trend is similar as in other cities with prices clocking CAGR of 1% and 3% over

Sector Update
the past three and five years, respectively. For Kolkata also, price appreciation has been
muted, posting 1% CAGR each over the past three and five years.
The share of ready units in unsold inventory as well as in sales has risen steadily for Chennai
and Kolkata. Only in Hyderabad it has been falling since CY16. This reflects the city’s
relatively better demand fundamentals, also reflected in low inventory months.
Demand slowdown evident in rising unsold units: The share of unsold inventory in
Hyderabad market rose till CY16, but has declined since then. The share of completed units
in sales, on the other hand, has continued to rise in the city.
Chart 108: Share of ready units in unsold inventory declining Chart 109: Share of completed units in sales up
10.0 30.0
8.0 24.0
6.0 18.0
(%)
(%)
4.0 12.0
2.0 6.0
0.0 0.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Hyderabad Hyderabad
25.0 35.0
20.0 28.0
15.0 21.0
(%)
(%)
10.0 14.0
5.0 7.0
0.0
0.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Chennai Chennai

Real Estate
12.0 25.0
9.6 20.0
7.2 15.0
(%)
(%)
4.8 10.0
2.4 5.0
0.0 0.0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Kolkata Kolkata
As far as Chennai is concerned, the share of unsold inventory has been on a steady uptrend
even as the share of completed units in sales has declined slightly over the past couple of
years. Kolkata, on the other hand, has witnessed the same trend as most of the other cities
for unsold inventory and ready unit sales.
Preference for smaller units: Hyderabad remains an outlier as far as demand for smaller
units is concerned. While there has been some increase in demand for 1BHK units, the
quantum of increase is much smaller compared to other cities. Similarly, there has been no
noticeable change as far as demand for 3 or 4BHK units, is concerned.
Chart 114: Demand for 1BHK units has improved marginally in Hyderabad
There has been no noticeable
change as far as demand for 3 or 100.0
4BHK units in Hyderabad, is
concerned. The share of 2,000sft 80.0

plus units in demand has in fact
risen over the past decade
60.0
40.0
20.0
0.0


Sector Update
Chart 115: Unlike other cities, demand for 2,000sft plus units up in Hyderabad
100.0
80.0

60.0
40.0
20.0
0.0
The same trend of being different from other cities plays out as far as size of units is
concerned. In Hyderabad, the share of 2,000sft plus units in demand has risen over the past
decade even as the share of 500-1,000sft units has declined.
Chart 116: Demand for 1BHK units has improved significantly in Chennai
100.0
80.0
60.0
Share of 1BHK units in overall
demand has jumped 4x in the
40.0
previous decade in Chennai. Also,
share of less than 500sft units has
20.0
more than tripled and that of 500-
1,000sft has more than doubled
over the previous decade 0.0


Real Estate
Chart 117: Demand for smaller unit size flats has gone up in Chennai
100.0
80.0

60.0
40.0
20.0
0.0
As far as Chennai is concerned, the share of 1BHK flats in overall demand has jumped ~4x
over the past decade. This has happened at the expense of 3BHK units whose share in
absorption has fallen by almost one-fourth during this period.
Similarly, the share of units of less than 500sft has more than tripled and that of 500-
1,000sft has more than doubled over the past decade. This has come at the expense of
1,500-2,000sft units whose share has nearly halved during this period.
Chart 118: Demand for 1BHK units has improved slightly in Kolkata
100.0
80.0
Demand for 1BHK units in Kolkata 60.0

has risen only marginally. Also,
while the share of 500-1,000sft 40.0
units in demand has jumped more
than 50%, that of units greater
20.0
than 1,500sft has fallen by more
than 50%
0.0


Sector Update
Chart 119: Demand for small size flats has jumped in Kolkata
100%

80%
60%
40%
20%
0%
Like Hyderabad, Kolkata has also witnessed only marginal increase in demand for 1BHK
units. This has happened at the expense of 3BHK units. As far as size of units is concerned,
the share of 500-1,000sft units in demand has increased by more than 50%, while that of
units greater than 1,500sft in size has fallen by more than 50%.
Outlook: While the Hyderabad market is performing comparatively better, Kolkata market is
still facing significant headwinds. Chennai market is somewhere in the middle as far as the
demand-supply equation is concerned. A further improvement in demand along with
contained launches is required for the realty sector’s performance to improve going ahead.

Real Estate
Commercial: In Fine Fettle
The commercial space in India, unlike its residential counterpart, is firing on all cylinders
currently. It went through a downturn phase during CY09-13 post the global financial
crisis, but has since bounced back. The period post CY13 has seen fundamentals
improving with the demand-supply gap reducing, leading to falling vacancy rates (down
~620bps since CY13) and rising rentals. Rising popularity of co-working space has also
come as a shot in the arm for the commercial realty segment. With the sector
consolidating around developers backed by financial institutions, we expect this space
to continue to perform well over the next couple of years.
Commercial segment firing on all cylinders

India’s commercial realty cycle, to some extent, has gone the exact opposite of the
residential cycle. While the residential space was going strong prior to CY13, the commercial
Commercial segment’s trajectory segment was facing headwinds post the Lehman crisis due to rising demand-supply gap and
has been opposite of residential increasing vacancy levels. The situation reversed post CY13 for both the segments—while
segment the residential arena started seeing falling absorption and build-up of inventory, the
commercial segment has been on an upswing with demand matching supply and vacancy
levels declining. Consequently, rentals have been on an upswing.
We take a look at the performance of the commercial segment in India since CY02.
Chart 120: Vacancy levels rose post CY07 with large supply in market
75 25.0
60 20.0
Vacancy levels (%)

45 15.0
(msf)
30 10.0
15 5.0
0 0.0
CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11
Absorption (msf) Supply (msf) Vacancy levels (RHS)

Note: Includes all grades and not just ‘Grade A’ buildings
Unless specified otherwise, all data for commercial realty is for ‘Grade A’ buildings only
Vacancies rose sharply post the Prior to CY13: The commercial realty segment went through two distinct phases prior to
global financial crisis due to CY13. The CY02-07 period was marked by rising absorption driven by high economic growth
dwindling demand and soaring and single-digit vacancies. Vacancies at an all India level, in fact, fell below the 5% mark in
supply CY05, signifying the strong demand for commercial space.

Sector Update
However, the global financial crisis punctured the rally with vacancies rising sharply post
CY07. In just three years between CY07 and CY10, vacancy levels more than tripled to ~20%.
This was a result of sharp decline in demand in CY09 along with rising supply over CY09 and
CY10.
Chart 121: CBD rentals in Mumbai and Delhi declined sharply between the start of CY08 and CY10 end
600
500
Rentals (INR/sft)
400
300
200
100
Q1CY08 Q2CY08 Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10
Mumbai Delhi
Chart: 122: CBD rentals in Chennai, Hyderabad and Pune plunged 25-35% post CY07
100
80
Rentals (INR/sft)
60
40
20
0
Q1CY08 Q2CY08 Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10
Chennai Hyderabad Pune

As a result of rising vacancies, rentals took a hard knock. Mumbai saw the biggest hit with
Rentals took a hit post CY07 due to CBD rentals plummeting ~40% between CY07 and CY10. Other cities like Delhi, Hyderabad,
rising vacancy levels; they plunged Pune and Chennai too saw rentals plummeting 25-35% during this period.
~25-40% over next three years in
Chennai, Hyderabad and Pune The commercial realty cycle continued to be weak till CY13 with elevated levels of vacancies
as a result of supply outpacing demand. It was only post CY13 that the sector bounced back.

Real Estate
Post CY13: Since CY13, fortunes of the commercial realty segment have revived driven
largely by demand catching up with supply. As a result, vacancies have steadily declined
from the peak of ~20% in CY13 and have now dipped below 14%.
Chart 123: Vacancies have been on a downward trend after peaking in CY13
45 25.0
36 20.0
Vacancy levels (%)

27 15.0
(msf)
18 10.0
9 5.0
0 0.0
CY12 CY13 CY14 CY15 CY16 CY17 CY18 H1CY19 CY19E CY20E
Source: Cushman & Wakefield, JLL, Edelweiss research
Going ahead also, not much supply-demand gap is anticipated and hence vacancies are
estimated to remain at ~14%.
One of the reasons for the uptrend in the segment’s fortunes is that supply of new office
space has been at reasonable levels. Supply in most cities peaked in CY15/16 and has fallen
lower since then.
Chart 124: CY18 supply lower than peak supply for all cities
35 CY15
28
Supply (msf)
21
14 CY16
CY15
CY12 CY15
7 CY17
CY13 CY15
0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata India
Peak supply CY18 supply

Note: Year denoting the peak supply has been shown

Sector Update
This is a result of: (a) the segment’s higher capital intensity; and (b) consolidation amongst
developers as a result of entry of financial institutions (discussed in detail later). This has
kept a lid on supply, leading to falling vacancies.
Chart 125: CY18 absorption in India close to peak demand level

35
CY15
28
Deamnd (msf)
21
14 CY16
CY12 CY14 CY18 CY15

7
CY13
CY12
0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata India
Peak demand CY18 demand

Note: Year denoting the peak demand has been shown
As far as demand is concerned, it has remained strong. Overall absorption in CY18 at ~27msf
was close to peak demand in CY15.
Chart 126: Vacancies in most cities peaked prior to CY16

45 CY15
36
CY15
Vacancy rates (%)
27 CY13
CY12 CY12 CY13
18 CY14
CY13
9
0
MMR NCR Kolkata Chennai Hyderabad Bengaluru Pune India
Peak Vacancy H1CY19 Vacancy

Note: Year denoting the peak vacancy level has been shown
Consequently, vacancy levels have fallen from peak (in CY12-15) and stabilised at ~14% over
the past few years.

Real Estate
Chart 127: IT/ITeS dominated markets have already crossed peak rentals of CY08
Rental index (Base Q3CY08 = 100)

150
120
90
60
30
0
Mumbai NCR Bengaluru Hyderabad Pune Chennai Kolkata
H1CY19 rental index

Supply and demand were robust
in H1CY19 Falling vacancies have lent a fillip to rentals; in IT/ITeS dominated cities like Bengaluru,
Hyderabad, Chennai and Pune, rentals have already crossed CY08 peak levels.
Success story gathers further steam in CY19

The commercial realty segment has maintained its strong run in H1CY19. Overall supply
surged to ~28msf in H1CY19, nearly 92% of CY18 supply and around 95% of the average
supply over the past five years. Similarly, demand was robust at 25msf, ~92% of the overall
absorption in CY18 as well as of the average demand over past five years.
Table 3: India ‘Grade A’ office stock

Vacant stock Occupied Share in occupied
City Stock (msf) Share in stock (%) Vacancy (%) (msf) space (msf) stock (%)
MMR 91.6 17.6 20.3 18.5 73.0 16.2
NCR 105.2 20.2 22.5 23.6 81.6 18.1
Bengaluru 141.9 27.2 5.7 8.0 133.9 29.7
Chennai 49.6 9.5 10.0 4.9 44.6 9.9
Hyderabad 57.5 11.0 5.3 3.1 54.4 12.1
Pune 49.3 9.5 5.1 2.5 46.8 10.4
Kolkata 25.9 5.0 37.9 9.8 16.1 3.6
Overall 520.9 100.0 13.5 70.5 450.4 100.0
Consequently, vacancy levels have fallen below 14%.

Sector Update
Bengaluru continues to be the biggest market

Bengaluru has maintained its pole position in the commercial space stock in India in H1CY19,
followed by NCR. The overall commercial space in the country has now crossed ~520msf, up
from ~430msf in CY16.
Chart 128: Growth in India ‘Grade A’ office stock

525
Commercial space stock (msf)

420
315
210
105
0
CY12 CY13 CY14 CY15 CY16 CY17 CY18 H1CY19
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata

Chart 129: Split of India ‘Grade A’ office stock

100.0
Commercial stock split (%)
80.0
60.0
40.0
20.0
0.0

Bengaluru, NCR and MMR account
for around two-thirds of India’s The top 3 cities of Bengaluru, NCR and MMR account for around two-thirds of the overall
overall commercial stock commercial stock in the country.

Real Estate
Chart 130: Vacant ‘Grade A’ office stock in India

75
60
Vacant stock (msf)

45
30
15
0

Vacancy levels in India have declined steadily over the past couple of years. Within this,
while Bengaluru, Pune and Hyderabad continue to have single-digit vacancy levels, MMR
and NCR have vacancies higher than 15%.
Chart 131: Split of vacant ‘Grade A’ office stock in India

100.0
Vacant stock split (%)
80.0
60.0
40.0
20.0
0.0
NCR continues to have the highest share of vacant space in the country. Over the past five
years, it has contributed ~40%, on an average, to the overall vacant space in India. MMR,
with ~20% share, follows next.
NCR and MMR cumulatively
account for ~60% of vacant Consolidation has brought its own benefits
commercial stock in the country
One of the reasons behind the robust performance of the office realty space over the past
few years is the ongoing consolidation in the space. The office realty segment in India is far
more consolidated than its residential counterpart, which continues to be fragmented. This
keeps a check on supply and hence keeps vacancy levels in check.

Sector Update
Chart 132: Entry of financial institutions has led to consolidation in office market
75
60
Office stock (msf)

45
Office space in India has seen far
greater consolidation compared to 30
residential market
15
Brookfield
Ascendas
Blackstone
Mapletree
Allianz
Xander
CPPIB
GIC
Office stock (msf)
Note: In case of office projects backed by financial institutions, the space is
considered to be with the PE player
One of the major reasons behind consolidation in the commercial segment is the entry of
financial institutions like PE players/pensions funds, etc. These institutions have tied up with
leading developers (GIC with DLF/Brigade, Blackstone with Embassy/Panchshil/K Raheja,
Allianz with Shapoorji Pallonji) to enhance their presence in India.
As a result of the consolidation, the top 4 financial institutions own more than 20% of the
overall office space in India. We believe, this will ensure that demand-supply dynamics of
the space remain favourable in the future as well.
Co-working spaces: Emerging significant growth driver

Co-working spaces are adding Factors such as spurt in the number of startups, flexibility and cost-efficiency are leading to
another dimension to demand for explosion in growth of co-working spaces. As per Anarock, co-working centres are about 15-
office space 25% cost efficient for startups and firms as they save money in office rentals, property
maintenance and fixed capital investments.
Rapid growth in co-working spaces is providing an impetus to commercial space demand in

the country. We take a look at the evolving dynamics of this space:
Growth of co-working space: As per CBRE, owing to its rapid pace of growth, flexible space
stock has crossed 50msf across the Asia-Pacific region. As far as India is concerned, the
figure, which stood at ~15msf in Q3CY18, has now crossed 20msf.

Real Estate
Chart 133: Flexible space being added at rapid pace

10
Flexible office space addition (msf)

8
0
CY15 CY16 CY17 CY18E CY20E
Flexible office space addition (msf)
Source: CBRE, Edelweiss research
As per JLL, the share of co-working in total office leasing has surged from 5% in CY17 to 8%
in CY18 and to 15% in H1CY19; the total space taken up by the co-working segment doubled
to 3.9msf in CY18 compared with CY17.
According to Anarock, more than 200 players are operating the current stock of more than
420 such workspaces across the country. This number is likely to increase 2-3x over the next
two years alone. It expects total space occupied by co-working spaces to rise by at least 30-
40% p.a.
With rapidly rising demand, funds likely to pour in: News reports indicate that shared
office space provider CoWrks is looking to raise USD350mn equity to fund its domestic and
foreign expansion. It is a Bengaluru-based company backed by property developer RMZ
Corp. The company has around 23 centres currently and is targeting about 70-75 centres by
the year end. In terms of members, the plan is to grow from 23,000 members currently to ~
75,000 by the year end.
Similarly, co-working space provider Smartworks has begun discussion to raise around
INR1bn. It is looking to increase its available co-working space to 5msf by FY20 end from
2.5msf across 22 facilities currently.
Overall, we believe, the growing acceptance of co-working spaces is likely to provide a fillip
to demand for commercial realty space in India.

Sector Update
Office: Bengaluru, Hyderabad On A Strong Footing

While the overall office segment has performed well in India over the past five years,
there is wide variance between individual city dynamics. Cities with concentration of
IT/ITeS companies (Bengaluru, Hyderabad, Pune and to some extent Chennai) are
characterised by low vacancy levels and rising rentals. On the other hand, NCR, MMR
and Kolkata are still struggling with high vacancy levels. We believe, it will take time
before the commercial realty market in these three cities revives.
Like the residential segment, India’s office space has also seen significant amount of
changes over the past few years in terms of contribution of various cities in supply and
demand. While Hyderabad has gained prominence over this period, relevance of MMR has
declined.
Chart 134: While NCR’s supply fell, Hyderabad’s improved

35
Commercial space supply (msf)
28
21
While NCR’s office supply has
declined substantially, Hyderabad’s 14
has improved
7
0
During CY12-14, NCR’s office space used to witness annual supply of 6-9msf; over the past
few years, this has fallen to 3-4msf. On the other hand, Hyderabad’s supply has ramped up
from 1.0-1.5msf over CY12/13 to a consistent 5-6msf on an annual basis now.
In terms of overall share, NCR’s contribution in office space supply has declined from ~20-
30% in CY12-14 to 10-15% over the past few years. On the other hand, Hyderabad, which
used to have single-digit share in new space addition over CY12-13 has seen its share
surging to ~18-20% over the past couple of years.

Real Estate
Chart 135: While Hyderabad’s share of supply has improved, NCR’s has declined
100.0
Commercial space supply split (%)

80.0
60.0
While NCR’s share in supply has

40.0
declined the most, Hyderabad’s
has improved
20.0
0.0

Chart 136: Demand has declined in MMR and Chennai, but improved in Hyderabad
30
Commercial space demand (msf)
24
18
12
While demand in MMR has been
hit the hardest, Hyderabad’s has 6
increased at a healthy pace
0

During CY12-13, office space absorption in MMR stood at 4-5msf; currently, this has fallen
to ~2-3msf p.a. On the other hand, Hyderabad’s supply has ramped up from 1.5-2.0msf in
CY12-13 to 5-6msf now.

Sector Update
Chart 137: Hyderabad’s share in absorption has improved at MMR’s expense

100.0
Commercial space demand split (%)

80.0
60.0
Hyderabad’s share in demand has
jumped since CY11, largely at 40.0
MMR’s expense
20.0
0.0

In terms of share in absorption, the biggest gainer has been Hyderabad—share more than
tripled since CY11. Currently, it contributes ~20-25% to the overall office space demand in
India. This has come largely at the expense of MMR whose share has nearly halved from
~22% in CY12-13 to 10-11% over CY17-18.

Real Estate
Bengaluru office market: Bulking up

Bengaluru is biggest market in The Bengaluru office market is the biggest in terms of absorption in the country with the city
India in terms of demand on average contributing to around one-third of the total office space demand in India over
the past five years. Its position as a tech hub and startup magnet renders it amongst the
best placed markets in India in terms of fundamentals. Another factor which burnishes
Bengaluru’s office market prospects is the healthy demand from co-working firms which
leased ~3msf in CY18.
Supply-demand dynamics: Vacancies in the Bengaluru market more than doubled post the
Lehman crisis. However, the situation started improving after CY10 with improvement in
demand leading to fall in vacancy levels.
Chart 138: Vacancies surged in Bengaluru post CY07

20 20.0
16 16.0
Vacancy levels (%)

(msf)
12 12.0
8 8.0
4 4.0
0 0.0

Chart 139: With demand catching up with supply, vacancies have declined steadily in Bengaluru in current decade
15 15.0
12 12.0
Vacancy levels (%)

9 9.0
(msf)
6 6.0
3 3.0
0 0.0


Sector Update
Vacancies continued to decline in Bengaluru over CY12-17 and fell below 5% in CY17. This
was a result of demand matching supply and even overshooting in CY15 and CY17.
In CY17 and CY18, office space demand stood at ~8msf; CY19 has begun on a bright note
with ~7.3msf of absorption in H1CY19. Supply, on the other hand, improved from ~7msf in
Vacancy levels have remained low CY17 to ~9msf in CY18, and matched demand in H1CY19.
in Bengaluru for the past few years
Over the past few years, demand has largely matched supply in the Bengaluru market.
Hence, vacancy levels have remained in single digits since CY14. Over the past couple of
years, they have stabilised at ~5-6%, making it one of the most attractive markets in India.
Office stock addition: The city has witnessed steady expansion in office stock over the past
few years. The overall office stock at ~140msf has jumped ~50% over the past five years.
Chart 140: Office stock has risen steadily in Bengaluru Chart 141: ORR’s share in office stock has improved
100.0

150
120 80.0
90 60.0
60 40.0
30 20.0
0 0.0
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
H1CY19
CY13
CY14
CY15
CY16
CY17
CY18
CBD / Off CBD ORR CBD / Off CBD ORR

Peripheral East Peripheral North Peripheral East Peripheral North
Peripheral South Suburban East Peripheral South Suburban East
Suburban North West Suburban South Suburban North West Suburban South
In terms of share in overall stock, the contribution of Outer Ring Road (ORR) i.e., Sarjapur,
KR Puram, Hebbal, etc., has grown from ~40% in CY13 to ~47% currently. This has come at
the cost of Eastern suburbs (Indira Nagar, Old Airport, C.V. Raman Nagar) which have
clocked slower growth.
Vacancy levels: Robust fundamentals of the Bengaluru market can be gauged from the fact
that barring the Peripheral East region (Whitefield), all other micro markets in the city have
single-digit vacancy levels.

Real Estate
Chart 142: Most micro markets have single-digit vacancy levels in Bengaluru
25.0
Except peripheral Eastern region,
Vacancy rates (%)

20.0
all other micro markets in
Bengaluru have single digit vacancy
15.0
levels
 t
10.0
h
e5.0
P0.0
e Q4CY13 Q4CY14 Q4CY15 Q4CY16 Q4CY17 Q4CY18 H1CY19
r
CBD / Off CBD ORR Peripheral East
i Peripheral South Suburban East Suburban South
p Overall Bengaluru
h Source: Cushman & Wakefield, Edelweiss research
e
r kept the overall vacancy in the city under check.
This has
a
l The upshot of benign vacancy levels in the city can be witnessed in the form of
Rentals:
surging lease rentals across the board. Average rentals in the city have catapulted ~50%
Rentals in Bengaluru shot up ~50% N
over CY13-18 with individual micro markets enjoying 30-60% rental appreciation during this
on average over CY13-18 period.o
r
t
Chart 143: Rentals on an upswing in Bengaluru
h
150
e
Rental rates (INR/sft)
120
r
n
90
r60
e
g30
i
o0
H1CY19
Q4CY12
Q4CY13
Q4CY14
Q4CY16
Q4CY17
Q4CY18
Q4CY11
Q4CY15
( CBD / Off CBD ORR Peripheral East

c Peripheral South Suburban East Suburban South
o Overall Bengaluru
m Source: Cushman & Wakefield, Edelweiss research
p
The highest
r rental uptick has been in the ORR area, which again establishes its primacy as
the dominant
i micro market in the city.
s
Outlook:
i Vacancy levels in the Bengaluru market are expected to remain under control
going ahead.
n This is a result of robust demand and constrained supply (with around half of
the expected
g supply in the rest of the year already pre-leased or in advanced stages of
negotiations). This, we believe, will ensure that rentals sustain strong momentum.
B
e
l
l
a
r
Sector Update
Hyderabad: Strong emerging contender

Hyderabad has been the biggest gainer in absorption amongst various cities and has seen its
Hyderabad has gained the
share more than triple since CY11. Currently, it contributes ~20-25% to the overall office
maximum incremental share in
space demand in India. In fact, it was the second-biggest market in terms of demand after
demand in the current decade and
Bengaluru in CY17 and CY18 and has overtaken Bengaluru in H1CY19. Like the Bengaluru
has emerged the second-biggest
office market, Hyderabad has also enjoyed single digit vacancy levels post CY14, highlighting
market since CY16
its robust fundamentals.
Demand-supply dynamics: After remaining stable at ~5% during CY04-07, vacancy levels in
Hyderabad rose during CY08 and CY09. With demand trailing supply, vacancy levels peaked
at ~29% in CY09, before moderating in CY10 and CY11.
Chart 144: Vacancies surged in Hyderabad over CY08-09

10 35.0
8 28.0
Vacancy levels (%)

(msf)
6 21.0
4 14.0
2 7.0
0 0.0

Chart 145: Single digit vacancy levels in Hyderabad post CY14

10 18
8 15
Vacancy levels (%)

(msf)
6 12
4 10
2 7
0 4


Real Estate
In the current decade, vacancy levels in Hyderabad were the highest in CY14 at ~14%. Since
then, the city has witnessed single-digit vacancy levels, reaching ~5% in H1CY19.
Demand has improved in Hyderabad every year since CY14, nearly doubling over CY15-18.
Hyderabad’s office space demand Supply, on the other hand, has been constrained, marginally declining YoY in CY18.
has nearly doubled over CY15-18
H1CY19 has again witnessed a repetition of the trend with demand remaining robust at
8.6msf. This is ~44% higher than the absorption in CY18. Supply also ramped up to ~9msf
from ~5.5msf in CY18.
Office stock addition: Hyderabad’s office stock addition has been, in fact, higher than even
Bengaluru, albeit on a lower base. The overall office stock in the city had surged ~70% over
CY13-18 and has touched ~58msf in H1CY19.
Chart 146: Office stock has risen steadily Chart 147: Madhapur maintains its dominant position
60 100.0

48 80.0
36 60.0
40.0
24
20.0
12
0.0
0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
H1CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Madhapur Gachibowli Peripheral East Madhapur Gachibowli Peripheral East

In terms of share in overall stock, the lion’s share comes from Madhapur (including
Madhapur, Kondapur, Raidurg) which has historically provided around two-thirds of the
overall pie. In fact, its share has been rising and has catapulted more than 1,200bps since
Madhapur provides bulk of office
CY12 to ~74% in H1CY19.
space in Hyderabad and has the
lowest vacancy rate amongst all
Vacancy levels: Unlike the Bengaluru market, vacancy rates differ widely amongst various
micro markets
micro markets in Hyderabad. While the Madhapur market has continuously enjoyed single-
digit vacancy levels in the current decade, others like Gachibowli and Peripheral Eastern
suburbs (Pocharam and Uppal) have had to contend with double- digit vacancy rates.

Sector Update
Chart 148: Madhapur has lowest vacancy rates in Hyderabad

60.0
48.0
Vacancy rates (%)

36.0
24.0
12.0
0.0
Q4CY13 Q4CY14 Q4CY15 Q4CY16 Q4CY17 Q4CY18 H1CY19
Madhapur Gachibowli Peripheral East Overall Hyderabad

Rentals: With vacancy levels on a downward trend, rentals are bound to head North.
Average rentals in the city have surged ~45% over CY13-18. However, due to the wide
variance in vacancy levels, the rate of appreciation in rentals has also varied widely.
Chart 149: Rentals on an upwards trajectory in Hyderabad

75
60
45
Rentals in Hyderabad have surged
30
~45% on average over CY13-18
15
H1CY19
Q4CY11
Q4CY12
Q4CY13
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY18
Madhapur Gachibowli Peripheral East Overall Hyderabad

In Madhapur, rentals have jumped 50% plus during this period. On the other hand, rentals in
Gachibowli and Peripheral Eastern suburbs (which still have relatively higher vacancy rates)
have risen by only ~30% and 10%, respectively, during this period.
Outlook: With demand remaining healthy and bulk of the upcoming supply in the current
year already pre-committed, low vacancy rates in the Hyderabad market are expected to
continue. As a result, till supply catches up with absorption and vacancy levels stabilise, a 3-
4% quarterly growth in rentals cannot be ruled out.

Real Estate
NCR: Long road to recovery

The NCR market comprises Delhi, Gurugram and Noida. There are wide variations between
these cities and even between the different micro markets in the same city. During CY13-15,
cumulative supply in the NCR market was, in fact, higher than Bengaluru. Since then, annual
supply in the NCR office space has declined from 6-9msf to 3-4msf now. In terms of
demand, it was the third-largest market in India after Bengaluru and Hyderabad over CY17
NCR was the third largest office and CY18.
space market in India over CY17-18
Supply-demand dynamics: Despite single-digit vacancy levels, vacancies continued to fall in
the NCR market during CY02-05, hitting a low of 4% in CY05. Due to this low base, vacancy in
NCR started to rise post CY05 itself (unlike other markets like Bengaluru and Hyderabad
where they rose only after the Lehman crisis).
Chart 150: Vacancies had started rising in NCR since CY05

15 15.0
Vacancy levels (%)

12 12.0
(msf)
9 9.0
6 6.0
3 3.0
0 0.0

Chart 151: Vacancies continue to remain at elevated level

15 35.0
12 28.0
9 21.0 Vacancy levels (%)

(msf)
6 14.0
3 7.0
0 0.0


Sector Update
In the current decade, vacancy levels in NCR have continued to remain elevated (upwards of
20%) despite demand outstripping supply over CY16-18. This is because of the huge gap
between supply and absorption in previous years (CY13-15), which had led to build up of
huge vacant space in the region.
In H1CY19, supply eclipsed absorption—while supply was a robust 4.3msf across Noida and
Vacancy levels in NCR continue to
remain upwards of 20% Gurugram, absorption was at mere 2.3msf. Supply was boosted due to developers trying to
expedite completion to meet the SEZ sunset clause timeline (FY20 end). On the other hand,
despite strong leasing of 6.2msf during H1CY19, relocation / consolidation meant that
~3.9msf space was vacated, leading to net demand of only 2.3msf.
Office stock addition: Despite high vacancy levels, NCR’s office stock addition has remained
healthy. Overall office stock in the region has touched ~105msf, rising ~44% since CY13.
Chart 152: Office stock has risen steadily Chart 153: Gurugram-Others has overtaken Gurugram-CBD
125 100.0

100 80.0
75 60.0
50 40.0
25 20.0
0 0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
CBD South East Delhi Delhi Airport CBD South East Delhi Delhi Airport
Gurugram -CBD Gurugram -Others Noida Gurugram -CBD Gurugram -Others Noida
Gurugram continues to contribute around two-thirds of the overall office stock within NCR.
Significant office space has been However, within this, the share of Gurugram-CBD has declined by ~1,200bps since CY12 to
added in Gurugram, but outside ~15% now. This has been captured by Gurugram-Others (which includes rest of Gurugram,
CBD region. Gurugram-CBD has excluding Manesar). The share of Gurugram-Others has improved ~1,400bps during this
enjoyed single digit vacancies since period and has crossed the half way mark now. Noida has remained steady in the 23-26%
CY13 range.
Vacancy levels: With NCR being made up of multiple cities, vacancy rates differ widely
amongst various micro markets. Gurugram-CBD is the best performing market, enjoying
single-digit vacancies since CY13. Delhi-CBD and South East Delhi have vacancies in the 10-
20% range.

Real Estate
Chart 154: Vacancies vary across various micro markets in NCR

45.0
Vacancy rates (%)

36.0
Noida is still struggling with high 27.0

vacancy levels
18.0
9.0
0.0
Q4CY12
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY13
Q4CY18
H1CY19
CBD South East Delhi Gurugram - CBD
Gurugram - Others Noida Overall NCR
On the other hand, Gurugram-Others and Noida micro markets continue to languish with
vacancies remaining upwards of 25% in both the markets.
Rentals: With vacancy levels varying across different micro markets, it is no surprise that
rental performance has also differed widely. While rentals in the overall NCR market had
Rents in Gurugram-CBD have
appreciated ~14% between CY12 and CY18, the performance has varied across the board.
jumped ~50% since CY12. On the
other hand, rentals in Delhi-CBD
Chart 155: Divergent rental performance across various micro markets in NCR
have dipped
500
400
300
200
100
H1CY19
Q4CY12
Q4CY13
Q4CY14
Q4CY17
Q4CY18
Q4CY15
Q4CY16
CBD South East Delhi Delhi Airport

Gurugram CBD Gurugram - Others Noida
Overall NCR
Rentals in Delhi have declined ~20% since CY12. On the other hand, rents in Gurugram-
CBD—the best performing micro market—have jumped ~50% during the period. Despite
high vacancy levels, rentals in Noida have still jumped by more than 15% during this period.
Outlook: With more than 20msf of new office space expected to enter the market by CY21
(primarily in Noida and Gurugram-Others), vacancy rates are expected to remain high. This
is likely to keep rentals in check. However, rentals are likely to continue their upward trend
in Gurugram-CBD due to limited upcoming supply.

Sector Update
MMR: Steady state

The MMR market comprises Mumbai, Thane and Vashi. There are wide variations, not only
Vacancy in MMR had touched
between these cities, but even between the different micro markets within them. The MMR
~20% in CY10
market has lost some of its prominence over the past few years—from more than 20%
share in all India absorption during CY12-13 (when it was amongst the top two markets in
the country), its share has declined and has remained in the 10-13% bracket since CY13.
Supply-demand dynamics: Aided by finely matched demand and supply, MMR enjoyed
single-digit vacancy levels over CY03-07. Post CY07, supply rose sharply; with demand
trailing, this led to vacancies rising to ~20% by CY10.
Chart 156: Vacancies rose sharply post CY07 in MMR

15 25.0
Vacancy levels (%)

12 20.0
9 15.0
(msf)
6 10.0
3 5.0
0 0.0
Chart 157: Vacancies have remained in 17-20% range since CY15

10 25.0
8 20.0
Vacancy levels (%)

6 15.0
(msf)
4 10.0
2 5.0
0 0.0

Since then, vacancies first declined to 15% in CY15 and then stabilised in the 17-20% range.
Annual absorption has remained in the 2.5-3.0msf band since CY13, while supply has
averaged ~4msf over this period.

Real Estate
H1CY19 saw strong absorption at 2.8msf, almost matching CY18 demand. Supply too
ramped up to ~3.6msf during the period (4.8msf in CY18).
Office stock addition: Overall office stock in the city is now ~90msf with Thane-Belapur
Road being the star performer as far as stock addition over the past few years.
Chart 158: Steady uptick in office stock

100.0

80.0
60.0
40.0
20.0
0.0
Thane-Belapur Road has seen CY12 CY13 CY14 CY15 CY16 CY17 CY18 H1CY19
maximum office stock addition in CBD BKC Worli
MMR over the past few years Lower Parel Andheri-Kurla Powai
Malad Central Suburbs Vashi
Thane-Belapur Road Thane
Chart 159: Thane-Belapur Road’s share has been on the rise

100
80
60
40
20
0
CBD BKC Worli
Lower Parel Andheri-Kurla Powai
Malad Central Suburbs Vashi
Thane-Belapur Road Thane
While Mumbai city continues to provide around two-thirds of the overall office stock in
MMR, it is the Thane-Belapur Road micro market which has seen maximum stock addition
since CY12. It now contributes more than a fifth of the overall office stock in MMR. Within
Mumbai, while the share of BKC and Lower Parel has declined since CY12, that of Andheri-
Kurla region has grown.

Sector Update
Vacancy levels: While there are a large number of micro markets within MMR, vacancy
rates across most are in the 10-20% range. It is only in Mumbai CBD (Nariman Point) and
Powai that vacancy levels are at sub-10%. While BKC and Lower Parel are in the 10-15%
range, Andheri-Kurla and Malad are close to the 20% mark.
Vacancy levels vary widely across
micro markets in MMR with Chart 160: Vacancies in 15-20% range in major micro markets in Mumbai city
Nariman Point and Powai having
45.0
single-digit vacancies
36.0
Vacancy rates (%)

27.0
18.0
9.0
0.0
Q4CY12 Q4CY13 Q4CY14 Q4CY15 Q4CY16 Q4CY17 Q4CY18 H1CY19
CBD BKC Worli Lower Parel Andheri-Kurla
Chart 161: Divergent trend across vacancies in MMR

35.0
Vacancy rates (%)
28.0
21.0
14.0
7.0
Thane and Thane-Belapur Road 0.0

Q4CY12 Q4CY13 Q4CY14 Q4CY15 Q4CY16 Q4CY17 Q4CY18 H1CY19
have had 20-25% vacancy levels
historically Powai Malad Vashi
Thane-Belapur Road Thane Overall MMR
Amongst other regions in MMR, Thane and Thane-Belapur Road have been in the 20-25%
vacancy range historically.
Rentals: There is a wide divergence in rental performance between various micro-markets

in MMR. With Nariman Point going out of flavour as far as office space is concerned, rentals
there have declined by more than 15% since CY12. Similarly, rentals in Worli and BKC are
currently broadly flat/marginally lower compared to CY12.

Real Estate
Rentals in Lower Parel, Andheri-Kurla and Malad have jumped 10-12% during this period. On
the other hand, Powai has seen maximum rental appreciation within Mumbai city at ~30%.
While rentals in Lower Parel,
Andheri-Kurla, Malad and Powai Chart 162: Rental trajectory varies across major micro markets in Mumbai city
have jumped since CY12, those 300
in Worli and BKC have been
flat/lower

260
220
180
140
100
H1CY19
Q4CY12
Q4CY13
Q4CY14
Q4CY16
Q4CY17
Q4CY18
Q4CY11
Q4CY15
CBD BKC Worli Lower Parel Andheri-Kurla
Chart 163: Rentals on an upswing in micro markets outside Mumbai city

150
120
90
60
30
0
Q4CY11
Q4CY12
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY13
Q4CY18
H1CY19
Powai Malad Vashi
Thane-Belapur Road Thane Overall MMR
Micro markets outside Mumbai city have witnessed major rental appreciation since CY12.
Rentals in Vashi, Thane and Thane-Belapur Road are up 25-35% over the past six years.
Outlook: Leasing scenario in MMR is expected to improve going ahead with rentals
expected to improve in micro markets of BKC, Powai and Andheri-Kurla. This is likely to be
driven by marginal decline in vacancy levels in these regions. On the other hand, rentals are
expected to stabilise in Thane and Thane–Belapur Road, which have already witnessed
sharp appreciation over the past few years.

Sector Update
Pune: Demand not an issue, supply is

Vacancy levels in the Pune market have declined consistently since CY13. They have been in
single digits over the past couple of years. This is the result of tight supply, which has trailed
As a result of tight supply, Pune absorption since CY13. With robust demand from IT/ITeS companies, Pune market’s
has enjoyed single-digit fundamentals continue to remain healthy.
vacancies since CY13
Supply-demand dynamics: The Pune market enjoyed low vacancy levels of ~5% in CY04 and
CY05. With supply outpacing demand, vacancies started inching up post CY05, though they
still remained below 10% till CY07. However, with the advent of the global financial crisis,
vacancies shot up and more than tripled over CY07-11.
Chart 164: Vacancies had started rising in Pune since CY05

10 30.0
8 24.0
Vacancy levels (%)

6 18.0
(msf)
4 12.0
2 6.0
0 0.0
CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11

Chart 165: Vacancies have steadily declined since CY13

10 25.0
Vacancy levels (%)

8 20.0
6 15.0
(msf)
4 10.0
2 5.0
0 0.0


Real Estate
Supply has trailed absorption in most years in the current decade. Over CY12-18, supply was
greater than demand only in two years. Consequently, vacancy levels have fallen
consistently since CY13 and have been in single digits since CY16.
Supply has trailed absorption in
most years in Pune in current
decade The same trend has continued in H1CY19. While demand was at 1.9msf, supply was even
lower at mere 1.1msf. Consequently, vacancy fell further to ~5%.
Office stock addition: Pune’s office stock addition has remained healthy over the past few
years. Overall office stock in the city has touched ~50msf, up ~49% since CY13.
Chart 166: Office stock has risen steadily Chart 167: Eastern suburbs maintain their dominance
60.0 100.0

48.0 80.0
36.0 60.0
24.0 40.0
12.0 20.0
0.0
0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
CBD SBD East SBD West PBD East PBD West CBD SBD East SBD West PBD East PBD West
The contribution of major micro markets in Pune to the overall office stock has broadly
remained consistent since CY12. Eastern suburbs continue to provide more than half of the
overall office stock in the city.
Vacancy levels: Except peripheral suburbs, vacancy levels in other micro markets in the city
are in single digits. In fact, in H1CY19, vacancies in CBD along with Eastern and Western
suburbs were in the 0-4% range.

Sector Update
Chart 168: Vacancies high in peripheral suburbs, low otherwise

40.0
Vacancy rates (%)

32.0
24.0
Vacancies in CBD along with
Eastern and Western suburbs in
16.0
Pune are in the 0-4% range
8.0
0.0
H1CY19
Q4CY12
Q4CY13
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY18
CBD SBD East SBD West
PBD East PBD West Overall Pune
However, in peripheral suburbs, vacancies continue to remain high. In peripheral Eastern

suburbs, vacancies are as high as 15%, though they have also been declining.
Rentals: With vacancy levels declining in the city, rental performance has been good over
the past few years. Rental growth across micro markets since CY13 is in the 30-65% range.
Chart 169: Rental on the rise in Pune

150
120
90
60
30
0
Q4CY11
Q4CY12
Q4CY13
Q4CY14
Q4CY16
Q4CY17
Q4CY18
Q4CY15
H1CY19
CBD SBD East SBD West
PBD East PBD West Overall Pune
Amongst various micro markets, Western suburbs have witnessed the highest appreciation
in rents with peripheral Western suburbs being the lowest.
Outlook: While an uptick in supply is expected in CY19, overall supply situation in Pune is
expected to improve only post CY20. Till then, vacancies will continue to remain low and
rentals may rise as a large portion of supply coming over CY19 and CY20 is already pre-
committed. Rentals may stabilise post CY20.

Real Estate
Chennai market going steady; Kolkata struggling

Chennai and Kolkata together Chennai and Kolkata markets are relatively less important as far as the commercial realty
absorb <10% of office space in market in India is concerned. While Chennai’s share in all India absorption has been ~8%
India since CY13, Kolkata’s has been even lower at ~3%. Kolkata has, in fact, the lowest annual
absorption and the highest vacancy level across all major cities in India. Chennai’s annual
demand, on the other hand, has been in the 2-3msf range since CY12.
Supply-demand dynamics: Vacancy levels in the Chennai market fell during CY03-05 to as
low as 5% in CY05. From this base, they rose sharply, growing ~4x in just three years. While
there was a dip post CY09, vacancy levels still remained high at 15% plus.
Chart 170: Vacancies rose in Chennai over CY05-10

15 25.0
12 20.0
Vacancy levels (%)

9 15.0
(msf)
6 10.0
3 5.0
0 0.0

Chart 171: Vacancies declined in Chennai till CY16 and have risen since then
5 25.0
4 20.0
Vacancy levels (%)

3 15.0
(msf)
2 10.0
1 5.0
0 0.0

Vacancies in the Chennai market have displayed a divergent trend in the current decade.
They declined sharply over CY12-16 to ~8% in CY16; since then, they have risen to ~10% in

Sector Update
H1CY19. Over the past five years, annual absorption in the market has been in the ~2.0-
2.5msf range. Supply has outpaced demand since CY17, leading to rise in vacancies.
Chart 172: Kolkata vacancy levels rose sharply in CY06-09

5 30.0
4 24.0
Vacancy levels (%)

3 18.0
(msf)
2 12.0
1 6.0
0 0.0

As far as the Kolkata market is concerned, vacancy levels remained in single digits over
CY04-07, bottoming at 5% in CY06. Since then, vacancies surged ~5x in just five years till
CY11.
Chart 173: Vacancies in Kolkata rose in CY12-15 and have remained high ever since
5 50.0
4 40.0
Vacancy levels (%)

(msf)
3 30.0
2 20.0
1 10.0
0 0.0

In the current decade, vacancies have remained at an elevated level. They were above 40%
in CY15 and CY16 and have remained around 38% ever since. Supply has outstripped
demand since CY12, leading to persistent high vacancy levels in the city.
Office stock addition: After a dip over CY12-14, Chennai’s office stock has increased
gradually since CY14. It rose by 20% over CY14-18 and is now nearing 50msf.

Real Estate
Chart 174: Chennai office stock has risen since CY14 Chart 175: South region has gained share gradually
50 100.0

40 80.0
30 60.0
20 40.0
10 20.0
0.0
0
H1CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
CY13
CY17
CY12
CY14
CY15
CY16
CY18
CBD Off-CBD
CBD Off-CBD
South-West North-West
South-West North-West
Suburban South Peripheral South Suburban South Peripheral South
Peripheral South-West Peripheral South-West
In terms of micro markets, Southern regions (suburban South and peripheral South) have
improved their share gradually—from 53% in CY13 to ~57% now. This has largely come at
the expense of a decline in share of CBD (Anna Salai, Nungambakkam, RK Salai).
Chart 176: Steady uptick in Kolkata office stock Chart 177: Salt Lake region maintains its dominance
30
100.0
24 80.0
18 60.0
40.0
12
20.0
6
0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
H1CY19
0
H1CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CBD Off CBD PBD SBD Sector-V, Salt Lake CBD Off CBD PBD SBD Sector-V, Salt Lake
As far as Kolkata is concerned, office stock has continued to rise post CY13 despite high
Kolkata’s Salt Lake region has seen vacancy levels—up 30% since CY13 and has crossed the 25msf mark. The Salt Lake region
bulk of office space addition since (mainly Phase V) has witnessed bulk of addition during this period and now contributes
CY13 nearly half of the office stock in the city. On the other hand, the share of CBD (Park Street,
Camac Street, AJC Bose Road, Theatre Road) has continued to decline.
Vacancy levels: Vacancy rates within various micro markets of Chennai have been volatile
over the past few years, even as they differ widely from each other. Vacancies in CBD have
dipped from ~30% in CY14 to near 12% now. As far as Suburban South regions (which
provides around a third of the office space in the city) are concerned, they have enjoyed

Sector Update
single-digit vacancy levels since CY13. On the other hand, for Peripheral Southern suburbs,
while vacancies have declined from ~30% in CY13-14, they still remain high at ~18-20%.
Chart 178: Vacancy rates in various Chennai micro markets have been volatile
60.0
48.0
Vacancy rates (%)

36.0
24.0
12.0
0.0
Q4CY12
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY18
Q4CY13
H1CY19
CBD Off CBD South West
North West Suburban South Peripheral South
Peripheral South-west Overall Chennai
Chart 179: Vacancy rates continue to remain sticky in Kolkata

75.0
60.0
Vacancy rates (%)
45.0
30.0
Vacancy rates in Kolkata continue
to remain high 15.0
0.0
H1CY19
Q4CY12
Q4CY13
Q4CY14
Q4CY16
Q4CY17
Q4CY18
Q4CY15
CBD Off CBD PBD

SBD Sector-V, Salt Lake Overall Kolkata
As far as Kolkata is concerned, while vacancy rates in all micro markets have declined since
CY15, they continue to remain high and have been sticky for the past couple of years. The
lowest vacancies are in the off-CBD region (Park Circus Connector) at around 25%, while
those in CBD and SBD (Rajarhat) are ~28-30%. The Salt Lake region, which provides the lion’s
share of the office space in the city, continues to have 45% plus vacancy levels.
Rentals: Except the CBD region (where rentals have remained flat over CY13-18), rentals
have improved sharply in most micro markets of Chennai even if the rate of growth differs
widely. The lowest growth of 16% has been in the off-CBD region (T. Nagar, Alwarpet,
Kilpauk, Egmore, Chetpet, Royapettah, Kotturpuram), while the highest of 60% plus is in the
peripheral Southern suburbs.

Real Estate
Chart 180: Rentals on an upswing in major micro markets in Chennai

100

80
60
40
20
Q4CY11
Q4CY12
Q4CY13
Q4CY14
Q4CY16
Q4CY17
Q4CY18
Q4CY15
H1CY19
CBD Off CBD South West
North West Suburban South Peripheral South
Peripheral South-west Overall Chennai
Chart 181: Rentals have declined in most micro markets in Kolkata

150
120
90
60
30
H1CY19
Q4CY11
Q4CY12
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY13
Q4CY18
CBD Off CBD PBD
SBD Sector-V, Salt Lake Overall Kolkata
Rentals have been increasing in Kolkata is the only market amongst major cities in India where rentals have declined over
most micro markets in Chennai, the past few years, courtesy its high vacancy rates. The off-CBD region is the only micro
but have been declining in Kolkata market where rentals were flat over CY13-18; they were down ~20% in CBD region and by
10-15% in other micro markets.
Outlook: With overall Chennai market’s vacancy level remaining at ~10%, we expect rentals
to continue their upwards trajectory going ahead. This is because a significant amount of
upcoming supply in the current year is already pre-committed and supply is expected to
ramp up only in CY20.
Outlook for the Kolkata market remains weak with adequate office space available in the
city. As a result, rentals are expected to largely remain flat.

Sector Update
Retail Space: On its way up

Performance of India’s retail space has been similar to that of office space. After a
couple of tough years till CY11, the sector’s fundamentals have improved significantly.
This was led by rising demand for quality assets in conjunction with limited new supply
and rationalisation of retail stock (still continuing). Consequently, the sector is enjoying
favourable supply-demand equation, which has led to declining vacancy levels and
rising rents. Going ahead, supply as well as demand are expected to be robust, which
should lead to sustained traction in the retail space.
Retail segment on a strong footing

India’s retail space, akin to its office counterpart, has been through various ups and downs
since the start of the millennium. The retail space was booming during 2000-07; as per
Anarock, while ~9.5msf of leasable mall space was added in the top 7 cities in the country
during this period, ~16msf of space was under construction.
Chart 182: India’s mall stock has grown rapidly

100.0
Retail stock (msf)
80.0
60.0
40.0
20.0
0.0
CY00
CY02
CY03
CY05
CY07
CY08
CY10
CY12
CY13
CY15
CY17
CY18
CY01
CY04
CY06
CY09
CY11
CY14
CY16
Retail stock
The huge supply of retail space found few takers in the post Lehman period. Consequently,
vacancies rose sharply. In addition, a lot of poor quality malls were constructed during this
period, which struggled to attract footfalls. Hence, many of these faced viability issues.
However, post CY11, the situation changed. Demand perked due to rising consumption
growth in the country. On the other hand, supply was measured since developers were
reorienting their strategies in light of poor performance of many existing malls. In addition,
the existing mall stock was getting rationalised i.e., poor malls were either getting converted
to other use or downgraded to ‘Grade B’ shopping centers.

Real Estate
Chart 183: Demand-supply dynamics have been favourable in retail space over past couple of years
18 25.0
Supply and absorption (msf)
14 20.0
Vacancy levels (%)

10 15.0
6 10.0
2 5.0
(2) 0.0
CY19F
CY20F
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
New completion Net absorption Vacancy (RHS)
Consequently, vacancy levels declined significantly post CY11.

Mall space demand has
outstripped supply over the past Chart 184: NCR leads in terms of mall stock in India
three years. Consequently, vacancy
30
levels have been declining
Quality retail stock (msf)
24
18
12
0
NCR Mumbai Bengaluru Chennai Pune Hyderabad Kolkata
2016 2019
NCR, followed by Mumbai, are the leaders as far as retail stock in India are concerned. Retail
space in Hyderabad and Chennai has jumped significantly over the past few years.
Over the past few years, vacancies in different cities have moved in tandem with retail
space addition; vacancies in NCR and MMR have dipped since CY16 as mall stock has
remained stagnant.

Sector Update
Chart 185: Divergent trend across various cities in terms of vacancy levels
25.0
20.0
Vacancy (%)
15.0
10.0
5.0
0.0
2016 2019
On the other hand, vacancies in Bengaluru, Chennai and Hyderabad have grown.
Chart 186: Rentals have moved up across most cities

100
Rental index (Base : 3Q 2008 = 100)
80
60
40
20
0
2016 2019
Rentals in most cities have jumped with Mumbai and Pune enjoying the highest increase.
Going ahead, Anarock expects ~32msf of retail space to be added by 2022. At the same
time, demand is expected to remain robust due to healthy pre-commitment of space in
projects. Vacancy levels may inch up marginally from current level, but will continue to
remain at comfortable level of ~15%. Going ahead, rental growth is expected to remain
healthy in the medium term with rising consumption, increasing demand for retail space
from retailers and supply of quality malls over the next few years.

Real Estate
Mall quality still a big issue

One of the major reasons behind many malls struggling to attract enough footfalls is their
poor quality.
Chart 187: Split of retail space as per quality

50.0
Mall quality split (%)

40.0
30.0
20.0
10.0
0.0
Chennai
Bengaluru
Hyderabad
India
Mumbai
Pune
NCR
Kolkata
Superior grade Average grade Poor grade
The proportion of ‘superior grade’ malls is still quite low. Hence, despite the overall
consumption boom in India, most cities have limited number of malls which are performing
well.
Mall mania entering tier 2/3 cities

Aided by the consumption boom in the country, mall developers are expanding their
footprints beyond metros and tier-1 cities and entering tier 2/3 cities in a big way. During
2003-12, mall supply in tier 2/3 cities was ~3.4msf; this was just ~10% of the overall mall
space added, considering that metros/tier 1 cities saw addition of 30.4msf retail space
during this period.
During 2013-22, tier 2/3 cities are likely to witness supply of 10.7msf retail space; this will be
17% of the overall new supply added across metro, tier 1 and select tier 2 cities. The rate of
expansion of malls across tier-2 cities during 2013-22 is estimated at 3x 2003-12.
Strong fundamentals leading to rising investor interest

Buoyed by the retail segment’s robust performance, investors have turned their attention
Robust performance of India’s towards the space. As per JLL, PE investment in the retail space over CY15-Q1CY19 surged to
retail space has attracted marquee USD1.9bn, a whopping figure compared to the USD134mn investment during CY09-14.
investors
The retail sector comprised over 21% of the overall USD8.8bn worth of platforms created in
the entire real estate sector since 2015.

Sector Update
Table 4: Major investors in retail space in India and project details

Brand Retail portfolio Projects
Blackstone ~6 msf
Elante Mall; Chandigarh
Treasure Island & Treasure Next; Indore
Seawoods Grand Central – Mumbai
Westend Mall & Pavilion; Pune
AlphaOne Mall; Ahmedabad
Esplanade One; Odisha
Mall of Amritsar; Amritsar
Canada Pension Plan ~1 msf operational, 3 msf Phoenix Market City; Bengaluru. Upcoming malls in Pune,
Investment Board (CPPIB) upcoming Bengaluru & Indore
GIC Private Limited ~2 msf Viviana Mall and R City Mall in Mumbai
The Xander Group ~5 msf VR Mall; Surat
VR Mall; Chennai
VR Mall; Bengaluru
VR Punjab/North Country Mall; Mohali
Source: CBRE, Edelweiss research
Buoyed by the robust investor interest, top developers are sharpening focus on the retail
space. Developers such as Phoenix Mills, Prestige Estates, Oberoi Realty, Sunteck Realty,
among others, are planning to develop retail assets.

Real Estate
Fund Flow To Sector Improving

India’s realty space has witnessed significant fluctuations in investment flow over the
past decade or so. While investments were booming prior to the global financial crisis,
they nosedived post CY08. After a lull of five years, they picked up again post CY13 and
have been robust ever since. Emergence of REIT is another significant positive for realty
players. At a time when traditional sources of funding for the sector (banks and NBFCs)
are drying up, a robust fund flow from the institutional segment is paramount to ensure
that the sector remains on growth trajectory.
According to JLL, India’s property space is estimated to have attracted USD30bn institutional
investments over the past decade (CY08-18). Impacted by the global financial crisis, the flow
of investments over CY08-13 was muted. However, it has catapulted over the past five years
led by reforms such as RERA, introduction of GST, relaxed FDI norms, industry status to
warehousing & logistics sectors, among others.
Consequently, bulk (~70%) of the institutional investments over the past decade has
happened in the past five years (CY14-18). With commitments from platform funds/JVs
having already crossed USD7bn, fund flow is expected to be robust in the future as well.
Chart 188: Institutional investments in India’s property space

6.0
4.8
3.6
(USD bn)
Institutional fund flow to realty 2.4

sector has surged since CY13
1.2
0.0
CY18E
CY09
CY10
CY11
CY13
CY14
CY16
CY17
CY12
CY15
Institutional investments
Note: Includes family offices, foreign banks’ real estate investment desks, pension funds, private
equity, real estate investor-cum-developer, sovereign wealth funds and foreign corporate groups
but not lending by banks, NBFCs and HFCs
Office space gaining traction at the expense of residential segment

Investment flow in the property space has followed the segment which is doing well at a
particular point of time. Hence, while the residential space attracted the lion’s share of
investments during CY09-13, office space has held sway since CY14. The split of investments
during the two periods thus shows a distinct pattern.

Sector Update
Chart 189: Split of USD9.5bn institutional investment during CY09-13

Others
Entity level
1%
14%
Mixed use
5%
Retail
2%
Residential
Office
61%
17%

Note: ‘Others’ include Hotels, Warehousing and Hospitals
Office space has replaced Chart 190: Split of ~USD20bn institutional investment during CY14-18
residential segment as the primary
Entity level Others
recipient of institutional funds 10% 2%
Mixed use
3%
Retail Residential
8% 37%
Office
40%
Note: ‘Others’ include Hotels, Warehousing and Hospitals
Buoyancy in the commercial realty segment over the past few years has meant that capital
flows to the segment have increased from USD1.6bn during CY09-13 to USD8.2bn during
CY14-18. More than 70% of the investments in office space during CY14-18 have been over
the past two years.

Real Estate
Chart 191: Institutional investments in India’s office space

3,500
2,800
(USD mn)
2,100
1,400
700
CY18E
CY09
CY11
CY12
CY13
CY15
CY16
CY17
CY10
CY14
Investments in office space
Institutional fund flow in office Within the office space as well, the split of investments has been changing. Prior to CY13,
space has surged since CY16 when the office space was facing tough times and assets were available at attractive
valuations, investors preferred IT park/SEZs with good occupancy levels. Hence, bulk of the
investments was in the IT/ITeS segment during this period.
Chart 192: Institutional investments in India’s office space by year

Investments in office space (USD mn)
3,500
2,800
2,100
1,400
700
0
CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18E
IT Park/SEZ Non-IT Others


Sector Update
Chart 193: Non-IT segment has been gaining traction in India’s office space since CY15
Split of office space investments (%)

100.0
80.0
Non-IT segment has attracted

significant investments over the
60.0
past couple of years
40.0
20.0
0.0
IT Park/SEZ Non-IT Others

With the office space doing well starting CY14, more institutional money came in to the
sector. Limited availability of IT office assets meant that a significant portion of these funds
went to quality non-IT office space over the past few years. Consequently, the share of
investments in non-IT office space has jumped to ~75-80% now.
Mumbai and NCR continue to garner bulk of investments

Historically, Mumbai, NCR and Bengaluru have attracted bulk of the institutional
investments in the country. During CY09-13, more than half of the investments were in
Mumbai and NCR alone.
Chart 194: Split of USD9.5bn institutional investment during CY09-13 by city

Others
12%
Hyderabad
4% Mumbai
Chennai 34%
7%
Pune
10%
Bengaluru
13% NCR
20%

Real Estate
Chart 195: Split of ~USD20bn institutional investment during CY14-18 by city

Others
Hyderabad 7%
6%
Chennai
7%
Mumbai, NCR and Bengaluru have Pune Mumbai
garnered three-fourth of 3% 42%
institutional investments since
CY13
Bengaluru
13%
NCR
22%
In fact, the share of these cities in investments has increased over the past five years. Over
CY14-18, almost two-thirds of the investments were in Mumbai and NCR; including
Bengaluru, this share crosses 75%.
PE investments form bulk of institutional fund flow

PE funds have historically contributed bulk of the institutional investments in India.
However, their share has dipped in the past five years with contribution from sovereign
wealth funds picking up.
Chart 196: Split of USD9.5bn institutional investment during CY09-13 by fund type
Investment bank Others
3% 3%
Sovereign
wealth fund
5%
Private equity
89%

Sector Update
Chart 197: Split of ~USD20bn institutional investment during CY14-18 by fund type
Investment bank Others
1% 4%
Sovereign
wealth fund
PE funds continue to contribute 15%
bulk of the institutional
investments in India
Private equity
80%
During CY09-13, PE funds contributed 89% of the overall institutional funds in India’s realty
space. This share slipped to 80% over CY14-18 with the share of sovereign wealth funds
jumping from 5% to 15% during these two time spans.
Foreign firms pouring in more money in realty sector

Reforms in India’s realty space have led to more foreign firms getting attracted to the
sector.
Chart 198: Foreign firms providing bulk of intuitional funds to realty segment
100.0
Split of realty space investments (%)
Foreign firms have supplied the 80.0

lion’s share of institutional
investments in the country 60.0
40.0
20.0
0.0
Domestic Foreign Co-investment

This is reflected in the fact that the share of foreign investments in the institutional fund
flow is estimated to have surged from 31% in CY09 to 70% in CY18.

Real Estate
Deep dive in to PE space

With PE investments constituting ~80% of the overall institutional investments in India, it is
worthwhile to analyse the flow of PE investments in the realty sector. Again, debt funding
by NBFCs and HFCs is excluded from the analysis.
Chart 199: PE investments in property space have picked up since CY13

10
(USD bn)
6
0
CY08
CY09
CY10
CY12
CY13
CY14
CY16
CY17
CY18
CY07
CY11
CY15
PE Investment in India property sector
In line with institutional fund flow, In line with the institutional investment flow in to the sector, PE investments too declined
PE investments in India have also post the Lehman crisis and then picked up post CY13. The growing confidence of investors is
surged since CY13 evident from the fact that the top 5 deals in 2018 contributed ~50% to total investments
during the year.
Investors’ confidence is also evident from the fact that investments at entity level during
2017 and 2018 were almost 3x compared to the previous two years. This indicates that
investors are not afraid of embracing higher complexity.
Chart 200: Commercial segment attracting bulk of PE investments in India

100.0
Investment by asset class (%)
80.0
60.0
40.0
20.0
Office space has attracted bulk of

0.0
PE investments 2015 2016 2017 2018
Commercial Residential Retail Others


Sector Update
With strong fundamentals, robust rental growth and emergence of a new exit option in the
form of REIT, the office segment is now attracting the lion’s share of PE investment in the
country with the share of residential segment declining. The booming consumption story is
being played through rising investments in the retail space. Finally, introduction of GST and
rapid growth in e-commerce business in India means that investments in the
logistic/warehousing space have also surged.
Chart 201: Foreign firms provide major part of PE investments in India

100.0
Investment by point of origin (%)

80.0
60.0
40.0
20.0
0.0
2015 2016 2017 2018
Domestic Foreign
Foreign firms provide ~90% of the overall PE investments in the country with domestic firms
contributing the balance. This proves the growing attractiveness of India’s property sector
for investors.
Chart 202: Share of equity investments in commercial segment is improving

75.0
Share of equity investments (%)
60.0
45.0
30.0
15.0
0.0
2015 2016 2017 2018
Commercial segment Residential segment

With the residential segment still to find its feet, equity investments in the segment have
dwindled. On the other hand, equity investments in the commercial segment are booming.

Real Estate
Chart 203: Platforms created over past few years

5
(USD bn)
2
0
2015 2016 2017 2018
Over the past few years, marquee investors like Warburg Pincus, Goldman Sachs, CPPIB,
Allianz, Ascendas, Xander, CDPQ, etc., have created platforms with a corpus of ~USD9bn for
investments in India.
REIT emerging as another exciting option for realty developers

The success of India’s maiden REIT issue (Blackstone-Embassy) has heralded the arrival of a
new funding source for realty players. Since its inception in the US in 1960, REIT has become
a major alternate investment instrument with global REIT asset value exceeding USD1.7tn in
CY18. This has been driven by REITs beating equity markets in returns over the long term.
Over the past 25 years, REIT has progressively made a debut in many countries. Currently,
REITs are present in 35 countries.
Chart 204: REIT—Presence in various countries
1,250 250
REITs are present across the globe
Number of REITs (x)

Market cap (USD bn)
1,000 200
with the global REIT asset value
exceeding USD1.7tn in CY18 750 150
500 100
250 50
0 0
Australia
Germany
France
Canada
Hong Kong
Singapore
UK
Japan
USA
Sector market cap (USD bn) Number of REITs (RHS)

Source: European Public Real Estate Association REIT survey 2018, JLL, Edelweiss research

Sector Update
Chart 205: Market capitalisation of listed REITs in US

1,250
Market cap (USD bn)

1,000
750
500
250
1971
1975
1980
1985
1990
1995
2005
2006
2007
2009
2010
2011
2013
2014
2015
2017
2018
2000
2008
2012
2016
Market cap of listed REITs
Source: National Association of Real Estate Investment Trusts, JLL, Edelweiss research
The market cap of REITs in the US has surged in the current decade.
Chart 206: Market capitalisation of listed REITs in Singapore

75
60
Market cap (USD bn)
45
30
15
0
2002
2003
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015
2016
2017
2018
2004
2013
Market cap of listed REITs

Source: CEIC, JLL, Edelweiss research
Despite a late start, REITs have gained currency in the Singapore market.
India has significant potential for REIT

According to JLL, almost 60% of the overall Grade A office stock in India has the potential to
become part of a REIT. Overall, ~294msf of office space will be eligible for REIT and can
attract potential investment of USD35bn (includes assets eligible for REIT from stock as on
CY18 and includes Embassy Office Parks REIT).

Real Estate
Chart 207: Split of ~294msf office space eligible for REIT in India by city
Pune Mumbai
11% 17%
Bengaluru has the highest share in
eligible REIT assets in India
NCR
14%
Bengaluru
33%
Chennai
Hyderabad Kolkata 13%
11% 1%
Chart 208: Split of value of assets eligible for REIT in India by city
Pune
8% Mumbai
24%
Bengaluru
31%
NCR
16%
Hyderabad
7%
Kolkata Chennai
1% 13%
Bengaluru (with quality assets and presence of large IT companies) has the highest potential
for REIT in India. The city has ~98msf office space worth ~USD11bn. Next comes Mumbai
with ~50msf space worth USD8.6bn.

Sector Update
Chart 209: IT/IT SEZ office space dominates assets eligible for REIT in India
100.0
90.0
Share (%)
80.0
70.0
60.0
Bulk of the assets eligible for REIT
in India belong to IT/IT SEZ office 50.0
Chennai
Bengaluru
Hyderabad
India
Mumbai
Pune
NCR
Kolkata
space
Share of IT/IT-SEZ office space in assets eligible for REIT

Bulk of the office space eligible for REIT in India pertains to the IT/IT SEZ office segment.
Chart 210: Opportunity for REITs in near future

35
34
Space (msf)
33
32
31
30
2019E 2020E 2021E
101msf space eligible for REIT over Upcoming space eligible for REITs
the next three years Source: JLL, Edelweiss research
With supply of office space expected to pick up going ahead, there is an impending
opportunity of 101msf space eligible for REIT over the next three years.
Apart from office space, there will be opportunity for REITs in the retail,
warehousing/logistics and hospitality sectors in India in the future. The organised retail
market size in India spans ~250 malls in top cities which occupy ~80msf space. Similarly, the
total stock in Grade A & B warehousing space in the top 8 cities in India is ~170msf.
Overall, the emergence of REIT in India is likely to lead to better formalisation and
transparency in the sector and thus attract higher institutional flows. Besides, it will provide
developers in the capital-intensive commercial segment with a new monetisation option for
their assets.

Real Estate
What can go wrong?

While we believe that supply in the overall realty space will continue to lag demand due to
regulatory and liquidity issues, a reversal of this trend has the potential to adversely impact
the fragile growth momentum. Thus, a lot depends on the external environment like
liquidity in the system, economic growth, etc. Following are the key risks to our earnings
growth estimates:
 Economic downturn, which could hurt absorption.
 Higher project launches or distress sale of units by developers to shore up liquidity.
 Sharp rise in interest rates, which could lead to decline in demand.
What needs to be monitored?

 Project launches in residential and commercial segments.
 Demand in residential and commercial segments.
 Unsold inventory levels in residential segment and vacancy levels in the commercial
segment.

Sector Update
COMPANIES

COMPANY UPDATE
DLF
A new inning
COMPANYNAME
India Equity Research| Real Estate
DLF has embarked on a new growth path characterised by a lean balance EDELWEISS 4D RATINGS
sheet, improving cash flow and a revamped business model in Devco Absolute Rating BUY
(development business). Its steadily growing rental portfolio (DCCDL) is Rating Relative to Sector Performer
likely to be scaled up over the medium term and is poised for strong Risk Rating Relative to Sector Low
value addition. While the company has a robust development pipeline Sector Relative to Market Equalweight
(both in Devco and DCCDL), the pace of liquidation of its unsold inventory
of about INR110bn will be a key determinant of the stock trajectory, in
MARKET DATA (R: DLF.BO, B: DLFU IN)
our view. Maintain ‘BUY’ with a target price of INR238/share.
CMP : INR 164
Target Price : INR 238
Balance sheet overhaul complete; time for growth
52-week range (INR) : 224 / 137
DLF has started generating positive operational cash flow (post-capex and ex-dividend)
Share in issue (mn) : 2,337.2
subsequent to fund infusion by promoters and QIP completion. The Devco is likely to M cap (INR bn/USD mn) : 393 / 4,774
focus on faster liquidation of ~INR110bn in unsold inventory to boost cash flow—with Avg. Daily Vol.BSE/NSE(‘000) : 10,550.9
Camellias alone making up about 41% of the unsold inventory, a pick-up in its sales is
needed. The Devco has about 16msf of projects in the pipeline, out of which execution SHARE HOLDING PATTERN (%)
on the Mid-town project (1.9msf in Phase 1) has commenced, while other projects are
Current Q4FY19 Q3FY19
in various stages of development.
Promoters * 74.9 71.9 74.9
MF's, FI's & BK’s 2.2 1.2 1.3
Robust rental portfolio broadens growth horizons FII's 16.9 21.3 16.8
With about 33msf of operational assets (about 30msf housed in rental arm DCCDL) and Others 5.9 5.7 7.0
3.4msf of under-construction assets, DLF’s robust rental portfolio is a sizable part of its * Promoters pledged shares : NIL
(% of share in issue)
value proposition. We believe about 22.5msf worth of development potential
(excluding Chennai commercial project), transfer of certain commercial assets from
PRICE PERFORMANCE (%)
DLF to DCCDL (in lieu of debt settlement) and an upward revision in rents for expiring
leases would drive an uptick in revenue going ahead. EW Real
Stock Nifty
Estate Index
1 month (5.4) (0.6) (1.2)

Outlook and valuation: Attractive; maintain ‘BUY’
3 months (13.6) (7.7) (7.0)
An attractive rental portfolio and a revamped balance sheet are likely to lift DLF’s cash
12 months (23.9) (5.6) (4.4)
flows, which could be crucial as the company is emerging as a key beneficiary of the
ongoing sector consolidation. We also believe the rate of liquidation of unsold
inventory will be a key trigger for the stock. All in all, we maintain earnings estimates
for the erstwhile merged entity (despite DCCDL’s demerger), pending greater clarity on
adjustments/reconciliation between DLF and DCCDL. We also maintain ‘BUY/SP’ with a
TP of INR238/share (10% discount to NAV of INR264/share.
Financials (INR mn)

Parvez Akhtar Qazi
Year to March FY18 FY19 FY20E FY21E +91 22 4063 5405
Revenues 67,068 83,661 90,861 147,075 parvez.qazi@edelweissfin.com
EBITDA 23,774 21,415 42,424 67,330
Archit Ranka
Net profit (43,015) 11,919 15,998 31,873 +91 22 4063 5523
EPS (INR) (24.1) 5.4 6.5 12.9 archit.ranka@edelweissfin.com
P/E (x) (6.8) 30.3 25.3 12.7

ROE (%) 14.9 3.8 4.4 7.8 September 3, 2019
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
DLF
Devco has turned the corner

DLF’s sales, buffeted by the slowdown in the NCR realty, have started bouncing back. Sales
had bottomed in FY18 before finally recovering in FY19. Against net sales of INR24.4bn in
FY19, management is targeting around 10% growth in FY20; with sales bookings of about
INR7bn in Q1FY20, the company is on track to achieve this target.
Chart 1: DLF’s sales on recovery path

80
Annual pre sales (INR bn)

64
48
32
16
Q1FY20
FY10
FY11
FY13
FY14
FY15
FY17
FY18
FY19
FY12
FY16
Pre sales (net) Pre sales (gross)
Source: Company, Edelweiss research
The bulk of the sales in FY19 emanated from Gurugram Phase V, mainly from Crest and
Camellias.
Chart 2: DLF Phase V accounted for a lion’s share of sales (net) in FY19
Horizo Camell
National
n& ias
Devco, 24
Others 14 Camell
21 ias
Upgra
dation
8
Crest
57
Rest of
Gurugram, 11 DLF Phase V, 65
Going ahead, Devco’s focus will be on liquidating its ~INR110bn inventory – about 10.8msf –
to shore up cash flow.

Real Estate
Chart 3: Camellias makes up more than 40% of DLF’s overall unsold inventory
National DLF Ph V, 44.2% Horizo

Crest
Devco, 24.0% n&
0.3%
Others
6.7%
Camell
Rest of ias
Gurugram, 31.8% 93.0%
Out of this unsold inventory, the bulk is located in DLF V, mainly in the Camellias project
(54% sold, inventory of ~INR45bn). Consequently, the company needs to focus its energies
on speeding up monetisation of this inventory. We believe this will be a key variable for
investors.
Thoughts turn towards growth

With ongoing projects nearing the end of execution cycle, DLF is now mulling new project
development. For these new projects too, the company is likely to continue its strategy of
launching them only after achieving a reasonable level of completion.
DLF has about 16msf of projects in the pipeline, which should enhance its growth potential.
These projects include:
 Mid-town, New Delhi, spanning ~8msf (DLF’s share at 50%) – The work on 1.9msf in
Phase 1 has already begun, while the balance ~6msf is currently at the design stage.
Out of this 6msf, financing for 2msf has been closed with work expected to start over
the next few quarters. The construction spend on the ~4msf work will be about
INR22bn.
 HSIIDC project spanning ~3msf (DLF’s share at 67%) – The company plans to apply for
pre-construction approvals for this ~3msf Hines JV project shortly. It expects
construction to commence before the end of the fiscal. The construction spend on the
project will be about INR12.5bn.
 Luxury residential project in DLF Phase V spanning ~2.5msf – This project is at the
planning stage.
 Hyderabad SEZ spanning ~3msf – Phase I (0.6msf) is currently at the design stage.
Over the long term, DLF has significant growth potential given its sizeable land bank. The
company has ~201msf of total development potential (this does not include additional
Transit Oriented Development (TOD) potential in Phase V and New Gurugram). Details of
the company’s development potential are:

DLF
Chart 4: DLF’s development potential (201msf)

Other Indian
Cities, 17 DLF
Phase
Kolkata, 1 V
16
Chandigarh
Tri-City, 8
New
Hyderabad, 4 Gurugr
am/Re
st of
Chennai, 9 Delhi Gurugr
Gurugram, 53 am
Metropolitan 84
Region, 8
Rental portfolio in good shape

The DLF group boasts of one of the largest rental portfolios in the country. It has about
33msf of operational rental assets, out of which about 30msf is under its rental arm DCCDL
and the balance in DLF.
Chart 5: Steady growth in DLF group’s rental portfolio

35.0
28.0
Lease portfolio (msf)
21.0
14.0
7.0
0.0
Q1FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10
Lease portfolio build-up

Of the ~30msf space in DCCDL, ~28msf is leased out.
We expect DCCDL’s portfolio to be on a stable growth path. It has the following three
avenues for ramping up its portfolio:
o Under-construction assets: Apart from about 30msf of operational rental assets,

DCCDL has about 3.4msf in assets under construction.

Real Estate
o 2.5msf Cyber Park (near Cyber City in Gurugram); the project is expected to receive
‘occupancy certificate’ (OC) soon and the rent is expected to commence from
Q3FY20. The project has been largely pre-leased.
o 0.9msf in Chennai IT SEZ; the work on the project is expected to be completed in
the current fiscal.
 Development potential: In addition, DCCDL has projects spanning about 22.5msf
development potential (excluding Chennai commercial project):
o 11.5msf in Cyber City, Gurugram; and
o About 11msf of commercial development in close proximity to Cyber City,
Gurugram; out of this, design of about 3msf in Phase I is under finalisation.
 Asset transfer from DLF: In lieu of the ~INR87bn loan taken by DLF from DCCDL, DLF
has already transferred certain rental properties and land parcels to DCCDL and will
transfer some more assets in the near future. These include:
o Mall of India, Noida (1.97msf) – Already transferred
o 3.05 acre land parcel near Mall of India, Gurugram – Already transferred
o DLF’s stake in Horizon Centre, Gurugram
o DLF Place, Saket, New Delhi
o Commercial land parcel in Chennai
o Other assets
Management believes DCCDL can generate free cash flow of about INR90bn over the next
five years. Even if half of this is paid in the form of dividends, the balance can be utilised to
develop 9–10msf of new projects without requiring any fund infusion from promoters, i.e.
DLF and GIC.
As a result, DCCDL’s portfolio is likely to expand steadily going ahead.
Chart 6: DCCDL portfolio to have multiple growth levers going ahead

75
DCCDL future opportunities (msf)
60
45
30
15
0
Operational portfolio Cyber Park Chennai IT SEZ Development DLF Downtown (Mall Assets to be acquired
(Phase III) potential in DLF of India, Gurugram) from DLF as part of
Cyber City Stage II of DCCDL-GIC
transaction

DLF
Chart 7: DCCDL rental growth – Strong trajectory

DCCDL rental portfolio build-up (INR mn)
50,000
40,000
30,000
20,000
10,000
Includes Saket
Chennai New
Cyber Park
development*
Q1FY20 rental rate
Contracted growth
area and mid term
Total current
FY22 rentals*
Mark to market
Rental for vacant
portfolio
Proposed
OHC/2HC
termination

Note: * Indicative numbers
Going ahead, DCCDL’s rental growth is likely to be boosted by the following factors:
 Mark-to-market on existing assets: On its existing rental portfolio, the company has
significant room for upward revision in rents for expiring leases.
Table 1: Significant potential for rent revisions for expiring leases

Weighted average rentals Market rent Potential
Project
(INR/sft/month) (INR/sft/month) upside (%)
Cyber City, Gurugram 99 119 20
Chennai SEZ 62 75 21
Cyber SEZ, Gurugram 75 102 36
Hyderabad SEZ 49 58 18
Note: Weighted average rentals are the weighted base rentals for leased area
Note: Market rent means weighted average rate for new leases entered till June 2019
The re-leasing of these assets at market rent should further boost revenue and is likely
to result in significant value addition.
 Incremental rentals post completion of under-construction assets such as DLF Cyber

Park and Chennai IT SEZ.
 Assets transferred from DLF in lieu of debt repayment.
 New project development (initial phases of the ~22.5msf development potential).
As a result of these factors, management expects DCCDL’s rental income (exit run rate) to
rise from INR28bn at end-FY19 to INR37.5bn by end-FY20 and INR47bn by end-FY22.

Real Estate
Balance sheet overhaul improves cash flow

The land bank built up in the previous decade and the slowdown in sales over the past few
years had saddled the company with significant debt. The consequent high-interest burden
was the main reason for DLF’s negative cash flow.
Chart 8: DLF’s cash flow has improved

5
Net cash flows (INR bn)

(15)
(35)
(55)
(75)
(95)
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY07
FY08
Net cash flows

Note: Net cash flow = Operating cash flow less net fixed asset purchase less interest expenses
Note: Financials prior to FY16 are as per IGAAP, FY16–18 are as per Ind AS 18 while FY19 financials
are as per Ind AS 115
Post fund infusion by promoters and the QIP issue, net debt for DLF group (ex-DCCDL) at
end-Q1FY20 reduced to about INR34bn while its net debt:equity improved to ~0.1x. The
company has posted positive operating cash flow (OCF; post-capex ex-dividend) for four
consecutive quarters now.
Chart 9: Declining leverage for DLF group (Devco + DCCDL)

400 1.5
320 1.2
Net debt:equity (x)

240 0.9
(INR bn)
160 0.6
80 0.3
0 0.0
FY19**
Q1FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY10
Net debt* Net worth Net debt:equity (RHS)

Note: Financials prior to FY16 are as per IGAAP, FY16–18 are as per Ind AS 18 while FY19 financials are as per Ind AS 115
Note: * Net debt for FY18, FY19 and Q1FY20 is combined net debt for Devco and DCCDL
Note: **FY19 net worth has negative impact of INR54bn due to Ind AS 115 adoption

DLF
We believe DLF’s cash flow is likely to improve due to the factors mentioned below.
 DLF has sales receivables worth about INR28bn, which is more than enough to fund the
construction outflow of about INR19.8bn on existing projects.
 Funds to be generated from liquidation of inventory of about INR110bn.
 Reduction in interest costs: In the wake of the transfer of assets to DCCDL,

management believes quarterly interest outgo will decine to INR1bn by end-FY20.
 Expected dividends from DCCDL.
As a result, the company’s cash flows are likely to receive a leg-up. Management believes
that gross debt for DLF group (ex-DCCDL) can reduce to INR35–40bn by end-FY20.

Real Estate
Outlook and valuation

DLF boasts an attractive rental portfolio that is growing steadily. Besides, the company has a
revamped balance sheet, which is likely to generate better cash flows, and, thus, it is likely
to be a key beneficiary of the ongoing sector consolidation in our view. We believe the rate
of liquidation of inventory worth INR110bn will be a key trigger for the stock. A pickup in
demand and consequently realisations (at a later date) can benefit the company
significantly, courtesy its large unsold inventory.
We recommend ‘BUY/SP’ with a target price of INR238, which we derive from our
December 2020E NAV of INR264 at a discount of 10%.
Table 2: SOTP valuations

Particulars Value
Value of future land bank (INR mn) 501,839
DLF's share in value of rental assets (INR mn) 332,571
Value of Ongoing Projects (INR mn) 67,575
Less: DLF's share in net debt 247,526
NAV (INR mn) 654,460
NAV Per Share (INR) 264
Discount to NAV (%) 10
Price Target (INR) 238
The rationale for a low 10% discount to NAV is based on the factors mentioned below.
1. DLF boasts a premium brand and must command an equity investment scarcity
premium (i.e. limited liquid real estate plays in the Indian equity market).
2. Robust rental portfolio, which lends high visibility to growing rental income.
3. Ability to grow rental portfolio from internal accruals.
4. Lean balance sheet and improving cash flow trajectory.
5. Relative lack of competition in the NCR market.
These factors contrast with a few negatives:

1. In the post-RERA environment, DLF intends to launch projects only after achieving a
reasonable level of completion. This may strain cash flows somewhat.
2. Limited new project being rolled out with the company already sitting on a huge unsold
inventory.
3. DLF has a long‐gestation land bank of 201msf (INR24.5bn of new sales in FY19), which
could take more than two decades to be monetised.
4. Around 60% of the company’s total land bank is concentrated in NCR. If the ongoing
slowdown in the Gurugram property market gets prolonged, DLF’s growth prospects
are likely to weaken.
5. Limited presence outside high-end residential space: The company intends to focus on
development of premium residential projects only.

DLF
Company Description
DLF, incorporated in 1963, is a north India based real estate developer with presence across
major markets in India. It is involved in development of various property types – residential,
commercial and retail. More than 50% of its land bank is located in Gurgaon. It has ~30msf
of leased rental assets located in key metros across India. The company is promoted by Mr.
K. P. Singh who has four decades of experience in the Indian real estate industry.
Investment Theme
DLF boasts of premium brand and equity investment scarcity (i.e., limited real estate plays in
the Indian equity market that are liquid).
Robust rental portfolio which lends high visibility to growing rental income.
Ability to grow rental portfolio from internal accruals.
Lean balance sheet and improving cash flow generation trajectory.
Relative lack of competition in the NCR market.
Key Risks
In the post RERA environment, DLF intends to launch projects only after achieving a
reasonable level of completion. This may lead to some strain on cash flows.
Limited new project roll out with the company already sitting on huge unsold inventory.
DLF has long‐gestation land bank which could take more than 2 decades to be monetised.
Around 60% of the company’s total land bank is concentrated in NCR, which could restrict
scale up in operations.
Limited presence outside high-end residential space

Real Estate
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Macro Income from operations 67,068 83,661 90,861 147,075
GDP(Y-o-Y %) 7.2 6.8 6.8 7.1 Direct costs 31,153 49,511 34,938 65,436
Inflation (Avg) 3.6 3.4 4.0 4.5 Employee costs 3,436 3,516 3,727 3,951
Repo rate (exit rate) 6.0 6.3 5.3 5.0 Other Expenses 8,704 9,219 9,772 10,358
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 43,293 62,246 48,437 79,744
Company EBITDA 23,774 21,415 42,424 67,330
Selling Price increase (%) 5 5 5 5 Depreciation 5,335 2,246 5,299 5,550
Construction Cost Increase (%) 5 5 5 5 EBIT 18,439 19,169 37,125 61,780
Less: Interest Expense 29,507 20,619 21,680 24,357
Add: Other income 9,569 6,633 6,700 6,767
Profit Before Tax 86,155 6,456 22,145 44,190
Less: Provision for Tax 43,230 2,774 6,201 12,373
Less: Minority Interest 129 (52) (54) (56)
Add: Exceptional items 87,653 1,273 - -
Associate profit share 1,844 9,458 - -
Reported Profit 44,639 13,192 15,998 31,873
Adjusted Profit (43,015) 11,919 15,998 31,873
Shares o /s (mn) 1,784 2,207 2,475 2,475
Adjusted Basic EPS (24.1) 5.4 6.5 12.9
Diluted shares o/s (mn) 1,784 2,207 2,475 2,475
Adjusted Diluted EPS (24.1) 5.4 6.5 12.9
Adjusted Cash EPS (21.1) 6.4 8.6 15.1
Dividend per share (DPS) 2.0 2.0 1.8 1.8
Dividend Payout Ratio(%) 8.0 33.5 27.6 13.9
Common size metrics

Year to March FY18 FY19 FY20E FY21E
Staff costs 5.1 4.2 4.1 2.7
S G & A expenses 13.0 11.0 10.8 7.0
Operating expenses 64.6 74.4 53.3 54.2
Depreciation 8.0 2.7 5.8 3.8
Interest Expense 44.0 24.6 23.9 16.6
EBITDA margins 35.4 25.6 46.7 45.8
Net Profit margins (64.1) 14.2 17.6 21.7
Growth ratios (%)

Revenues (18.4) 24.7 8.6 61.9
EBITDA (30.8) (9.9) 98.1 58.7
PBT (125.0) NA 327.2 99.6
Adjusted Profit NA NA 34.2 99.2
EPS NA NA 19.7 99.2

DLF
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Share capital 3,568 4,414 4,951 4,951 Operating cash flow 24,776 68,855 33,439 44,937
Reserves & Surplus 349,536 331,351 389,373 415,888 Financing cash flow (7,162) (57,053) 119,509 (30,274)
Shareholders' funds 353,104 335,765 394,323 420,839 Investing cash flow (35,825) 13,973 (174,787) (9,500)
Minority Interest 488 406 406 406 Net cash Flow (18,210) 25,774 (21,840) 5,163
Long term borrowings 174,908 172,225 249,173 224,256 Capex 160,380 15,704 (174,787) (9,500)
Def. Tax Liability (net) 4,385 (19,372) (19,372) (19,372) Dividend paid (4,330) (5,357) (5,357) (5,357)
Sources of funds 532,885 489,024 624,531 626,129 Share issue/(buyback) (76) 85,329 58,242 -
Gross Block 75,535 58,295 229,070 239,919
Net Block 70,731 53,125 218,601 223,899 Profitability and efficiency ratios
Capital work in progress 1,373 1,029 5,041 3,693 Year to March FY18 FY19 FY20E FY21E
Total Fixed Assets 72,104 54,154 223,642 227,592 EOP(ROE) (%) 14.9 3.8 4.4 7.8
Goodwill on consolidation 10,092 10,092 10,092 10,092 ROAE (%) NA 3.5 4.4 7.8
Non current investments 208,316 210,047 210,047 210,047 ROACE (%) 6.3 5.7 7.9 11.8
Cash and Equivalents 22,779 48,554 26,714 31,877 Current Ratio 4.3 2.4 2.0 1.9
Inventories 197,529 220,085 224,297 228,658 Gross Debt/EBITDA 7.4 8.0 5.9 3.3
Trade receivables 12,858 8,323 9,086 14,707 Gross Debt/Equity 0.5 0.5 0.6 0.5
Loans & Advances 15,775 22,589 23,267 23,732 Net Debt/Equity 0.4 0.4 0.6 0.5
Other Current Assets 65,826 71,612 71,827 72,545
Total current assets 291,988 322,609 328,476 339,643 Operating ratios
Current liabilities 71,737 155,646 173,655 192,336 Year to March FY18 FY19 FY20E FY21E
Provisions 658 785 785 785 Total Asset Turnover 0.1 0.2 0.2 0.2
Total Current Liab 72,394 156,431 174,440 193,121 Fixed Asset Turnover 0.4 1.4 0.7 0.7
Net Curr Assets-ex cash 219,594 166,178 154,036 146,521 Equity Turnover 0.2 0.2 0.2 0.4
Uses of funds 532,885 489,024 624,531 626,129
BVPS (INR) 197.9 152.1 159.3 170.0 Valuation parameters
Free cash flow (INR mn) Adj. Diluted EPS (INR) (24.1) 5.4 6.5 12.9
Year to March FY18 FY19 FY20E FY21E Y-o-Y growth (%) NA NA 34.2 99.2
Reported Profit 44,639 13,192 15,998 31,873 Adjusted Cash EPS (INR) (21.1) 6.4 8.6 15.1
Add: Depreciation 5,335 2,246 5,299 5,550 Diluted P/E (x) NA 30.3 25.3 12.7
Interest (Net of Tax) 19,770 9,585 15,393 17,293 P/B (x) 0.8 1.1 1.0 1.0
Less: Changes in WC 25,198 (53,416) (12,142) (7,515) Dividend Yield (%) 1.2 1.2 1.1 1.1
Less: Capex (160,380) (15,704) 174,787 9,500
Free Cash Flow 204,926 94,144 (125,956) 52,731

Real Estate
Additional Data
Directors Data
Dr. K.P. Singh Chairman Mr. Rajiv Singh Vice Chairman
Dr. D.V. Kapur Independent Director Mr. K.N. Memani Independent Director
Ms. Priya Paul Independent Director Mr. Mohit Gujral CEO & Whole-time Director
Mr. Rajeev Talwar CEO & Whole-time Director Ms. Pia Singh Independent Director
Mr. G.S. Talwar Independent Director Mr. Pramod Bhasin Independent Director
Mr. Rajiv Krishan Luthra Independent Director Mr. Ved Kumar Jain Independent Director
Lt. Gen. Aditya Singh (Retd.) Independent Director Mr. A. S. Minocha Independent Director
Mr. Ashok Kumar Tyagi Whole-time Director Mr. Devinder Singh Whole-time Director
Mr. Vivek Mehra Independent Director
Auditors - S.R. Batliboi & Co. LLP

*as per last annual report
Holding – Top 10
Perc. Holding Perc. Holding
Invesco Ltd 7.20 Oppenheimer Global 3.66
Republic of Singapore 3.39 Vanguard Group 0.82
Aditya Birla Sun Life MF 0.56 Govt of Singapore 0.48
Voya Investment Management 0.47 Dimensional Fund Advisors 0.44
Reliance Capital 0.32 HDFC Asset Management Co Ltd 0.20
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
23 Oct 2018 Rajdhani Investments & Agencies Pvt. Ltd. Buy 164151.00
19 Oct 2018 Rajdhani Investments & Agencies Pvt. Ltd. Buy 50000.00
*in last one year

COMPANY UPDATE
GODREJ PROPERTIES
In a league of its own
COMPANYNAME
Godrej Properties (GPL) has emerged as the sole pan-India developer by EDELWEISS 4D RATINGS
notching up sales of least ~1msf/INR8bn in each of the four major markets Absolute Rating BUY
(MMR, NCR, Bengaluru and Pune) in FY18 and FY19. Its brand name and Rating Relative to Sector Outperformer
leadership status in the Development Management (DM) model has led to Risk Rating Relative to Sector Low
its project portfolio expanding at a dizzying speed—~71msf projects added Sector Relative to Market Equalweight
in the past three years. While surging growth has brought along challenges
in the form of cash flow strain, repeated fund raise and expensive
valuations, we believe GPL remains the best bet to play the industry MARKET DATA (R: GODR.BO, B: GPL IN)
CMP : INR 900
consolidation in the medium to long term. Hence, we upgrade to ‘BUY’
Target Price : INR 1,088
with revised TP of INR1,088 (INR770 earlier).
52-week range (INR) : 1,120 / 460
Share in issue (mn) : 252.0
Performance reinforces leadership position M cap (INR bn/USD mn) : 227 / 1,537
GPL’s diversified geographical presence, robust brand name and its front runner status Avg. Daily Vol.BSE/NSE(‘000) : 411.4
in the DM mode have enabled the company to grow its project portfolio by more than
50% in the past three years; it has added 50msf plus projects over FY18 and FY19 SHARE HOLDING PATTERN (%)
alone. This has been backed by strong preparatory work (annual project launch area Current Q4FY19 Q3FY19
has doubled over FY17-19), healthy sales and marketing push (clocking ~1msf/INR8bn Promoters * 64.5 70.8 70.8
sales in all key markets in FY18 and FY19) and robust execution (~20msf delivered in MF's, FI's & BK’s 2.8 1.6 1.3
past five years). GPL has been a significant beneficiary of the industry consolidation. FII's 20.3 13.8 13.9
Others 12.4 13.7 14.0
Growth brings its own set of challenges * Promoters pledged shares : NIL
One of the downsides of the rapid growth in demand is that it has brought on the
balance sheet front in terms of approval costs, construction funding etc. Collections PRICE PERFORMANCE (%)
have not kept pace with land acquisition/approval/construction spends as project
EW Real
addition has far outpaced sales; this has resulted in strain on GPL’s cash flows. As a Stock Nifty
Estate Index
result, the company has had to raise capital five times in the past decade. How GPL
1 month (4.5) (0.6) (1.2)
manages its growth going ahead will be a key monitorable for investors. 3 months 1.7 (7.7) (7.0)
12 months 28.4 (5.6) (4.4)
Outlook and valuation: Growth at a price; upgrade to ‘BUY’
The ongoing consolidation in the realty sector and the liquidity crisis bode well for GPL
which is well placed to maintain its leadership in the realty space. In our view, the
company’s robust project pipeline, rapidly expanding project portfolio and tailwinds
from RERA are key positives and will enable the stock to continue to trade at rich
valuations. Hence, we upgrade to ‘BUY/SO’ from ‘HOLD/SP’ with TP of INR1,088/share
(on par with NAV of INR1,088/share).
Financials (INR mn)

Parvez Akhtar Qazi
EBITDA (1,790) 1,780 2,187 4,472 Archit Ranka

Net profit 869 2,532 5,479 10,676 +91 22 4063 5523
archit.ranka@edelweissfin.com
EPS (INR) 4.0 11.0 21.7 42.4
P/E (x) 224.2 81.5 41.4 21.2
ROE (%) 7.2 10.3 10.7 17.3 September 3, 2019
Real Estate
Leadership burnishes credentials

Over the past decade, GPL has emerged as the only true pan-India real estate developer. It
has delivered strong performance on most operating parameters, be it project addition,
portfolio diversification, sales growth or execution. This has enabled the company to make a
mark as the premier real estate developer in the country.
Chart 1: GPL has been on a rapid growth path over past few years
10.0
8.0
Sales volumes (msf)

6.0
4.0
2.0
0.0
Q1FY20
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY19
FY14
Sales volumes
Part of the reason for this lies in the strong parentage and healthy brand image that the
company enjoys. This has enabled it to be on the top of evolutionary changes in India’s
realty space, which has witnessed regulatory changes in favour of transparency and higher
formalisation over the past few years.
Portfolio addition at break-neck pace…

The company’s wide geographical footprint, its long-standing experience of growing via the
partnership model (JV/JDA) and its pioneering position in the use of DM model have helped
GPL add projects to its portfolio at a rapid speed.
Chart 2: GPL project portfolio expanding at a rapid pace

15
Number of projects added
12
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20
MMR NCR Bengaluru Pune Kolkata Hyderabad Chennai Nagpur

Godrej Properties
The transformative effect of RERA imposition and the changing dynamics of the industry in
the form of consolidation are clearly visible when one looks at the pace of GPL’s portfolio
expansion—project addition has moved in to a different orbit altogether when one looks at
the past few years.
Chart 3: GPL’s geographical diversification aids portfolio growth

35
Area of projects added (msf)

28
21
14
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
MMR NCR Bengaluru Pune Kolkata Hyderabad Chennai Nagpur
Compared with ~9-10msf of average annual project addition during FY14-16, the company,
on an average, has added ~24msf projects annually over FY17-19. In fact, the quantum of
projects added in FY19 alone at ~30msf eclipses the cumulative project addition during
FY14-16.
Chart 4: GPL’s project portfolio is well diversified

200
Total developable area (msf)
160
120
80
40
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20
Ahmedabad Pune Hyderabad Kolkata Mumbai Chennai
Kochi Bengaluru Mangalore Chandigarh NCR Nagpur
Another thing that the company has managed well over the past decade is avoiding
concentration as far as project addition is concerned. It has been able to ensure that the
various markets where it is present in have a fair share in the overall development pipeline.

Real Estate
Chart 5: GPL has strong development visibility in all major markets
100
Project portfolio area split (%)

80
60
40
20
0
Ahmedabad Pune Mumbai Bengaluru NCR Others
Consequently, the five major regions (Ahmedabad, Mumbai, Pune, Bengaluru and NCR)
where the company’s development pipeline resides have between 13% and 29% share in
the overall project portfolio. This is likely to ensure that GPL grows at a steady pace even if it
has to face a slowdown in any individual market. Consequently, it is insulated from any
geographical concentration risk; this sets it apart from most peers who derive bulk of their
sales from individual home markets.
…well supported by strong sales and execution performance

It is one thing to add projects and build a large development pipeline, quite another to be
able to execute them perfectly in terms of getting timely approvals, launching them,
providing the requisite sales & marketing muscle and delivering them through time-bound
execution. When one has to do this over multiple geographies, the scale of difficulty
becomes much larger as each market has its own characteristics and hence one-size-fits all
approach does not really work.
It is here that GPL has set itself apart from peers. Its ability to manage all of these activities
in a streamlined manner is the biggest contributor to its scorching growth, in our view.
The company has mastered the art of fast project turnaround; the time from project
acquisition to launch has been quick at ~1-2 years. This is a testimony to the company’s
ability to complete the approval process at a rapid pace.

Godrej Properties
Table 1: GPL is well known for a quick project turnaround

Time period
Project Location Acquisition Launch
(quarters)
Godrej Central Park Pune Q3FY18 Q4FY19 5
Godrej Habitat Gurugram (NCR) Q4FY18 Q4FY19 4
Godrej Aqua Bengaluru Q4FY17 Q4FY19 8
Godrej Air NCR Q2FY18 Q3FY19 5
Godrej Reserve Bengaluru Q4FY18 Q3FY19 3
Godrej Reflections Bangalore Q2FY17 Q2FY19 8
Godrej Meridian Gurugram (NCR) Q2FY18 Q1FY19 3
Godrej Elements Pune Q4FY17 Q1FY19 5
Godrej Alive Mumbai Q2FY18 Q1FY19 3
Godrej Nature + Gurugram (NCR) Q1FY18 Q4FY18 3
Vista, Godrej Emerald Thane (MMR) Q4FY16 Q4FY18 8
Godrej Nest Noida (NCR) Q4FY16 Q3FY18 7
GPL’s robust sales machine has ensured that it is able to launch projects quickly post receipt
of approvals. For e.g., after the disruption caused by RERA in FY17, project launches have
picked up materially; the number of projects launched and the area of launches have more
than doubled over FY17 to FY19.
Chart 6: GPL has witnessed strong launch activity in the past few years
20
Number of projects launched
Launch activity
16
has perked up
since FY17
12
0
MMR NCR Bengaluru Pune Ahmedabad
Kolkata Chennai Mangalore Nagpur

Real Estate
Chart 7: GPL has maintained robust launch activity in all its key markets over FY17-19
13.0
Area of projects launched (msf)

Steady stream of
10.4 launches from GPL
since FY17
7.8
5.2
2.6
0.0
MMR NCR Bengaluru Pune Ahmedabad
Kolkata Chennai Mangalore Nagpur
Not only has the number of launches picked up, GPL has been able to maintain a steady
pace of launches across all its four key markets. In terms of area of projects launched over
the past two years, the share of the company’s four main markets has ranged between 13%
and 36%.
Chart 8: GPL’s sales have been diversified geographically Chart 9: GPL has presence across multiple markets
10 60,000
City wise pre-sales (INR mn)
8 48,000
City wise pre-sales (msf)
6 36,000
4 24,000
2 12,000
0 0
FY18 FY19 FY18 FY19
NCR Mumbai Bengaluru Pune Others NCR Mumbai Bengaluru Pune Others

Godrej Properties
Chart 10: Share of commercial segment in sales has declined Chart 11: Residential segment sales on an upwards path
60,000 10
48,000 8
Pre sales (INR mn)
36,000 6
Pre sales (msf)

24,000 4
12,000 2
0 0
Q1FY20
Q1FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY13
FY14
FY15
FY16
FY17
FY18
Residential Commercial FY19 Residential Commercial

This has enabled the company to maintain a healthy sales trajectory across all geographies.
For e.g., in FY18, the company sold a minimum of 1.2msf/INR8bn across all its four key
markets. In FY19, GPL clocked a minimum of 1.1msf/INR9bn across its four key markets.
This has helped the company minimise dependence on any single market.
The company’s brand strength can be gauged from the fact that in an overall weak Noida
market, GPL’s sales exceeded 1msf with a value in excess of INR6.75bn in FY19.
…resulting in significant market share gain

With the realty industry consolidating at a rapid pace, organised players like GPL have
emerged as major beneficiaries. Nowhere is this more illustrative than the performance of
GPL in the NCR market over the past few years. At the start of the decade, GPL was a
peripheral player in the NCR market. It gradually expanded footprint with its share in
demand and launches reaching ~1% over CY14-16.
Chart 12: GPL has emerged as a major force in the NCR market post CY16
15 5
Share in launches (%)
Share in demand (%)

12 GPL has scripted a 4
stunning success
9 story post CY16 3
6 2
3 1
0 0
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY10

Note: Data is in terms of units Source: PropEquity, Edelweiss research

Real Estate
Post CY16, the company has been propelled in to a new growth orbit. With other developers
grappling with execution issues on existing projects and with the after effects of RERA,
demonetisation, GST etc., GPL launched a slew of projects. To the average customer who
had been spooked by the barrage of stalled projects in the NCR market, GPL presented an
opportunity to own a house being developed by a reputed brand. Consequently, its share in
demand has surged ~3.5-4.0x in just two years.
Despite a sluggish NCR market, the company has been able to achieve significant sales
velocity.
Chart 13: Sales velocity robust for GPL in an overall sluggish NCR market
80
Unsold inventory (months)
64
48
32
16
0
CY11
CY12
CY13
CY14
CY15
CY16
CY10
CY17
CY18
Unsold inventory - GPL Unsold inventory - Gurugram
Unsold inventory - Noida
Consequently, GPL’s unsold inventory is way lower than that of the overall Gurugram or
Noida markets.
Growth comes with its own issues

One of the downsides of the scorching pace at which the company has grown over the past
decade is the strain that it puts on cash flows. Apart from construction funding on ongoing
projects, GPL also needs to spend a significant sum of money on land acquisition and
approvals for new projects.
With the ever expanding portfolio size, collections from existing projects are not sufficient
to meet the land/approval related costs of new projects. Consequently, the company’s cash
flows remain under stress despite rising sales.

Godrej Properties
Chart 14: Cash flows under strain

4.0
0.0

(4.0)
(8.0)
Includes INR 4bn
inflow from deal
(12.0)
with Jet Airways for
BKC project
(16.0)
FY08
FY09
FY10
FY11
FY12
FY13
FY16
FY17
FY18
FY19
FY07
FY14
FY15
Net cash flow
Note: Financials prior to FY16 are as per IGAAP, FY16 and FY17 are as per
IND AS 18 while FY18 and FY19 financials are as per IND-AS 115
As a result, the company has had to raise funds repeatedly over the past few years; it has
undertaken a fund raising exercise five times in the past decade. In addition, there was
another equity dilution in FY16 post amalgamation of a group company.
Table 2: Fund raising exercise/equity dilution in GPL over the past few years
Year Instrument Details
FY10 IPO INR4.7bn raised
FY12 Institutional Placement Programme (IPP) INR4.7bn raised
FY14 Rights issue INR7bn raised
FY16 Amalgamation of a Godrej Group company ~8% equity dilution
FY19 Preferential issue to GIC INR10bn raised
FY20 QIP issue ~INR21bn raised

Real Estate
Chart 15: GPL’s leverage levels have declined due to fund raising exercise
2.0 12.5
1.6 10.0
Borrowing cost (%)

Net debt:equity (x)
1.2 7.5
0.8 5.0
0.4 2.5
0.0 0.0
FY11
FY13
FY15
FY16
FY17
FY18
FY12*
FY14*
FY19*
FY10*
Q1FY20 *
Net debt:equity Average borrowing cost (RHS)
Note: Financials prior to FY16 are as per IGAAP, FY16 and FY17 are as per
IND AS 18 while FY18 and FY19 financials are as per IND-AS 115
Note: * denotes the year in which there has been a fund raising exercise
Despite the repeated fund raise, the company’s leverage has remained at an elevated level
due to capital requirements of the business. Going ahead, how the company manages its
growth will be a key monitorable for investors.
Outlook and valuation: In pole position; upgrade to ‘BUY’

GPL has emerged as the best bet to play the ongoing consolidation in India’s realty space.
The liquidity crisis in the industry bodes well for the company and is likely to aid it in
maintaining leadership in the realty space. In our view, robust project pipeline, rapidly
expanding project portfolio and tailwinds from RERA will enable the stock to continue to
trade at rich valuations.
Hence, we upgrade recommendation/rating to ‘BUY/SO’ from ‘HOLD/SP’ with target price

of INR1,088, which is at par with our December 2020E NAV of INR1,088.
Table 3: SOTP Valuations

Particulars Value
Development Portfolio land bank (INR mn) 85,423
Vikhroli and other DMs 46,594
Business development value (INR mn) 155,965
Less: Net debt 13,801
NAV Per Share (INR) 1,088
Price Target (INR) 1,088

Godrej Properties
We argue for nil discount to NAV based on following:

1. Improvement in macro climate—lowering of interest rates and consolidation in the
realty space.
2. Strong brand leverage on customers and landowners, enabling relatively faster
expansion.
3. Asset-light JDA model, enabling the company to add projects at a rapid pace.
4. Geographical diversification which eliminates single market risk.
These factors contrast with a few negatives:

1. Cash flow stress given large project pipeline.
2. Execution risk given large number of relatively small projects.

Real Estate
Company Description
GPL, established in 1990, is a pan-India real estate developer focusing primarily on
residential development. It has a development portfolio with significant exposure to key
markets of Ahmedabad, Bangalore, Mumbai, Pune and NCR. The company’s land bank
strategy includes both outright purchase and joint agreement with land owners in the form
of revenue / profit share. It also ties up with developers as a ‘Development Manager’
wherein it earns 10-11% of project revenue in lieu of project marketing, selling and
branding.
Investment Theme
We cite the following positives and expected tailwinds:
1. Continued scale up in operations via steady new launches and strong sales recorded in
these projects.
2. Steady augmentation of GPL’s development portfolio through value accretive JDA/JV
deals in key city markets.
4. Post RERA implementation, opportunities of new project acquisitions are expected to
increase, especially for organised/large developers like GPL.
5. Geographically diversified development portfolio.
Key Risks
Upside risks:
1. Sharp improvement in demand across markets coupled with price increase.
2. Faster addition of new projects to development portfolio versus our expectations.
3. New project acquisitions at significantly attractive terms.
4. Quick liquidation of balance inventory in commercial project in Chandigarh.
5. Increase in market share in key city markets owing to RERA and shift of customer
preference to organised developers.
Downside risks:
1. Slowdown in new launches.
2. Low involvement in certain group MoUs.
3. Delay in selling balance inventory in commercial project in Chandigarh.

Godrej Properties
Company EBITDA (1,790) 1,780 2,187 4,472
Selling Price increase (%) 5 5 5 5 Depreciation 161 143 146 149
Construction Cost Increase (%) 5 5 5 5 EBIT (1,951) 1,637 2,041 4,322
Less: Interest Expense 1,501 2,340 1,469 529
Add: Other income 4,986 4,046 1,987 2,936
Less: Provision for Tax 300 951 870 2,288
Less: Minority Interest 366 (140) (3,791) (6,234)
Reported Profit 869 2,532 5,479 10,676
Adjusted Profit 869 2,532 5,479 10,676
Shares o /s (mn) 216 229 252 252
Adjusted Basic EPS 4.0 11.0 21.7 42.4
Diluted shares o/s (mn) 216 229 252 252
Adjusted Diluted EPS 4.0 11.0 21.7 42.4
Adjusted Cash EPS 4.8 11.7 22.3 43.0
Common size metrics

Staff costs 8.6 6.1 10.6 8.3
S G & A expenses 17.7 9.7 17.6 14.5
EBITDA margins (11.2) 6.3 12.6 19.0
Net Profit margins 5.4 9.0 31.6 45.4
Growth ratios (%)

Revenues 1.3 75.7 (38.4) 35.7
EBITDA (170.8) (199.5) 22.8 104.5
PBT (39.3) 117.9 (23.5) 163.1
Adjusted Profit (58.0) 191.3 116.4 94.8
EPS (58.0) 175.0 97.0 94.8

Real Estate
Share capital 1,082 1,147 1,260 1,260 Operating cash flow 26,527 2,728 3,409 16,371
Reserves & Surplus 11,022 23,544 49,910 60,585 Financing cash flow (11,578) 8,184 (4,000) (4,000)
Shareholders' funds 12,104 24,690 51,169 61,845 Investing cash flow (12,727) (10,813) (500) (500)
Long term borrowings 37,029 35,158 10,158 6,158 Net cash Flow 2,223 99 (1,091) 11,871
Sources of funds 49,133 59,849 61,328 68,003 Capex (977) (235) - -
Gross Block 1,554 1,508 1,508 1,508 Share issue/(buyback) (8,802) 10,055 21,000 -
Net Block 1,126 967 820 671
Capital work in progress 715 995 995 995 Profitability and efficiency ratios
Deferred tax asset 6,400 5,148 5,148 5,148 Year to March FY18 FY19 FY20E FY21E
Total Fixed Assets 1,841 1,962 1,815 1,666 EOP (ROE) (%) 7.2 10.3 10.7 17.3
Non current investments 14,541 26,372 26,872 27,372 ROAE (%) 5.4 13.8 14.4 18.9
Cash and Equivalents 3,327 3,426 2,335 14,206 ROACE (%) 6.5 9.7 6.8 10.9
Inventories 37,334 22,108 33,257 36,208 Current Ratio 1.8 2.3 1.9 1.8
Trade receivables 1,562 1,599 1,485 1,989 Gross Debt/EBITDA (20.7) 19.7 4.6 1.4
Loans & Advances 17,708 20,305 21,304 22,304 Gross Debt/Equity 3.1 1.4 0.2 0.1
Total current assets 56,604 44,012 56,046 60,500 Net Debt/Equity 2.8 1.3 0.2 (0.1)
Current liabilities 33,403 20,845 30,662 40,662
Provisions 177 227 227 227 Operating ratios
Total Current Liab 33,580 21,071 30,888 40,888 Year to March FY18 FY19 FY20E FY21E
Net Curr Assets-ex cash 23,024 22,941 25,158 19,612 Total Asset Turnover 0.3 0.5 0.3 0.4
Uses of funds 49,133 59,849 61,328 68,003 Fixed Asset Turnover 14.9 26.9 19.4 31.6
BVPS (INR) 55.9 107.7 203.1 245.5 Equity Turnover 1.0 1.5 0.5 0.4
Free cash flow (INR mn) Valuation parameters

Reported Profit 869 2,532 5,479 10,676 Adj. Diluted EPS (INR) 4.0 11.0 21.7 42.4
Add: Depreciation 161 143 146 149 Y-o-Y growth (%) (58.0) 175.0 97.0 94.8
Interest (Net of Tax) 1,208 1,675 970 349 Adjusted Cash EPS (INR) 4.8 11.7 22.3 43.0
Less: Changes in WC (25,502) (83) 2,217 (5,546) Diluted P/E (x) 224.2 81.5 41.4 21.2
Less: Capex 977 235 - - P/B (x) 16.1 8.4 4.4 3.7
Free Cash Flow 26,763 4,198 4,378 16,720

Godrej Properties
Additional Data
Directors Data
Mr. Adi B. Godrej Chairman Emeritus Mr. Jamshyd N. Godrej Non-Executive Director
Mr. Nadir B. Godrej Non-Executive Director Mr. Pirojsha Godrej Executive Chairman
Mr. Keki B. Dadiseth Independent Director Mrs. Lalita D. Gupte Independent Director
Mr. Pranay Vakil Independent Director Mr. Amitava Mukherjee Independent Director
Mr. Mohit Malhotra Managing Director & Chief Executive Officer
Auditors - B S R & Co. LLP

Holding – Top 10
GIC 8.42 SBI Funds Management 1.60
BNP Paribas 1.40 Vanguard Group 0.90
Goldman Sachs Group 0.75 Ensemble Holdings & Finance Ltd 0.55
L&T Investment Management 0.48 Dimensional Fund Advisors 0.40
Blackstone Asia Advisors LLC 0.31 Standard Life Aberdeen PLC 0.22
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
04 Oct 2018 Godrej Industries Limited Buy 74568.00
03 Oct 2018 Godrej Industries Limited Buy 106672.00
28 Sep 2018 Godrej Industries Limited Buy 165204.00
*in last one year

COMPANY UPDATE
OBEROI REALTY
High quality play with changing business mix
COMPANYNAME
Oberoi Realty (OBER) has created a niche with a robust brand in the EDELWEISS 4D RATINGS
premium residential segment in Mumbai, strong annuity assets and a lean Absolute Rating HOLD
balance sheet. While the company’s sales momentum has remained range Rating Relative to Sector Underperformer
bound over the past few years and may continue to do so in the near term, a Risk Rating Relative to Sector Low
changing business mix with rising exposure to annuity assets is a significant Sector Relative to Market Equalweight
positive. The pace of residential sales will determine the stock’s trajectory
going ahead, in our view. We believe the current stock price factors in most
MARKET DATA (R: OEBO.BO, B: OBER IN)
of the positives and hence downgrade to ‘HOLD’ with revised TP of INR590
CMP : INR 541
(INR544 earlier).
52-week range (INR) : 642 / 351
Presence in premium residential segment a mixed bag Share in issue (mn) : 363.6
OBER has emerged as a strong brand in its own right by delivering marquee projects in the M cap (INR bn/USD mn) : 207 / 1,955
premium residential segment in Mumbai. High profitability of these projects, a result of Avg. Daily Vol.BSE/NSE(‘000) : 548.2
prudent financial management, has enabled the company to maintain low leverage level.
However, the general sluggishness in luxury residential sales across the board has meant SHARE HOLDING PATTERN (%)
that the company’s sales have remained range bound over the past few years. While OBER Current Q4FY19 Q3FY19
is now diversifying in to Thane, it remains to be seen to what extent can sales be ramped up Promoters * 67.7 67.7 67.7
going ahead. MF's, FI's & BK’s 3.9 4.4 4.5
FII's 26.1 25.4 25.4
Growing exposure to annuity assets a positive Others 2.4 2.5 2.4
* Promoters pledged shares : NIL
The company has high quality annuity assets which generate ~INR4bn revenue annually. (% of share in issue)
OBER is expanding its annuity portfolio substantially across all the three verticals—office,
retail and hospitality. Overall, the annuity portfolio will jump ~4x from 2msf (currently PRICE PERFORMANCE (%)
operational) to around 8msf in the medium term. We believe this will provide cash flow EW Real
Stock Nifty
stability and insulate the company from any slowdown in the residential segment. Estate Index
1 month (3.6) (0.6) (1.2)

Outlook and valuation: Sales pick up key; downgrade to ‘HOLD’ 3 months (5.5) (7.7) (7.0)
12 months 17.0 (5.6) (4.4)
OBER’s low gearing provides room to leverage its balance sheet and enables it to capitalise
on attractive land purchase opportunities and grow its NAV. Performance of new launches
in Thane and Goregaon projects and sales pick up in ongoing projects are key stock
catalysts. We lower our discount rate (from 11.5% to 11.0%) and apply 5% discount to our
NAV of INR621 to arrive at revised TP of INR590. We believe the current stock price
captures most of the positives regarding growing annuity footprint and hence downgrade to
‘HOLD/SU’ from ‘BUY/SP’.
Financials (INR mn) Parvez Akhtar Qazi

EBITDA 6,753 11,554 17,459 19,650 Archit Ranka

Net profit 4,588 8,169 11,673 13,096 +91 22 4063 5523
EPS (INR) 13.5 22.5 32.1 36.0
P/E (x) 40.0 24.1 16.8 15.0
ROE (%) 7.5 10.2 12.8 12.7 September 3, 2019
Oberoi Realty
Making a mark in premium residential segment

OBER has emerged as a premier developer in the luxury residential segment in Mumbai over
the past few decades. Its presence across multiple micro-markets in Mumbai through
quality historical land parcels has enabled it to develop projects across the price spectrum
(ticket size) while catering solely to the premium residential segment.
Chart 1: OBER has delivered projects across the Mumbai city

25,000
20,000
Pre-sales (INR mn) 15,000
10,000
5,000
Q1FY20
FY10
FY11
FY12
FY13
FY15
FY16
FY18
FY19
FY14
FY17
Goregaon Worli Mulund Santa Cruz Borivali Andheri East Andheri West
Chart 2: Goregaon has been the biggest contributor to OBER’s sales

1,500,000
1,200,000
Pre-sales (sft)
900,000
600,000
300,000
Q1FY20
FY10
FY11
FY12
FY14
FY15
FY16
FY17
FY19
FY13
FY18
Goregaon Worli Mulund Santa Cruz Borivali Andheri East Andheri West
Its concentration in the premium residential segment can be gleaned from the fact that
average ticket size of the company’s projects starts from ~INR25mn currently and goes as
high as INR400mn plus.

Real Estate
Chart 3: OBER is a brand to reckon with in the premium residential segment
60
Ticket size (INR mn/unit)

48
36
24
12
Q1FY20
FY10
FY11
FY13
FY14
FY15
FY16
FY18
FY19
FY12
FY17
Goregaon Mulund Borivali Andheri East Andheri West
Prudent financial management

OBER enjoys high operating profitability with EBITDA margin consistently hovering above
40%. While part of it is due to the strong brand name which enables it to price its products
at a premium, a large part of it is also a result of fiscal prudence evident in:
 Conservative land acquisition stance: The company has bought land opportunistically,
whenever it feels that it can take advantage of a favourable business cycle or market
opportunity. For e.g.
o In 2002 and 2005, it took debt for land purchase in Mulund, Goregaon and JVLR,
when it anticipated growth in the real estate market.
o In 2007 and 2008, it did not buy land despite comfortable liquidity position as it
had concerns about project viability.
o In 2009 and 2014, it acquired land in Worli (through JV) and Borivali, respectively.
o In 2017, it won the bid to acquire GSK Pharma’s 60acre land parcel in Thane.
 Judicious use of internal accruals: The company uses its internal cash generation to
prune leverage from time to time. For e.g., post the Borivali land acquisition, the
company used internal accruals to repay debt, which brought its leverage down in FY16
(compared to FY15). This prevents leverage from getting out of hand.

Oberoi Realty
Chart 4: OBER has followed a conservative approach towards cash flow management
4

(4)
Includes INR1.36bn
and INR11.5bn paid in
(8) FY14 and FY15
respectively towards
(12) land / development
rights in Borivali (East) Thane land
acquisition
(16)
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Net cash flow
Note: Financials prior to FY16 are as per IGAAP, FY16-18 are as per
IND AS 18 while FY19 financials are as per IND-AS 115
 Calibrated approach towards annuity assets: OBER has four high quality annuity assets
currently (discussed in detail later). It has followed a gradual approach towards
development of these assets to prevent leverage build up. For e.g., it completed the
Oberoi Mall and the office asset Commerz I in 2008, the Westin Goregaon hotel in 2010
and Commerz II – Phase I in 2013. This phased ramp up in its annuity portfolio helped
the company manage its balance sheet well.
Chart 5: OBER has always maintained low debt levels

0.5
0.3
Net debt:equity (x)
0.1
(0.1)
(0.3)
(0.5)
Q1FY20
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19
FY15
Net debt:equity
Similarly, while the company is currently in the process of enhancing its rental portfolio,
it first created a war chest for the same by raising INR12bn funds through a QIP in 2018.
As a result of these actions, the company’s leverage has always been comfortable.

Real Estate
However, premium residential segment has its own issues

While the premium residential segment does deliver high operating profitability if managed
well, its high ticket size does mean that only a few can afford these projects, mostly from
the business class. As such, these projects are more susceptible to change in overall
economic conditions than those in the affordable to mid income (AMI) segment which count
the salaried class amongst buyers. Also, if a large number of competing projects come up at
the same time, the limited buyer spread for premium projects does tend to impact sales
momentum adversely.
Over the past few years, with tough economic conditions, sales of luxury residential projects
have taken a hit across the country. Mumbai is no exception. As per Anarock:
 For properties priced above INR40mn, MMR witnessed new supply of ~27,000 units
between 2013 and Q1CY19. Of this, South-Central Mumbai localities alone added ~81%
or about 22,000 units.
 Compared to launch of 22,000 units, the absorption has been only half i.e., South-
Central Mumbai is currently sitting on unsold inventory of ~11,000 units – exactly half
the stock launched since 2013.
 Large apartment size creates further issues: Apart from high realisations, a big factor
which has adversely impacted sales in South-Central Mumbai is the relatively large unit
size. Currently, of the total unsold stock in these areas, ~38% comprises units sized
above 2,000sft carpet area. This makes these projects out of bound for many HNIs as
well.
Chart 6: Share of different unit sizes in unsold inventory in South-Central Mumbai

>4000 sft
<1000 sft
3000-4000 sft 5%
12%
10%
1000-1500 sft
2000-3000 sft 24%
23%
1500-2000 sft
26%
 Supply falling, but inventory liquidation to take long: Considering the slow sales,
developers have curtailed launches. Annual supply (in terms of units) has plummeted
~52% from CY13 to Q1CY19.
However, in order to maximise FSI and TDR, a large number of projects had been
launched at the same time rather than being staggered. As a result, buyers are spoilt
for choice and hence gestation cycle for sale of luxury projects has increased
significantly.

Oberoi Realty
OBER has also been impacted by this slowdown in premium residential sales and the
increase in period required for selling projects.
Table 1: Long gestation period for some projects of OBER

Official launch Project area Area sold till Inventory
Project
date (msf) date (msf) (msf)
Exquisite Oct-09 1.55 1.43 0.12
Esquire Feb-11 2.12 1.66 0.47
Three Sixty West May-16 2.28 0.55 1.73
Eternia Jan-15 2.15 0.62 0.57*
Enigma Jan-15 1.99 0.43 0.86*
Sky City Oct-15 4.59 1.72 0.84*
Note: * Basis area opened for booking
In some projects like Three Sixty West, Eternia and Enigma, OBER is likely to need a
significant amount of time to sell the projects.
Chart 7: Sales performance of major projects of OBER

25,000
Pre-sales (INR mn)
20,000
15,000
10,000
5,000
Q1FY20
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Splendor Exquisite Splendor Grande Esquire
360 West/Oasis Priviera Prisma Eternia
Enigma Sky City Oberoi Springs Oberoi Seven
Consequently, the company’s sales have remained range bound over the past few years.
To spur sales, the company had launched deferred payment schemes in its Goregaon and
Mulund projects. We believe some kind of marketing activations will be required to boost
sales trajectory considering that the company is sitting on inventory of ~INR45bn in Mulund
projects, ~INR10bn in Goregaon projects and ~INR75bn in the Worli project.
In addition, in its upcoming project in Thane, the company may launch units (in part of the
project) which may have ticket size lower than traditional OBER homes i.e., at ~INR15-20mn.
This tilt towards slight more ‘affordable’ homes may boost sales going ahead.

Real Estate
Timely and apposite shift towards annuity projects

OBER currently has four high quality annuity assets—one retail and one hospitality asset and
two office assets. All these assets have more than five years of operating history and hence
generate sizeable cash flows for the company.
Chart 8: Annuity assets on a steady growth path

5,000
Operating revenues (INR mn)

4,000
3,000
2,000
1,000
Q1FY20
FY11
FY13
FY14
FY15
FY16
FY18
FY19
FY12
FY17
Oberoi Mall Commerz Commerz II - Phase I Westin Goregaon
Chart 9: Robust occupancy levels in annuity assets

110.0
88.0
Occupancy (%)
66.0
44.0
22.0
0.0
Q1FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY18


Oberoi Realty
Chart 10: Stable to growing operating profitability in annuity assets

120.0
98.4
EBITDA margin (%)

76.8
55.2
33.6
12.0
Q1FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY18
Going ahead, OBER has decided to significantly expand its rental portfolio. In terms of size,
its annuity portfolio is likely to grow ~4x from 2msf to ~8msf while its annuity income will
grow from the current ~INR4bn to ~INR14-15bn p.a. New assets being added include:
 Retail: ~1msf mall in Worli (part of the I-Ven project) and ~1.6msf mall in Borivali.
 Office: 2msf office space in Goregaon and ~0.6msf in Worli (part of the I-Ven project).
 Hospitality: 200-250 keys hotel in Borivali, 80-100 keys hotel in Worli (part of the I-Ven
project), 200 keys hotel in Goregaon and 221 keys hotel in Worli (part of the Three Sixty
project). Thus, the overall hotel portfolio will grow from current 269 keys to around
1,000-1,100 keys.
Chart 11: Sizeable scale-up in annuity portfolio

9
Annuity asset portfolio (msf)
4x
5
0
Operational Post capex completion
Office Retail Hospitality
Post completion of the assets, OBER’s annuity income will improve materially.

Real Estate
Chart 12: Annuity income to witness a quantum jump
22,500

18,000
13,500
9,000
4,500
0
FY20E FY21E FY22E FY23E FY24E FY25E
Retail Hospitality Office
Chart 13: Retail portfolio to witness substantial growth

11,000
8,800
6,600
4,400
2,200
0
Oberoi Mall Borivali I-Ven
Chart 14: Hospitality portfolio to see multiple project addition Chart 15: Office portfolio to be scaled up significantly
5,000 7,000
4,000 5,600
3,000
4,200
2,000
2,800
1,000
1,400
0
FY20E FY21E FY22E FY23E FY24E FY25E 0
Westin Goregaon Ritz Carlton
Borivali I-Ven Commerz Commerz II - Phase I
New Goregaon hotel Commerz II - Phase II I-Ven

Oberoi Realty
We believe the decision to enhance focus on the annuity portfolio is driven by factors such
as:
 Traction in premium residential sales being hard to come by.
 Strong financial health of the company.
 Upcycle in the retail and commercial realty space.
We believe the decision is a right one as:
 It will enable the company to efficiently utilise its strong balance sheet through better
and faster deployment of capital in annuity assets which will provide it with stable cash
flows in the future. This will insulate it from any prolonged slowdown in the premium
residential segment.
 The company can always revert to the residential segment once sales revive.
 Post asset development, the company’s annuity asset portfolio will reach a scale where
it can be monetised through routes such as InViT, PE money, among others.
Overall, the tilt towards annuity assets seems prudent at a time when the residential
segment is facing a subdued demand environment.
Outlook and valuation: Positives priced in; Downgrade to ‘HOLD’

OBER’s strong brand name, access to quality land bank, healthy balance sheet and robust
(and growing) annuity portfolio are key positives for the company. This is countered, to
some extent, by the lack of traction in the premium residential segment. We believe the
future is bright for OBER with a potential move towards slightly lower ticket size units and a
growing annuity portfolio likely to improve cash flow trajectory over the long term. We
believe the rate of liquidation of inventory in ongoing projects and response to the Thane
project will be a key trigger for the stock.
We believe the current stock price factors in most of the positives and hence downgrade the
stock to ‘HOLD/SU’ recommendation/rating with a target price of INR590, which we have
arrived at by applying 5% discount to our December 2020E NAV estimate of INR621.

Particulars Value
Development assets (INR mn) 105,338
Rental assets (INR mn) 119,302
Hospitality assets (INR mn) 15,290

Real Estate
We argue for low 5% discount to NAV valuation for OBER based on:
1. Low gearing lends OBER capital flexibility to increase leverage to buy more land and
grow its NAV faster.
2. Premium brand in the lucrative Mumbai market.

3. Growing annuity portfolio to lend cash flow stability.
4. Prospects of demand improvement in Mumbai residential market.
Potential pressures
1. Exposed to single market (MMR) risk.
2. Muted sentiments in the premium residential segment.
3. Large unsold inventory to keep realisations in check.

Oberoi Realty
Company Description
Oberoi Realty (OBER), incorporated in 1988 as Kingston Properties, is a Mumbai-based real
estate developer, focused on development of premium residential spaces, commercial
space, retail, hospitality and social infrastructure. More than 90% of its land bank is in
Mumbai while balance is in Pune. Most of OBER’s current land bank has been purchased on
outright basis in key micro-markets of Mumbai.
Investment Theme
1. Steady scale-up in operations ahead, driven by planned new launches.
2. Rising size of annuity portfolio
3. Well-located land parcels in the premium Mumbai market
4. Strong brand name and history of delivering quality projects in Mumbai
5. Has a strong balance sheet versus peers, which could be further leveraged to add value-
accretive projects
Key Risks
1. Delay in launch of planned projects – Exquisite Phase III, Thane and future Sky City
projects.
2. Slowdown in MMR market.
3. Sangam city land usage issue (i.e., conversion of agricultural land for non-agricultural
use).
4. Regulatory risks.

Real Estate
Inflation (Avg) 3.6 3.4 4.0 4.5 Employee costs 672 734 800 871
Repo rate (exit rate) 6.0 6.3 5.3 5.0 Other Expenses 552 1,066 1,226 1,410
Company EBITDA 6,753 11,554 17,459 19,650
Selling Price increase (%) 3 3 3 3 Depreciation 491 440 973 1,102
Less: Interest Expense 69 194 244 294
Add: Other income 266 787 629 673
Associate profit share 36 69 - -
Reported Profit 4,588 8,169 11,673 13,096
Adjusted Profit 4,588 8,169 11,673 13,096
Shares o /s (mn) 340 364 364 364
Common size metrics

Staff costs 5.3 2.8 2.0 1.9
S G & A expenses 4.4 4.1 3.1 3.1
EBITDA margins 53.4 44.7 43.5 43.6
Growth ratios (%)

Revenues 13.6 104.1 55.5 12.2
EBITDA 18.5 71.1 51.1 12.6
PBT 14.9 81.3 44.1 12.2
Adjusted Profit 21.2 78.1 42.9 12.2
EPS 21.2 66.3 42.9 12.2

Oberoi Realty
Share capital 3,396 3,636 3,636 3,636 Financing cash flow 7,331 10,117 4,125 (875)
Reserves & Surplus 57,528 76,656 87,454 99,675 Investing cash flow (8,098) (3,340) (17,475) (7,460)
Shareholders' funds 60,924 80,292 91,090 103,311 Net cash Flow (3,599) 6,339 (2,671) 3,556
Long term borrowings 16,941 15,858 20,858 20,858 Capex (832) (1,416) (17,475) (7,460)
Def. Tax Liability (net) (1,087) (1,040) (1,040) (1,040) Dividend paid 817 875 875 875
Sources of funds 76,777 95,111 110,909 123,129 Share issue/(buyback) (106) 12,074 - -
Gross Block 11,233 12,515 24,323 26,884
Net Block 9,763 10,617 21,452 22,911 Profitability and efficiency ratios
Capital work in progress 1,126 1,261 6,928 11,827 Year to March FY18 FY19 FY20E FY21E
Total Fixed Assets 10,890 11,877 28,380 34,738 EOP (ROE) (%) 7.5 10.2 12.8 12.7
Non current investments 24,083 26,007 26,007 26,007 ROAE (%) 7.8 11.6 13.6 13.5
Cash and Equivalents 1,284 7,623 4,953 8,509 ROACE (%) 9.1 13.0 16.3 16.5
Inventories 42,467 41,655 44,850 47,530 Current Ratio 2.7 4.9 4.1 4.0
Trade receivables 1,812 1,094 2,150 2,450 Gross Debt/EBITDA 2.5 1.4 1.2 1.1
Loans & Advances 1,573 2,662 2,958 3,736 Gross Debt/Equity 0.3 0.2 0.2 0.2
Other Current Assets 18,680 19,020 19,970 20,969 Net Debt/Equity 0.3 0.1 0.2 0.1
Total current assets 64,532 64,430 69,928 74,685
Current liabilities 23,992 14,799 18,289 20,740 Operating ratios
Provisions 21 28 70 70 Year to March FY18 FY19 FY20E FY21E
Total Current Liab 24,012 14,827 18,359 20,810 Total Asset Turnover 0.2 0.3 0.4 0.4
Net Curr Assets-ex cash 40,520 49,603 51,569 53,875 Fixed Asset Turnover 1.3 2.5 2.5 2.0
Uses of funds 76,777 95,111 110,909 123,129 Equity Turnover 1.2 2.3 2.0 1.4
BVPS (INR) 179.4 220.8 250.5 284.1
Valuation parameters
Free cash flow (INR mn) Year to March FY18 FY19 FY20E FY21E
Year to March FY18 FY19 FY20E FY21E Adj. Diluted EPS (INR) 13.5 22.5 32.1 36.0
Reported Profit 4,588 8,169 11,673 13,096 Y-o-Y growth (%) 21.2 66.3 42.9 12.2
Add: Depreciation 491 440 973 1,102 Adjusted Cash EPS (INR) 15.0 23.7 34.8 39.0
Interest (Net of Tax) 48 134 169 203 Diluted P/E (x) 40.0 24.1 16.8 15.0
Less: Changes in WC 7,907 9,035 1,966 2,307 P/B (x) 3.0 2.4 2.2 1.9
Operating cash flow (2,832) (438) 10,680 11,892 Dividend Yield (%) 0.4 0.4 0.4 0.4
Less: Capex 832 1,416 17,475 7,460
Free Cash Flow (3,612) (1,708) (6,627) 4,634

Real Estate
Additional Data
Directors Data
Vikas Oberoi Chairman & Managing Director Anil Harish Independent, Non Executive Director
Bindu Oberoi Non Independent, Non Executive Director Tilokchand P. Ostwal Independent, Non Executive Director
Venkatesh Mysore Independent, Non Executive Director Karamjit Singh Kalsi Independent, Non-Executive Director
Saumil Daru Non-Independent, Executive Director
Auditors - S R B C & Co LLP

Holding – Top 10
Oppenheimer 4.16 Stichting Depositary 1.54
Franklin Templeton 1.53 Fidelity 1.50
L&T MF 1.20 Wellington Management 1.07
Vanguard Group 1.00 Blackrock 0.95
Dimensional Fund Advisors 0.83 Reliance Capital 0.76
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
No Data Available
*in last one year

COMPANY UPDATE
SOBHA
On a strong wicket
COMPANYNAME
Sobha has consolidated its position as a premier realty developer by dint EDELWEISS 4D RATINGS
of its strong brand name, healthy execution skills and efficient cash flow Absolute Rating BUY
management. It is on a steady growth path aided by robust fundamentals Rating Relative to Sector Outperformer
of its mainstay Southern realty market; in addition, its varied product Risk Rating Relative to Sector Medium
offerings have enabled it to capture changing customer preferences Sector Relative to Market Equalweight
adequately. While the company’s return ratios could have improved had
it been able to monetise its land bank, we believe it remains an attractive
MARKET DATA (R: SOBH.BO, B: SOBHA IN)
bet to play the industry consolidation theme. Maintain ‘BUY’ with revised
CMP : INR 535
TP of INR670 (INR619 earlier). Target Price : INR 670
52-week range (INR) : 588 / 380
Steady growth; promise of more to come Share in issue (mn) : 94.8
Sobha has bounced back well from the industry slowdown witnessed towards the M cap (INR bn/USD mn) : 51 / 577
middle of the current decade by notching up its highest-ever sales in FY19. The Avg. Daily Vol.BSE/NSE(‘000) : 264.5
company has emerged as a leading developer aided by: (a) its established brand name;
(b) strong performance of the Southern realty market; (c) timely diversification in to SHARE HOLDING PATTERN (%)
other markets such as Gurugram, Pune and now Hyderabad; (d) long standing presence Current Q4FY19 Q3FY19
in affordable and mid-income housing segments; (e) diversified product offerings; and Promoters * 51.8 56.0 56.0
(f) robust execution skills, courtesy its backward integrated model. MF's, FI's & BK’s 15.6 13.7 11.7
FII's 27.0 24.6 27.0
Healthy cash flows; better land utilisation could help further Others 5.7 5.8 5.4
Unlike many of its peers, Sobha has managed growth well; it has generated positive net * Promoters pledged shares : 10.9
cash flows in quite a few years in the past decade. Consequently, it has managed to
keep leverage in check. However, its return ratios have been depressed due to a large
legacy land bank. Better utilisation of the same could help the company lower debt and
EW Real
improve profitability & return ratios. Stock Nifty
Estate Index
1 month (0.1) (0.6) (1.2)

Outlook and valuation: Well placed for growth; maintain ‘BUY’ 3 months (2.0) (7.7) (7.0)
Ongoing liquidity crunch and RERA-driven consolidation offer growth opportunities for
12 months 16.2 (5.6) (4.4)
organised players like Sobha. We expect the company’s new sales and cash flows to
continue to improve given the robust launch pipeline. Steady sales momentum in the
Dream Acres project, improvement in the Bengaluru market and balance sheet
improvement are key stock catalysts, in our view. We continue to maintain ‘BUY/SO’
with TP of INR670/share. We derive the TP by applying 10% discount to NAV of
INR697/share for the residential business plus value of the contractual business, i.e.
INR42/share.
Financials (INR mn)

Parvez Akhtar Qazi

Net profit 2,169 2,970 3,374 4,203 +91 22 4063 5523
EPS (INR) 22.9 31.3 35.6 44.3 archit.ranka@edelweissfin.com
P/E (x) 23.4 17.1 15.0 12.1

ROE (%) 8.0 11.9 14.3 15.8 September 3, 2019
Real Estate
Growth revival brings happy tidings

Over the past two and half decades, Sobha has emerged as a leading realty player in the
South India market. In FY11, it became the first realty company in South to cross the
INR10bn mark for sales bookings. Having completed ~55msf of residential projects at FY19
end, it has established a strong reputation for itself in the region.
Chart 1: Sobha’s sales* have bounced back nicely

38 5.0
30 4.0
Sales value (INR bn)
Sales volumes (msf)

23 3.0
15 2.0
8 1.0
0 0.0
Q1FY20
FY08
FY09
FY10
FY11
FY13
FY14
FY15
FY16
FY18
FY19
FY12
FY17
Sales value Sales volume (RHS)
Note: * This is overall sales, not Sobha’s share of sales
While the industry slowdown did take a toll on its performance during FY14-17, it has
rebounded well since then. Its FY19 sales volumes at ~4msf were the highest ever.
Sobha’s sales were also helped by the calibrated approach adopted by the company as far
as project launches are concerned.
Chart 2: Project launches have picked up for Sobha

13.0
Area of projects launched (msf)
10.4
7.8
5.2
2.6
0.0
Q1FY20
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Area launched
Note: Includes area released for sale from existing approved projects

Sobha
Going ahead, we believe the company will continue to churn out healthy sales numbers.
Apart from the realty division, Sobha is also a name to reckon with as far as the contracting
space is concerned. It has completed 307 contractual projects with developable area of
~49msf as at FY19 end. This has added another dimension to the company’s growth journey.
Chart 3: Both real estate and contracting division performing well

42,500
34,000
Revenues (INR mn)

25,500
17,000
8,500
Q1FY20
FY08
FY09
FY11
FY12
FY14
FY15
FY17
FY18
FY10
FY13
FY16
FY19
Real estate Contract and manufacturing
Note: Financials prior to FY16 are as per IGAAP, FY16-18 are as per IND AS 18 while
FY19 financials are as per IND-AS 115
In addition to its established brand name and the relatively better performance of the Southern
realty market, there are some other factors too which have enabled the company to achieve
success: (a) presence across multiple cities; (b) long-standing presence in the affordable and mid-
income (AMI) housing segment with diversified product offerings; and (c) robust execution skills,
courtesy its backward integration. We explore these points in detail below.
Diversification burnishes growth potential

While Bengaluru has historically provided bulk of Sobha’s sales (~70%), it has taken steps to
diversify in to other markets as well. This includes not only other cities in South India like
Chennai, Cochin, Thrissur etc., but also markets like Gurugram and Pune. The company
recently entered Gift City, Gujarat, with the launch of an affordable housing project with
saleable area of 0.52msf. This geographical diversification is likely to reduce concentration
risk for the company.
Table 1: Sobha has consistently taken steps to enhance its footprints

City Year of entry
Pune 2007
Mysore 2011
Gurugram 2011
Chennai 2012
Kozhikode 2013
Kochi 2014
Hyderabad, Gift City (Gujarat) 2019

Real Estate
Chart 4: Sobha now has presence across multiple cities
4,750
3,800
Sales volume ('000 sft)

2,850
1,900
950
Q1FY20
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Bengaluru Thrissur Coimbatore Pune Mysore
Gurugram Chennai Kozhikode Kochi Gift City
Chart 5: Entry into new markets has boosted Sobha’s growth prospects
35,000
Sales value (INR mn)
28,000
21,000
14,000
7,000
Q1FY20
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Bengaluru NCR (Gurugram) Chennai Thrissur
Pune Coimbatore Calicut Cochin
Mysore Gift City Gujarat
Note: This is overall sales, not Sobha’s share of sales
The entry in new cities has also helped Sobha broad base its sales; for e.g. over the past
couple of years, Gurugram has consistently contributed ~10% to sales volume. It has already
announced a new JDA project in Hyderabad which is a new market for the company.

Sobha
Chart 6: Sobha has diversified land bank

230
Developable area (msf)

184
138
92
46
0
Gurugram Pune Ahmedabad Mysore Thrissur

Chennai Bengaluru Hosur Kochi Coimbatore
Kozhikode Hyderabad Trivendrum
Note: This is Sobha’s share of developable area
With the company boasting of land parcels across multiple cities, we believe its
diversification drive will remain intact, boosting growth prospects. Management believes
that in the next five years, the share of Bengaluru in overall sales could fall to ~60%.
Varied product offerings in AMI segment spurs growth

One of the major reasons behind Sobha’s growth is its strong presence in the AMI segment.
Within the segment, the company has multiple options for buyers. This has expanded the
bouquet of offerings and helped it capture a larger share of opportunities in the market.
Chart 7: Split of Sobha’s sales across various ticket sizes

100.0
80.0
Price band split (%)
60.0
40.0
20.0
0.0
FY13 FY14 FY15 FY16 FY17 FY18 FY19
< INR 5 mn INR 5-10 mn INR 10-20 mn INR 20-30 mn INR 30 mn plus
With high ticket size items clocking low sales, Sobha has enhanced focus on smaller unit
sizes. Consequently, the share of INR30mn plus houses in its overall sales has declined by
almost half in the past five years.

Real Estate
Launch of the Dream Acres project in February 2015 has further boosted the company’s
growth horizon. Spread over ~80acres, the project spans ~7.5msf, of which ~5msf has
already been launched. With construction being carried out through pre-cast technology,
the first three towers measuring 0.35 msf were completed 17 months ahead of committed
time lines.
Going ahead, the company believes that share of INR20mn plus houses in sales will decline,
while that of less than INR10mn value will increase.
Healthy execution boosts growth

One of the major reasons behind Sobha’s success is its unique backward integrated model.
Apart from the realty segment, the company also has presence in contractual and
manufacturing (glazing and metal works divisions, interiors and furnishing division and
concrete products division) space. This allows it to capture the entire value chain from
concept to commissioning.
Apart from providing the required execution strength to the company for timely delivery of
housing units, the contracting and manufacturing division also contributes significantly to
profitability.
Chart 8: Sobha has strong execution skills, evident in robust project delivery
12.5
10.0
Area delivered (msf)
7.5
5.0
2.5
0.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Real Estate Contracts
This division has been on a high growth path with revenue of the contractual and
manufacturing division having posted CAGR of 24% over FY16-19. Its revenues and
collections in FY19 were its highest ever. By contributing a third of the overall operating
cash inflow in FY19, the division has definitely played a part in the company’s success story.
Impressive cash flow management

While rising growth has brought the issue of cash flow management to the fore for many of
Sobha’s peers, the company has been able to grow without any huge funding requirement.
In fact, it has managed to post positive net cash flows for a few years in the past decade.

Sobha
One of the major reasons behind the company’s robust cash flow generation is that its
capex on land acquisition has been relatively less compared to peers. Also, the company
does not have any meaningful exposure to the funding intensive commercial realty segment.
These two factors have kept its cash flow situation relatively healthy.
Chart 9: Sobha’s cash flow generation has been strong

3.0

(0.8)
(4.6)
(8.4)
(12.2)
(16.0) FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19
FY10
FY15
Net cash flow
Aided by strong cash flow generation, the company has managed to keep its leverage in
check.
Chart 10: Sobha’s leverage ratios have remained under control

1.5 17.0
Net debt:equity (x)
1.2 13.6
Cost of borrowings (%)

0.9 10.2
0.6 6.8
0.3 3.4
0.0 0.0
Q1FY20
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19
FY10
FY15
Net debt:equity Cost of borrowing (RHS)


Real Estate
As a result, Sobha is amongst the few leading realty developers who have not had to dilute
equity in the current decade. In fact, the company did a buyback of shares in FY17 and FY18.
Land monetisation could boost return ratios

Despite the robust cash flow generation, the company’s return ratios are depressed; one of
the main reasons behind this is the large land bank sitting on the company’s books. Sobha’s
land bank, though falling gradually, has remained in excess of 2,300acres for the past
decade.
Chart 11: Sobha has a large land bank

3,500
Land bank (acres) 2,800
2,100
1,400
700
Q1FY20
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY18
Land bank
Note: Total land bank, not Sobha’s share of land bank
With significant capital trapped in this land bank, the company’s return ratios have been
depressed. Better utilisation of the same could provide a fillip to the company’s profitability.
The company has plans to put this land bank to use. While it is planning to set up a crushing
unit in part of the Hosur land parcel, balance could be used for plotted development.
Similarly, the Hoskote land could witness some development over the medium term.
Outlook and valuation: Bright prospects; maintain ‘BUY’

We are positive on Sobha’s prospects and expect its operations to continue to ramp up
steadily. The strong performance of the South India realty market in general and Bengaluru
market in particular, its robust execution capabilities and industry consolidation are likely to
drive healthy growth for Sobha going ahead.
Our December 2020E real estate NAV is INR697/share, to which we apply 10% discount and
add value of the contractual business (INR42/share), which yields target price of INR670. We
maintain ‘BUY/SO’ recommendation/rating on the stock.

Sobha
Table 2: SOTP Valuations

Particulars Value
Real estate NAV (INR mn) 66,115
Real estate NAV per share (INR) 697
Real estate value per share (INR) 627
Contracting biz value per share (INR) 42
We attach 10% discount to real estate business NAV of Sobha based on following:
1. Steady scale up in operations aided by diversification.
2. Proxy for stable Bengaluru residential market, which has steady demand/supply
momentum.
3. Bengaluru office space market continues to witness strong traction; this should
translate into incremental demand for residential units and help sustain sales
momentum for the market.
4. Steady cash flows from contractual business.
Potential pressures:
1. Large and concentrated land bank which has depressed return ratios; also, no imminent
monetisation prospects from large land parcels, such as, Hoskote.
2. Significant dependence on the Bengaluru market which contributes ~70% of the sales.
3. High leverage ratio (net debt:equity > 1).

Real Estate
Company Description
Sobha is a Bengaluru-based real estate developer focused on developing residential space. It
has a presence across key markets in South India like Bengaluru, Mysuru, Kochi, Chennai,
Hosur etc. It also has a presence in Gurugram. The company has a backward-integrated
business model with all operations from in-house conceptualisation through execution. It
has acquired land bank in the past via outright acquisitions and joint development
agreements with land owners. Additionally, Sobha undertakes contract for construction for
third parties under its contractual business.
Investment Theme
1. Sobha is expected to scale up operations going ahead driven by planned new launches
and improved affordability.
2. Plans are afoot to develop large land parcels.
momentum with a moderate (8–10%) price increase
4. Steady cash flow from contractual business
5. Attractive valuations
6. Potential tailwinds from improvement in demand due to affordable housing incentives
and tax exemption on development of affordable homes
Key Risks
1. Adverse macroeconomic environment, viz., high interest rate, inflation and slow growth.
2. Physical market demand weakens, especially in Bengaluru.
3. Approval delays leading to slower new sales
4. IT slowdown impacting residential demand, especially in Bengaluru

Sobha
Inflation (Avg) 3.6 3.4 4.0 4.5 Other Expenses 5,833 7,127 7,483 7,857
Repo rate (exit rate) 6.0 6.3 5.3 5.0 Total operating expenses 22,633 27,688 31,034 34,392
USD/INR (Avg) 64.5 70.0 72.0 72.0 EBITDA 5,197 6,733 7,536 8,859
Company Depreciation 544 623 695 776
Selling Price increase (%) 5 5 5 5 EBIT 4,653 6,110 6,841 8,084
Construction Cost Increase (%) 5 5 5 5 Less: Interest Expense 1,978 2,362 2,429 2,452
Reported Profit 2,169 2,970 3,374 4,203
Adjusted Profit 2,169 2,970 3,374 4,203
Shares o /s (mn) 95 95 95 95
Common size metrics

Staff costs - - 1.0 1.0
S G & A expenses 21.0 20.7 19.4 18.2
EBITDA margins 18.7 19.6 19.5 20.5
Growth ratios (%)

Revenues 24.9 23.7 12.1 12.1
EBITDA 23.8 29.5 11.9 17.6
PBT 29.5 41.4 13.6 24.6
Adjusted Profit 34.9 36.9 13.6 24.6
EPS 34.9 36.9 13.6 24.6

Real Estate
Share capital 948 948 948 948 Operating cash flow 1,106 3,364 1,035 3,049
Reserves & Surplus 26,751 21,343 23,917 27,319 Financing cash flow 179 1,926 450 (1,050)
Shareholders' funds 27,699 22,291 24,865 28,267 Investing cash flow (1,559) (4,712) (1,000) (1,200)
Long term borrowings 23,313 26,039 27,289 27,039 Net cash Flow (274) 578 484 799
Def. Tax Liability (net) 2,521 (935) (935) (935) Capex (672) (1,253) (900) (1,100)
Sources of funds 53,533 47,395 51,219 54,371 Dividend paid (799) (800) (800) (800)
Gross Block 6,241 6,939 7,739 8,639 Share issue/(buyback) (620) - - -
Net Block 4,758 4,876 4,981 5,106
Capital work in progress 1,345 1,900 2,000 2,200 Profitability and efficiency ratios
Total Fixed Assets 6,103 6,776 6,982 7,306 Year to March FY18 FY19 FY20E FY21E
Non current investments 1,125 1,128 1,228 1,328 EOP(ROE) (%) 8.0 11.9 14.3 15.8
Cash and Equivalents 1,194 1,771 2,256 3,055 ROAE (%) 8.0 11.9 14.3 15.8
Inventories 48,349 65,173 67,822 69,162 ROACE (%) 10.6 15.8 16.0 17.6
Trade receivables 3,407 3,355 3,760 4,216 Current Ratio 2.3 1.7 1.7 1.8
Loans & Advances 30,071 28,257 29,137 29,564 Gross Debt/EBITDA 4.5 3.9 3.6 3.1
Total current assets 81,827 96,786 100,719 102,942 Gross Debt/Equity 0.8 1.2 1.1 1.0
Current liabilities 36,409 58,796 59,645 59,889 Net Debt/Equity 0.8 1.1 1.0 0.8
Provisions 306 271 321 371
Total Current Liab 36,715 59,067 59,966 60,260 Operating ratios
Net Curr Assets-ex cash 45,112 37,719 40,753 42,682 Year to March FY18 FY19 FY20E FY21E
Uses of funds 53,533 47,395 51,219 54,371 Total Asset Turnover 0.5 0.7 0.8 0.8
BVPS (INR) 292.0 235.0 262.2 298.0 Fixed Asset Turnover 5.6 7.1 7.8 8.6
Equity Turnover 1.0 1.4 1.6 1.6
Free cash flow (INR mn)
Year to March FY18 FY19 FY20E FY21E Valuation parameters
Reported Profit 2,169 2,970 3,374 4,203 Year to March FY18 FY19 FY20E FY21E
Add: Depreciation 544 623 695 776 Adj. Diluted EPS (INR) 22.9 31.3 35.6 44.3
Interest (Net of Tax) 1,353 1,565 1,610 1,625 Y-o-Y growth (%) 34.9 36.9 13.6 24.6
Less: Changes in WC 1,584 (7,393) 3,035 1,929 Adjusted Cash EPS (INR) 28.6 37.9 42.9 52.5
Less: Capex 672 1,253 900 1,100 Diluted P/E (x) 23.4 17.1 15.0 12.1
Free Cash Flow 1,809 11,299 1,744 3,574 P/B (x) 1.8 2.3 2.0 1.8
Dividend Yield (%) 1.5 1.5 1.5 1.5

Sobha
Additional Data
Directors Data
Mr. Ravi PNC Menon Chairman Mr. J.C. Sharma Vice Chairman & Managing Director
Mr. T.P. Seetharam Whole-time Director Mr. R.V.S. Rao Independent Director
Mr. Anup Shah Independent Director Dr. Punita Kumar - Sinha Independent Director
Auditors - B S R & Co. LLP

Holding – Top 10
Franklin Templeton 8.31 Schroder International 6.98
Platinum Asset Management 5.02 L&T MF 4.76
Dimensional Fund Advisors 2.45 Nordea 2.09
SBI MF 1.56 Vanguard Group 1.53
Nomura 1.36 Invesco 1.36
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
25 Jun 2019 Mrs. Sobha Menon Sell 4000000.00
08 Apr 2019 Mrs. Sobha Menon Sell 2900000.00
08 Apr 2019 Ravi Pnc Menon Buy 2900000.00
23 Oct 2018 Ravi Pnc Menon Buy 16618.00
*in last one year

COMPANY UPDATE
BRIGADE ENTERPRISES
Robust value proposition
COMPANYNAME
Revival in sales momentum, high quality rental assets and strong brand EDELWEISS 4D RATINGS
credentials have led to Brigade Enterprises (BEL) emerging a premier Absolute Rating BUY
realty developer. While the company’s burgeoning lease portfolio will Rating Relative to Sector Outperformer
benefit from the healthy outlook for commercial realty space, the Risk Rating Relative to Sector High
residential segment is likely to provide growth capital for annuity Sector Relative to Market Equalweight
businesses. We believe the company’s ability to manage leverage levels,
leasing trajectory for under-construction assets and value unlocking in
MARKET DATA (R: BRIG.BO, B: BRGD IN)
the hospitality arm will be key stock catalysts. Maintain ‘BUY’ with TP of
CMP : INR 198
INR252.
52-week range (INR) : 206 / 104
Diversified portfolio in scale up mode Share in issue (mn) : 204.3
BEL’s presence spans residential, commercial and hospitality segments, all of which are M cap (INR bn/USD mn) : 41 / 571
rapidly scaling up. After being impacted by industry slowdown post FY15, realty Avg. Daily Vol.BSE/NSE(‘000) : 114.3
segment’s sales bounced back in FY19 with 80% plus YoY growth; Q1FY20 sales were
the highest-ever for the company. A healthy launch pipeline will aid growth prospects. SHARE HOLDING PATTERN (%)
The company’s lease business is steadily ramping up with its share of rental revenue Current Q4FY19 Q3FY19
likely to touch ~INR5.5bn by FY22. BEL’s hospitality portfolio, currently at ~1,200 keys, Promoters * 46.8 46.8 46.8
will touch ~1,800-1,900 keys over the next couple of years. MF's, FI's & BK’s 16.0 15.9 15.8
FII's 12.5 12.5 12.6
Cash flow and leverage management key to growth Others 24.7 24.8 24.8
* Promoters pledged shares : NIL
The company’s rapid growth, particularly its exposure to the fund-intensive annuity (% of share in issue)
businesses, has resulted in significant funding requirements over the past few years.
Consequently, its leverage levels have shot up. While the residential realty segment PRICE PERFORMANCE (%)
has provided cash flow support, the company still needs other avenues (like value
EW Real
unlocking in hospitality portfolio) to bring debt under control, in our view. Stock Nifty
Estate Index
Improvement in profitability of the hospitality arm can also lend a helping hand to the
1 month 14.1 (0.6) (1.2)
company in this endeavour. 3 months 17.9 (7.7) (7.0)
12 months 39.1 (5.6) (4.4)
Outlook and valuation: Poised for healthy growth; maintain ‘BUY’
RERA-driven consolidation and the ongoing liquidity crisis bode well for organised
players like BEL. Robust growth prospects of the Bengaluru market, strong launch
pipeline and a robust annuity portfolio are key positives. We believe, timely launch of
planned projects, further ramp up in sales momentum and timely completion of
annuity assets will determine the stock’s trajectory. We maintain ‘BUY/SO’ with TP of
INR252.
Financial (INR mn) Parvez Akhtar Qazi


Net profit 1,507 2,399 511 1,173 +91 22 4063 5523
EPS (INR) 7.4 11.7 2.5 5.7
P/E (x) 26.8 16.8 79.1 34.4
ROE (%) 6.1 11.1 2.3 5.2 September 3, 2019
Brigade Enterprises
Diversified businesses scaling up to next level

BEL has been on a steady growth path over the past decade with its three verticals—real
estate, leasing and hospitality— having grown in scale substantially. The company has been
consistently widening its footprint and diversifying in to new segments. Its entry in the
hospitality and office/retail business has provided it with steady rental income, thereby
reducing its dependence on the sale business, which is cyclical in nature.
In the hospitality space, its first hotel, Grand Mercure in Bengaluru, was launched in April
2009. In the leasing space, while the World Trade Center (WTC) at Brigade Gateway in
Bengaluru was launched in November 2010, Phase I of WTC in Kochi was launched in
February 2016. It ventured in to the retail space with the launch of Orion Mall at Brigade
Gateway in January 2012. Currently, the company has emerged as an integrated realty
developer with presence in multiple segments.
The three verticals have achieved critical mass and contribute handsomely to BEL’s business.
Chart 1: Real estate segment contributes bulk of the revenues for the company
35,000 100
Segment revenues (INR mn)
Segment EBITDA margin (%)

28,000 80
21,000 60
14,000 40
7,000 20
0 0
Q1FY20
FY13
FY14
FY15
FY16
FY17
FY19
Real estate revenue FY18
Lease rental revenue
Hospitality revenue Real estate margin (RHS)
Lease rental margin (RHS) Hospitality margin (RHS)
Note: Financials prior to FY16 are as per IGAAP, FY16-18 are as per IND AS 18 while FY19
financials are as per IND-AS 115
The real estate segment constitutes bulk of the company’s revenue; however, as far as
margin is concerned, this vertical has the lowest profitability with the leasing business
having the highest margin.

Real Estate
Chart 2: Hospitality vertical contributes the least to profitability
7,000
Segment PBD (INR mn)

5,600
4,200
2,800
1,400
0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20
Real estate Hospitality Lease rental

Note: PBD = Profit before depreciation and tax (after interest)
The real estate segment has the highest contribution to Profit before depreciation and tax
(after interest), followed by the leasing and hospitality businesses.
Diversified land bank lends helping hand to growth

BEL’s land bank reflects the company’s focus on diversification, both from a segmental and
geographical point of view. While the residential segment occupies pride of place, the
leasing segment also has a fair representation in the company’s land bank.
Chart 3: Residential segment has the highest share in BEL’s land bank
50
Land bank - developable area (msf)
40
30
20
10
0
Residential Commercial ‐ sale Commercial ‐ lease Retail Hotel
Note: Includes only BEL’s share in project area
As far as geographical presence is concerned, Bengaluru has the highest share followed by
Chennai and Mangalore.

Brigade Enterprises
Chart 4: Bengaluru contributes the highest share in BEL’s land bank

50
Land bank - developable area (msf)

40
30
20
10
0
Bengaluru Chennai Hyderabad
Kochi Mangalore GIFT
Thiruvananthapuram Mysore
Note: Includes only BEL’s share in project area
The diversified land bank has enabled BEL to launch projects across verticals. This has
enhanced its ability to tailor offerings depending upon which vertical is in favour at a
particular point in time.
Chart 5: Launches in the residential segment have picked up

13
10
Projects launched (msf)
0
FY15 FY16 FY17 FY18 FY19 Q1FY20 FY20
(target)
Residential Commercial - sale Commercial - lease Hospitality

The revival in residential segment can be gauged from the fact that its share in overall
launches has been rising over the past couple of years after steadily declining over FY16 and
FY17. Simultaneously, the company is also focussing on maintaining its robust presence in
the commercial segment (sale and leasing).

Real Estate
Chart 6: BEL’s share of area in ongoing projects
18
Share in ongoing projects (msf)

14
11
0
Real Estate Commercial Hospitality
We expect the share of residential projects in the company’s ongoing operations to rise,
going ahead.
Development property business on an upsurge

While BEL’s sales were adversely impacted by the industry slowdown post FY15, they have
rebounded strongly over the past year. This bounce back was across commercial and
residential projects, as far as sales are concerned. Consequently, the company met its target
of ~3msf of new sales in FY19 (up 89% YoY) and posted highest-ever sales in Q1FY20 (up
165% YoY). It is now targeting 4msf sales in FY20.
Chart 7: Robust sales performance

17,500
14,000
Pre sales (INR mn)
10,500
7,000
3,500
0
Residential Commercial

Brigade Enterprises
Chart 8: Residential segment dominates sales

3.5
2.8
Pre sales (msf)

2.1
1.4
0.7
0.0
Residential Commercial
Propelled by its credible track record, strong brand presence and robust launch pipeline, we
expect robust growth for the company going forward.
Strong rental assets, exceptional brand boost prospects

BEL has created a strong niche in the rental business. Its presence in the rental presence
spans office as well as the retail space.
In the office segment, BEL holds the licence to build WTCs in all capital cities in South India
states, apart from Kochi. It has already developed a WTC in Bengaluru and Kochi while WTC
in Chennai is under development. The company has also signed a MoU with the
Government of Kerala for developing a WTC in Thiruvananthapuram with a potential to
build over 2msf.
In the office segment, BEL has 2.3msf of leasable space, of which 1.5msf has been already
leased out.
Currently, BEL has two key commercial projects under development:
 Brigade Tech Garden, Bengaluru: This is a 3.2msf project in which BEL has 51% share.
The first phase of the project of ~1msf has received occupancy certificate (OC). While
~0.75msf has been already leased out, discussions for the balance are underway.
Management expects to complete the project by FY20.
 WTC Chennai: This is a 2msf project in which BEL has 51% share. While ~0.63msf has
been leased out, discussions for the balance area are in process.
BEL ventured in to the retail space with the launch of Orion Mall at Brigade Gateway in
January 2012. In June 2016, it began operations of Brigade Orion East in Bengaluru.
Currently, the Orion OMR mall in Bengaluru is under development. Its overall retail portfolio
is currently 1.02msf, which is almost entirely leased out. The retail portfolio generated
revenue of INR1.7bn including common area maintenance (CAM) in FY19.

Real Estate
BEL’s overall rental income has surged from INR275mn in FY10 to ~INR1.3bn in FY14 and
~INR3bn in FY19. Currently, the company’s total operational leasable area (across office and
retail assets) is 3.3msf, of which it has leased ~2.5msf; this is in addition to the ~1.4msf
space which has been leased in Brigade Tech Gardens and WTC Chennai.
Chart 9: Steady growth in BEL’s rental portfolio

4.0
Total rental portfolio (msf)

3.2
2.4
1.6
0.8
0.0
Leased out To be leased out
Chart 10: Office portfolio scaling up Chart 11: BEL’s retail portfolio on steady growth path
3.0 1.3
2.4 1.0
Office portfolio (msf)
Retail space (msf)
1.8 0.8
1.2 0.5
0.6 0.3
0.0 0.0
Q1FY20
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Q1FY20
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Leased out To be leased out Leased out To be leased out

BEL leased 1.2msf space in FY19, which is estimated to yield INR900mn rentals going ahead.
The pace of leasing improved in Q1FY20 with the company leasing 0.77msf space. The
company is targeting 3msf for leasing in FY20—1.5msf in Brigade Tech Gardens, 1msf-plus in
WTC Chennai and balance in other projects.
The company’s lease business is steadily ramping up with its share of rental revenue likely
to touch ~INR5.5bn by FY22. This will be driven by:
 Completion of under construction assets.

Brigade Enterprises
 Rental uptick: Management mentioned that wherever existing leased projects have
come up for renewal, rents have jumped ~20%.
Chart 12: Surging lease revenues for BEL improving its prospects
7.5
6.0
Lease revenues (INR bn)

4.5
3.0
1.5
0.0
FY20E
FY21E
FY22E
FY23E
FY10
FY12
FY14
FY16
FY17
FY18
FY19
FY11
FY13
FY15
Lease revenues
We believe BEL is building a robust portfolio of rental assets and the strong outlook of the
office/retail market in India bodes well for the company. Further, development of the REIT
market will trigger value accretion and open up additional funding avenues for the
company.
Spreading wings in hospitality arena

In the hospitality space, BEL’s first hotel, Grand Mercure in Bengaluru, was launched in April
2009. Since then, the company has steadily expanded its hospitality portfolio; today, the
company has six operational hotels with ~1,200 keys. Revenue from the hospitality segment
was ~INR3.1bn in FY19.
Chart 13: BEL has been ramping up its hospitality portfolio

1,500
1,200
Number of rooms
900
600
300
0
Q1FY20
FY10
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY11
FY16
Number of rooms

Real Estate
BEL is planning to enhance its hospitality portfolio to ~1,800-1,900 keys. Post stabilisation of
these hotels, the company expects its hospitality segment’s revenue to touch ~INR6bn.
Chart 14: Hospitality segment income on an uptrend for BEL

7.0
Hospitality revenues (INR bn)

5.6
4.2
2.8
1.4
0.0
FY20E
FY21E
FY22E
FY23E
FY10
FY11
FY13
FY14
FY15
FY16
FY17
FY18
FY12
FY19
Hospitality revenues
The company is also planning a minority stake sale in its hospitality business; management
has mentioned that it is in active discussions with multiple parties for the same.
Rising growth brings need to manage cash flows/leverage to the fore

BEL’s rapid growth has created the need for greater funding; its exposure to the funding-
intensive leasing and hospitality segments has meant that its capex has grown by leaps and
bounds. As a result, BEL’s cash flows have been strained, leading to rising leverage levels.
Chart 15: BEL’s cash flows have been under pressure

3.0
(0.4)
Net cash flow (INR bn)
(3.8)
(7.2)
(10.6)
(14.0)
FY07
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY11
FY16
Net cash flow


Brigade Enterprises
Chart 16: Steady rise in capital intensity for BEL

77,500
Capital employed (INR mn)

62,000
46,500
31,000
15,500
0
Real estate Lease rental Hospitality
Chart 17: Debt rising due to annuity segment exposure Chart 18: Annuity segment leverage levels going up
42,500 3.0
Gross debt (INR mn)
34,000 2.4
Debt:equity ratio (x)
25,500 1.8
17,000 1.2
8,500 0.6
0 0.0
Q1FY20
FY17
FY13
FY14
FY15
FY16
FY18
FY19
Q1FY20
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Real estate Lease rental Hospitality Real estate Hospitality Lease rental
While the real estate segment has generated surplus cash flows (evident in steady reduction
in segment related debt since FY16), they have been insufficient to meet demands of the
annuity businesses.

Real Estate
Chart 19: Leverage has been rising for BEL
2.0 17.0
Cost of borrowings (%)

1.6 13.6
Net debt:equity (x)

1.2 10.2
0.8 6.8
0.4 3.4
0.0 0.0
Net debt:equity Cost of borrowing (RHS)

Note: Includes only BEL’s share of debt
This has resulted in rising debt levels, necessitating raising of equity funds. The company
raised INR5bn through a QIP in 2017; it has recently allotted convertible warrants worth
INR1.15bn to the promoter group.
Management believes debt will peak in FY20. It expects to maintain debt:equity ratio at
~1.2-1.3x. Going ahead, how the company manages its cash flows will be a key determinant
of its growth, in our view.
Outlook and valuation: Growth to sustain; maintain ‘BUY’

We like BEL for its robust sales momentum, high quality rental assets and strong brand
presence. Its diversified product portfolio and sustained momentum in the Bengaluru
market are key positives for the stock. The ongoing consolidation in the market also bodes
well for an organised player like BEL.
We have a ‘BUY/SO’ recommendation/rating on BEL with a target price of INR252, which we

have arrived at by applying 15% discount to our December 2020E NAV estimate of INR296.

Brigade Enterprises

Particulars Value
Hospitality assets (INR mn) 15,083
Land bank (INR mn) 10,686
NAV (INR mn) 60,464
We argue for 15% discount to NAV valuation for BEL based on:
1. Steady scale up in operations aided by diversification.
momentum.
3. Bengaluru office space market continues to gain strong traction; this should translate in
to strong leasing going ahead.
4. Burgeoning annuity portfolio to lend cash flow stability.
Potential pressures
1. Cash flow stress given exposure to annuity businesses.

2. Leasing risk on under construction office projects considering FY20 deadline for tax
exemption.

Real Estate
Company Description
BRGD is an established real estate developer in South India with focus on development of
residential, commercial, retail, and hospitality projects. Since inception, its business is
concentrated within Bengaluru and nearby areas such as Mysore. The company has an in-
house, fully integrated project management team comprising engineers and architects who
oversee the development of properties from inception to completion.
BRGD follows a mix of outright purchase of land parcels and of JDA with land owner as its
project acquisition strategy, while its product mix consists of premium residential
apartments, mixed use developments and affordable homes. For its commercial / hospitality
projects, it follows a strategy of monetizing the asset post stabilization for superior
realizations.
Investment Theme
Quality South India developer with focus on Bengaluru
BRGD is a South India based developer with operations concentrated primarily in Bengaluru
along with other cities like Hyderabad, Mysore, Chennai, and Kochi.
Strong portfolio of completed rental assets
BRGD has a strong rental portfolio comprising of marquee commercial towers, retail malls
and hospitality projects. Its operational commercial portfolio spans an area exceeding 3msf.
Further, the company has ~1200 hotel keys operational across various assets.
Key Risks
Reliant on the Bengaluru market
Majority of Brigade’s projects are in the Bengaluru market. Any slowdown or regulatory
changes in the market could cause stress to Brigade’s development property business.
Commercial and hospitality capex to put pressure on cash flows
While Brigade’s operational commercial and hospitality assets are performing well, any
weakness in the upcoming projects could cause stress to the company’s cash flows and debt
servicing.

Brigade Enterprises
GDP (Y-o-Y %) 7.2 6.8 6.8 7.1 Direct costs 8,448 15,947 17,010 17,052
Company EBITDA 5,545 7,896 8,136 9,603
Selling Price increase (%) 5 5 5 5 Depreciation 1,377 1,400 3,420 3,594
Less: Interest Expense 2,594 2,785 4,507 4,883
Profit Before Tax 1,942 4,256 840 1,859
Less: Provision for Tax 628 1,455 294 651
Less: Minority Interest (63) 420 80 80
Add: Exceptional items (115) - - -
Associate profit share 15 18 45 45
Reported Profit 1,392 2,399 511 1,173
Adjusted Profit 1,507 2,399 511 1,173
Shares o /s (mn) 204 204 204 204
Dividend Payout Ratio (%) 23.5 13.7 72.3 31.5
Common size metrics

Staff costs 8.1 6.3 6.8 7.1
S G & A expenses 18.1 13.5 10.0 10.0
EBITDA margins 29.2 26.6 26.9 29.9
Growth ratios (%)

Revenues (6.3) 56.7 1.7 6.3
EBITDA (3.5) 42.4 3.0 18.0
PBT (18.9) 119.1 (80.3) 121.3
Adjusted Profit (9.0) 72.3 (78.7) 129.6
EPS (17.7) 59.0 (78.7) 129.6

Real Estate

Share capital 1,361 1,362 2,043 2,043 Financing cash flow 12,619 37 9,856 (3,289)
Reserves & Surplus 21,510 20,332 19,793 20,597 Investing cash flow (12,591) (3,314) (16,105) (3,235)
Shareholders' funds 22,870 21,694 21,836 22,640 Net cash Flow 102 756 (1,166) 131
Minority Interest 2,231 1,884 1,964 2,044 Capex (10,773) (4,696) (16,127) (3,205)
Long term borrowings 33,897 37,855 48,000 45,000 Dividend paid (328) (328) (369) (369)
Def. Tax Liability (net) 259 (1,141) (1,141) (1,141) Share issue/(buyback) 4,856 (3,247) - -
Sources of funds 59,257 60,292 70,659 68,543
Gross Block 21,624 27,514 47,098 49,490 Profitability and efficiency ratios
Net Block 18,005 22,724 38,887 37,684 Year to March FY18 FY19 FY20E FY21E
Capital work in progress 21,291 20,097 16,640 17,453 EOP (ROE) (%) 6.1 11.1 2.3 5.2
Total Fixed Assets 39,296 42,821 55,527 55,138 ROAE (%) 7.0 10.8 2.3 5.3
Goodwill on consolidation 43 43 43 43 ROACE (%) 10.2 14.0 12.4 15.1
Non current investments 546 563 592 621 Current Ratio 1.6 1.2 1.2 1.2
Other non current assets 4,342 2,919 3,019 3,119 Gross Debt/EBITDA 6.1 4.8 5.9 4.7
Current Investments 1,813 413 363 363 Gross Debt/Equity 1.5 1.7 2.2 2.0
Cash and Equivalents 1,466 2,222 1,056 1,187 Net Debt/Equity 1.4 1.6 2.1 1.9
Inventories 21,795 48,161 50,616 51,000
Trade receivables 1,770 4,208 4,233 4,500 Operating ratios
Loans & Advances 2,900 3,047 3,147 3,247 Year to March FY18 FY19 FY20E FY21E
Other Current Assets 4,128 2,461 2,558 2,655 Total Asset Turnover 0.4 0.5 0.5 0.5
Total current assets 30,592 57,877 60,554 61,402 Fixed Asset Turnover 1.2 1.5 1.0 0.8
Current liabilities 18,759 46,469 50,393 53,223 Equity Turnover 1.0 1.3 1.4 1.4
Provisions 81 97 102 107
Total Current Liab 18,840 46,566 50,494 53,329 Valuation parameters
Net Curr Assets-ex cash 11,752 11,311 10,060 8,073 Year to March FY18 FY19 FY20E FY21E
Uses of funds 59,257 60,292 70,659 68,543 Adj. Diluted EPS (INR) 7.4 11.7 2.5 5.7
BVPS (INR) 112.1 106.2 106.9 110.8 Y-o-Y growth (%) (17.7) 59.0 (78.7) 129.6
Adjusted Cash EPS (INR) 13.6 18.6 19.2 23.3
Free cash flow (INR mn) Diluted P/E (x) 26.8 16.8 79.1 34.4
Year to March FY18 FY19 FY20E FY21E P/B (x) 1.8 1.9 1.9 1.8
Reported Profit 1,392 2,399 511 1,173 Dividend Yield (%) 0.7 0.7 0.8 0.8
Add: Depreciation 1,377 1,400 3,420 3,594
Interest (Net of Tax) 1,755 1,833 2,930 3,174
Less: Changes in WC 2,694 (464) (1,151) (1,887)
Operating cash flow 75 4,034 5,083 6,655
Less: Capex 10,773 4,696 16,127 3,205
Free Cash Flow (8,943) 1,399 (8,114) 6,624

Brigade Enterprises
Additional Data
Directors Data
Mr M. R. Jaishankar Chairman & Managing Director Ms Githa Shankar Wholetime Director
Ms. Pavitra Shankar Executive Director Ms. Nirupa Shankar Executive Director
Mr. Amar Mysore Executive Director Mr. Aroon Raman Independent Director
Mr. Bijou Kurien Independent Director Ms. Lakshmi Venkatachalam Independent Director
Mr. Pradeep Kumar Panja Independent Director Dr. Venkatesh Panchapagesan Independent Director
Auditors - M/s. S.R. Batliboi & Associates LLP

Holding – Top 10
Franklin Templeton 4.70 ICICI Prudential AMC 4.18
Nomura 3.98 FundRock Management Co SA 2.86
Kotak AMC 2.84 L&T Mutual Fund 1.79
Sundaram Mutual Fund 1.79 Kotak Mahindra LIC 1.38
Nordea Bank Abp 0.93 Dimensional Fund Advisors 0.98
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
03 Oct 2018 Mysore Holdings Private Limited Buy 38275.00
28 Sep 2018 Mysore Holdings Private Limited Buy 21601.00
*in last one year

COMPANY UPDATE
SUNTECK REALTY
Diversification burnishes growth potential
LIMITED
COMPANYNAME
Sunteck Realty (SRL) is amongst the few realty developers in MMR which EDELWEISS 4D RATINGS
successfully straddle the entire spectrum of realty projects—uber luxury,
Absolute Rating HOLD
aspirational and affordable. Its diversification in the affordable housing Rating Relative to Sector Underperformer
and commercial realty segments is likely to: (a) boost growth prospects Risk Rating Relative to Sector Low
by insulating it from sluggish sales in the luxury realty space; and (b) Sector Relative to Market Equalweight
impart cash flow stability via development of rental assets. Pick up in
sales in BKC & ODC projects and launch of Naigaon Phase II are key stock
drivers, in our view. We believe the current price factors in most of the MARKET DATA (R: SUNT.BO, B: SRIN IN)
positives and hence downgrade to ‘HOLD’ with a revised TP of INR494 CMP : INR 451
(INR477 earlier).
52-week range (INR) : 533 / 296
Share in issue (mn) : 146.3
Attractive land buys headline marquee assets
M cap (INR bn/USD mn) : 68 / 422
SRL’s ability to source land at attractive prices during periods of low competition Avg. Daily Vol.BSE/NSE(‘000) : 299.5
(recession) boosts projects’ viability. In addition, its research-based approach has
enabled it to envision future development potential of the micro markets where its SHARE HOLDING PATTERN (%)
projects are present. This has led to development of marquee assets in the uber-luxury
Current Q4FY19 Q3FY19
(BKC) and aspirational (ODC) segments. While the general slowdown in the Mumbai Promoters * 67.2 67.2 67.0
realty market has impacted sales traction, these projects entail strong cash flow
MF's, FI's & BK’s 2.7 1.5 2.7
generation potential.
FII's 26.9 27.1 24.9
Others 3.3 4.2 5.4
Diversification expands growth horizons * Promoters pledged shares : NIL
The company has successfully entered the affordable housing segment through its (% of share in issue)
Naigaon project (attractive JDA structure). Backed by a robust balance sheet, SRL is
also expanding its commercial realty portfolio and planning to develop rental assets in
BKC (~1.5-2.0msf), ODC (~2.6msf) and Naigaon (~1msf). This will not impart only cash EW Real
Stock Nifty
Estate Index
flow stability, but also provide a buffer against any slowdown in the residential
segment. Management has reiterated that it will maintain fiscal discipline while 1 month 9.4 (0.6) (1.2)
building this commercial portfolio and ensure that debt:equity levels remain contained. 3 months (11.0) (7.7) (7.0)
12 months (7.4) (5.6) (4.4)
Outlook and valuation: Rich; downgrade to ‘HOLD’

Industry consolidation due to RERA & the ongoing NBFC crisis, a diversified product
portfolio and lean balance sheet are key positives for SRL. While the Naigaon project
has been a grand success, pick up in sales of other projects is must for sustained sales
traction. We remain positive on SRL’s long-term prospects, but believe the current
stock price adequately captures all these positives. Hence, we downgrade to
‘HOLD/SU’ from ‘BUY/SO’ with revised TP of INR494 (at par with NAV).
Financials (INR mn) Parvez Akhtar Qazi

Net profit 2,142 2,275 4,312 3,806 +91 22 4063 5523
EPS (INR) 14.7 15.6 29.5 26.0
P/E (x) 30.8 29.0 15.3 17.3
ROE (%) 8.1 8.0 13.3 10.6 September 3, 2019
Sunteck Realty
Research backed timely land purchases pave way for value creation
SRL has, over the years, demonstrated the ability to source high quality land at attractive
prices, which has ultimately boosted project viability. This has been done by: (a) timing its
land buys during recession periods when liquidity is scarce and competition for land parcels
is low; (b) following a research-backed approach which has enabled the company to forecast
and capitalise on infrastructure-led demand improvement (e.g., ODC) and offer
differentiated products (like residential units in commercial hub like BKC) and; (c) judicious
use of the JV/JDA model.
Chart 1: SRL’s land purchases were concentrated in the post-Lehman era when competition was low

Note: Highlighted projects are those projects in BKC and ODC which required significant capital allocation
For e.g., SRL acquired the land for its flagship uber-luxury project, Signature Island in BKC, in
July 2006; at that time, BKC was primarily a commercial hub with little supply of high-end
residential space in nearby areas. However, SRL correctly forecasted that there will be
demand for a premium luxury project in the CBD area and hence acquired land.
Post Lehman crisis when liquidity was scarce, SRL stepped up its land acquisition activities:
 It bought additional land parcels in BKC in CY09 and CY10 to develop Signia Isles and
Signia Pearl projects, respectively.
 Over CY10 and CY12, SRL acquired 23 acres in Oshiwara, Goregaon West, from land
owners. Through successful resolution of certain ownership issues, the company was
able to acquire these land parcels for ~INR1.26bn, implying a rate of just ~INR180mn
per acre. This has significantly boosted viability of the projects.
 Apart from these, the company acquired seven other land parcels over CY09 and CY10,
indicating the rapid pace at which it moved to take advantage of the liquidity crisis.
 In CY18, SRL, through an attractive JDA deal, added the Naigaon project (where it has
launched an affordable housing project) to its portfolio.

Real Estate
As a result of these land acquisitions, SRL has been able to build its project portfolio at a
faster clip, that too at attractive rates; this has boosted its growth prospects.
Going ahead, the company is likely to focus on growing its affordable and mid-income
housing portfolio. It will prefer adopting the JDA/JV mode for such projects. For luxury
projects with higher margins, the company will use the ownership model.
Straddling entire spectrum of realty projects

SRL is amongst the few realty developers in MMR which have projects spanning the entire
gamut of realty space—uber luxury (BKC projects), aspirational (ODC/Borivali/Navi Mumbai)
and affordable (Naigaon project). This has enabled the company to capture opportunities
across the entire spectrum of the realty segment.
It also insulates the company from slowdown in any particular segment. For e.g., launch of
the Naigaon project in FY19 boosted SRL’s sales trajectory at a time when luxury realty
projects have faced slowdown.
Chart 2: SRL’s sales traction boosted by Naigaon project

14,000 2.0
Annual pre sales (INR mn)
11,200 1.6
Sales volumes (msf)

8,400 1.2
5,600 0.8
2,800 0.4
0 0.0
Q1FY20
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY11
FY16
Sales value - ex Naigaon Sales value - Naigaon Sales volume (RHS)

Apart from the Naigaon project, BKC and ODC projects have historically contributed a lion’s
share to company’s sales.

Sunteck Realty
Chart 3: SRL has presence across multiple micro-markets in MMR; BKC and ODC
contribute to bulk of the sales volumes
400,000
320,000
Pre-sales (sft)
240,000
160,000
80,000
Q1FY20
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19
FY15
BKC ODC Andheri Borivali Navi Mumbai Others
Note: Excluding Naigaon project sales volumes
Chart 4: Launch of Naigaon project has changed the trajectory of SRL’s sales
7,500
6,000
Pre-sales (INR mn)
4,500
3,000
1,500
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY19*
BKC ODC Andheri Borivali Navi Mumbai Naigaon Others

Note:* refers to Naigaon project sales in FY19
With projects across micro markets and price range, the average realisation for the
company’s projects varies widely.

Real Estate
Chart 5: Average realisations for SRL’s projects are in a wide range
75,000
60,000
Realisations (INR/sft)
45,000
30,000
15,000
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Signature Island Signia Isles Signia Pearl
ODC Borivali Navi Mumbai
A look at the price trajectory of the company’s projects indicates that despite a sluggish
market, realisations have improved significantly compared to launch prices. Its BKC projects
have witnessed sharp price appreciation over the past decade, so have the Navi Mumbai
projects. This has been made possible by the strong value proposition in these projects,
made possible by the company’s prudent land acquisition strategy.
Conservative leverage strategy brightens prospects

SRL’s land acquisition strategy has been melded successfully with a conservative balance
sheet structure which the management has always strived to maintain. After a flurry of land
buys post the Lehman crisis, the company tightened its belt to prune leverage; it has utilised
internal accruals generated to pare debt over the past few years. Consequently, the
company’s leverage position is one of the best in the realty industry.
Chart 6: SRL’s cash flow management has been conservative

4.0
1.2
(1.6)
(4.4)
(7.2)
(10.0)
FY09
FY10
FY12
FY13
FY15
FY16
FY18
FY19
FY11
FY14
FY17
Net cash flow

Note: Financials prior to FY16 are as per IGAAP, FY16-18 are as per IND AS 18 while FY19 financials are as per IND-AS 115

Sunteck Realty
Chart 7: SRL’s leverage has been on a downwards trend

2.0
1.6
Net debt:equity (x)

Sharp
1.2
reduction in
leverage
0.8
0.4
0.0
Q1FY20
FY10
FY11
FY12
FY13
FY15
FY16
FY18
FY19
FY14
FY17
Net debt:equity
Also, prior to entering the commercial realty segment, SRL shored up its liquidity position by
raising ~IN5bn funds through a QIP in FY18. This again indicates the management’s
conservative stance before venturing in to the funding-intensive commercial segment.
Mumbai market slowdown has lengthened gestation period

While some of the company’s Mumbai projects, in uber-luxury and aspirational segments,
have attracted significant buyer interest (resulting in sizeable improvement in realisation),
to some extent certain other projects have also faces brunt of the slowdown in the market.
This is reflected in the long gestation period of these projects.
Table 1: Long gestation period for some projects of SRL

Project Total number of units Number of units unsold Unsold (%)
Signature Island 64 17 26.6
Signia Isles 76 4 5.3
Signia Pearl 80 19 23.8
ODC 1 465 169 36.3
ODC 2 536 143 26.7
Signia High 80 42 52.5
Signia Waterfront 170 75 44.1
For e.g., by the time the BKC projects are sold out fully, it will have been more than a
decade since the time of launch. Similarly, ODC 1, where sales started in FY12, will also need
close to a decade to get sold out. SRL is likely to need a significant amount of time to sell the
Signia High project as well.
Consequently, the company has had to undertake marketing activations to boost sales in
certain projects. For e.g., to spur sales, the company launched a deferred payment scheme
in the Signia High project. Similarly, in the ODC project, the company gave discounts to
customers on some of slow-moving inventory. We believe, some kind of marketing

Real Estate
activations will be required to boost sales in projects with significant amount of unsold
inventory.
In pole position to reap diversification benefits

After consolidating its position in the premium and aspirational residential segments, SRL
has diversified successfully in to the affordable housing segment. It launched first phase of
the Naigaon project in FY19. The project was a stupendous success with the company
notching up sales of 1.1msf worth ~INR5.2bn in FY19. With an overall size of 12msf, the
project is likely to drive sales for many years.
Apart from the residential segment, SRL is also enhancing presence in the commercial realty
space. The company has experience of developing commercial projects; it has developed
commercial projects, both on the sale model (Sunteck Grandeur, Andheri, and Sunteck
Kanaka, Goa) and on the lease model (Sunteck Centre, Vile Parle).
Going ahead, the company is planning to enhance its presence in the annuity space. We
believe the decision to expand its commercial portfolio is driven by factors such as:
 Upcycle in the retail and commercial realty space.
 Strong financial health of the company.

 Longer gestation period of residential projects.
SRL is planning to develop a slew of commercial projects spanning ~6msf. It intends to invest
~INR50bn in commercial and retail assets over the next four years. Its ~6smf commercial
portfolio will include:
 ~2.6msf in ODC: This will be a mixture of office and retail space.

 ~1.5-2.0msf in and around BKC in the office segment: SRL is already developing two
projects around BKC spanning ~0.5msf—Sunteck Icon and Sunteck Gateway 51. Apart
from this, the company is also looking at another 1-1.5msf of office development in BKC.
 ~1msf retail development in Naigaon: This will be undertaken to create an ecosystem
for the residential portion of the project. SRL has already started work on 0.12msf of
high street retail space here, of which ~50% has been pre-leased.
Funding: The funding for these commercial projects will come from:
 BKC: Over the next four years, BKC residential projects will generate cash flows of
~INR20bn.
 ODC: Funds generated from Avenue 1 and 2 projects will support construction of
Avenue 5 and 6 projects, which will be developed in a calibrated way. The company will
not start work on the entire ~3msf office/retail space in ODC at one go.
 Naigaon: The retail space in Naigaon will also be developed in a phased manner
supported by cash flows from residential portion of Phase I and II of the project.
 Management has reiterated that it will maintain fiscal discipline while building this
commercial portfolio and ensure that debt:equity levels do not go out of hand.
As of now, we are factoring in only the ~2.6msf development in ODC, apart from Sunteck
Icon and Sunteck Gateway 51 projects in our projections; we will include the rest of the
projects after getting clarity on project timelines, ownership structure and funding details.

Sunteck Realty
Post completion of ODC retail/office assets, SRL’s annuity income will improve materially.
Chart 8: SRL’s annuity income to improve substantially

6,250

5,000
3,750
2,500
1,250
0
FY20E FY21E FY22E FY23E FY24E FY25E FY26E
Annuity income
We believe the decision to enhance its footprint in the commercial space is prudent as it is
likely to provide steady rental revenue stream to the company and cushion it against any
slowdown in the residential realty market.
Outlook and valuation

SRL’s strong brand name, diversified segmental presence, healthy balance sheet and rising
exposure to annuity assets are key positives for the company. This is countered to some
extent by the slow sales traction in certain residential projects. We believe entry in
affordabe housing and a burgeoning annuity portfolio are likely to improve growth
prospects over the long term. We believe the rate of liquidation of inventory in ongoing
luxury/aspirational ongoing projects and response to subsequent phases of the Naigaon
project will be a key trigger for the stock.
We believe there are limited upsides from the current levels as most of the positives are
already priced in. Henc we downgrade to ‘HOLD/SU’ from ‘BUY/SO’ with target price of
INR494, which is on par with our December 2020E NAV.
Table 2: SOTP valuation

Particulars Value
Business development value (INR mn) 7,611
NAV (INR mn) 69,364

Real Estate
We argue for nil discount to NAV based on following:
 Low gearing lends SRL capital flexibility to increase leverage to buy more land and grow
its NAV faster.
 Presence across the entire gamut of residential projects.
 Growing annuity portfolio to lend cash flow stability.
Potential pressures
 Exposed to single market (MMR) risk.
 Muted sentiments in the premium residential segment.
 Large unsold inventory to keep realisations in check.

Sunteck Realty
Company Description
SRL is a Mumbai focused real estate developer engaged in construction and development of
residential and commercial properties. Majority of its land bank is located in Mumbai with
the balance across Nagpur, Goa and Jaipur. Its land bank has been acquired through
outright purchase as well as JDA/JV with landowners. Its residential development caters to
buyers across segments.
Investment Theme
1. Focused and monetisable land bank in lucrative Mumbai market.
2. Ability to source value accretive land buying opportunities.
3. Expected operational scale-up leading to healthy surplus cash.
4. Rising exposure to annuity assets
Key Risks
1. Prolonged slowdown in Mumbai residential market
2. Regulatory risks
3. Partnership risks in JDA/JV projects
4. Macro risks

Real Estate
Inflation (Avg) 3.6 3.4 4.0 4.5 Employee costs 98 123 135 149
Repo rate (exit rate) 6.0 6.3 5.3 5.0 Other Expenses 165 451 496 546
Company EBITDA 3,722 3,780 7,089 6,358
Selling Price increase (%) 5 5 5 5 Depreciation 17 22 22 23
Less: Interest Expense 421 408 525 586
Less: Minority Interest 98 136 244 238
Associate profit share (57) 3 - -
Reported Profit 2,142 2,275 4,312 3,806
Adjusted Profit 2,142 2,275 4,312 3,806
Shares o /s (mn) 146 146 146 146
Dividend Payout Ratio (%) 12.3 11.6 6.1 6.9
Common size metrics

Staff costs 1.1 1.4 0.9 1.3
S G & A expenses 1.9 5.3 3.2 4.6
EBITDA margins 41.9 44.1 46.2 53.8
Growth ratios (%)

Revenues (6.7) (3.5) 79.0 (22.9)
EBITDA 6.9 1.6 87.5 (10.3)
PBT 9.4 9.4 86.9 (11.2)
Adjusted Profit 5.0 6.2 89.5 (11.7)
EPS (9.5) 6.2 89.5 (11.7)

Sunteck Realty
Share capital 140 140 140 140 Operating cash flow (3,034) 243 4,011 4,696
Reserves & Surplus 26,163 28,197 32,244 35,786 Financing cash flow 2,520 560 736 736
Shareholders' funds 26,303 28,337 32,385 35,926 Investing cash flow 1,016 (423) (2,060) (4,275)
Minority Interest 775 910 910 910 Net cash Flow 502 380 2,687 1,156
Long term borrowings 5,680 6,346 7,346 8,346 Capex (1) (19) (2,060) (4,275)
Def. Tax Liability (net) (157) (148) (148) (148) Dividend paid (263) (265) (264) (264)
Sources of funds 32,602 35,446 40,493 45,034 Share issue/(buyback) 6,472 23 - -
Gross Block 452 471 491 2,450
Net Block 386 406 221 1,103 Profitability and efficiency ratios
Capital work in progress - - 2,040 4,356 Year to March FY18 FY19 FY20E FY21E
Total Fixed Assets 386 406 2,261 5,458 EOP(ROE) (%) 8.1 8.0 13.3 10.6
Goodwill on consolidation 318 318 318 318 ROAE (%) 9.7 8.3 14.2 11.1
Non current investments 2,174 2,577 2,577 2,577 ROACE (%) 11.7 11.6 18.4 15.0
Other non current assets 107 280 280 280 Current Ratio 8.8 9.8 9.6 6.3
Current Investments 29 29 29 29 Gross Debt/EBITDA 1.5 1.7 1.0 1.3
Cash and Equivalents 1,099 1,479 4,166 5,323 Gross Debt/Equity 0.2 0.2 0.2 0.2
Inventories 26,427 26,321 26,695 28,832 Net Debt/Equity 0.2 0.2 0.1 0.1
Trade receivables 2,906 3,135 3,485 3,835
Loans & Advances 1,626 610 810 1,210 Operating ratios
Other Current Assets 1,326 3,913 3,952 3,992 Year to March FY18 FY19 FY20E FY21E
Total current assets 32,286 33,978 34,941 37,869 Total Asset Turnover 0.3 0.3 0.4 0.3
Current liabilities 3,653 3,587 4,041 6,777 Fixed Asset Turnover 22.5 21.6 48.9 17.9
Provisions 145 36 39 43 Equity Turnover 0.4 0.3 0.5 0.3
Total Current Liab 3,798 3,622 4,080 6,820
Net Curr Assets-ex cash 28,488 30,356 30,862 31,049 Valuation parameters
Uses of funds 32,602 35,446 40,493 45,034 Year to March FY18 FY19 FY20E FY21E
BVPS (INR) 180.0 193.9 221.6 245.9 Adj. Diluted EPS (INR) 14.7 15.6 29.5 26.0
Y-o-Y growth (%) (9.5) 6.2 89.5 (11.7)
Free cash flow (INR mn) Adjusted Cash EPS (INR) 14.8 15.7 29.7 26.2
Year to March FY18 FY19 FY20E FY21E Diluted P/E (x) 30.8 29.0 15.3 17.3
Reported Profit 2,142 2,275 4,312 3,806 P/B (x) 2.5 2.3 2.0 1.8
Add: Depreciation 17 22 22 23 Dividend Yield (%) 0.3 0.3 0.3 0.3
Interest (Net of Tax) 286 266 347 387
Less: Changes in WC 5,194 2,032 506 187
Less: Capex 1 19 2,060 4,275
Free Cash Flow (2,750) 513 2,114 (247)
Peer comparison valuation

Market cap Diluted P/E (X) P/B (X) ROAE (%)
Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E
Oberoi Realty 2693 16.8 15.0 2.2 1.9 12.8 12.7
Brigade Enterprises 553 79.1 34.4 1.9 1.8 2.3 5.2
DLF 5626 25.3 12.7 1.0 1.0 4.4 7.8
Godrej Properties 3155 41.4 21.2 4.4 3.7 10.7 17.3
Sobha Limited 697 15.0 12.1 2.0 1.8 14.3 15.8
Sunteck Realty Limited 925 15.0 17.0 2.0 1.8 14.2 11.1
Median - 21.1 16.0 2.0 1.8 11.8 11.9
AVERAGE - 32.1 18.7 2.3 2.0 9.8 11.7

Real Estate
Additional Data
Directors Data
Mr. Kishore Vussonji Independent Director Mr. Ramakant Nayak Independent Director
Mrs. Sandhya Malhotra Independent Director Mr. Kamal Khetan Chairman & Managing Director
Mr. Atul Poopal Executive Director Mrs. Rachana Hingarajia Director & Company Secretary
Auditors - Lodha & Co.

Holding – Top 10
Pabrai Investment Fund 8.52 Fiam Group 1.24
Fidelity Investments 5.09 BNP Paribas 2.63
FID Funds Mauritius Ltd 2.05 L&T Mutual Fund Tustee Ltd/India 1.57
Dimensional Fund Advisors LP 0.83 DSP Investment Managers Pvt Ltd 0.53
BlackRock Inc 0.50 Van Eck Associates Corp 0.14
*in last one year
Bulk Deals
13 May 2019 Astha Trust . Sell 628000 428.00
13 May 2019 Samagra Wealthmax Pvt Ltd . Buy 7210000 428.00
13 May 2019 Paripurna Trust Sell 8280000 428.00
13 May 2019 Glint Infraprojects Pvt Ltd . Buy 2326000 428.00
06 Mar 2019 BNP PARIBAS ARBITRAGE BUY 4126567 370.03
*in last one year
Insider Trades
16 May 2019 Glint Infraprojects Pvt Ltd Buy 1163000.00
16 May 2019 Paripurna Trust Sell 4140000.00
16 May 2019 Samagra Wealthmax Private Limited Buy 3605000.00
16 May 2019 Astha Trust Sell 628000.00
05 Mar 2019 Glint Infraprojects Pvt Ltd Buy 45000.00
*in last one year

RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Brigade Enterprises BUY SO M DLF BUY SP H
Godrej Properties BUY SP L Oberoi Realty HOLD SP L
Sobha Limited BUY SO M Sunteck Realty Limited BUY SO H
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING

Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return

Real Estate
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES
Aditya Narain LIMITED, ou=SERVICE,
2.5.4.20=3dc92af943d52d778c99d69c48a8e
0c89e548e5001b4f8141cf423fd58c07b02,
Head of Research
NARAIN
postalCode=400011, st=MAHARASHTRA,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c
aditya.narain@edelweissfin.com 20, cn=ADITYA NARAIN
Date: 2019.09.04 13:47:03 +05'30'
Coverage group(s) of stocks by primary analyst(s): Real Estate

Brigade Enterprises, DLF, Godrej Properties, Oberoi Realty, Sobha Limited, Sunteck Realty Limited
Recent Research
Date Company Title Price (INR) Recos
22-Aug-19 DLF Supreme Court notice singes 144 Buy

stock; Company Update
16-Aug-19 Brigade Strong operational 271 Buy
Enterprises performance;
Result Update
13-Aug-19 Sobha Steady sales; leverage inches 501 Buy
up; Result Update
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
446
(INR)
297
149
-
Apr-14
Sep-14
Feb-14
Mar-14
Jun-14
Dec-14
Jul-14
Aug-14
Oct-14
Nov-14
May-14
Jan-14

(INR) (INR) (INR)
150
175
200
225
440
510
580
650
160
180
200
220
100
125
300
370
120
140
Sep-18 Sep-18 Sep-18
Oct-18 Oct-18 Oct-18
Nov-18 Nov-18 Nov-18

One year price chart
Dec-18 Dec-18 Dec-18
Jan-19 Jan-19 Jan-19
Feb-19 Feb-19 Feb-19
DLF
Mar-19 Mar-19 Mar-19
Oberoi Realty
Apr-19 Apr-19 Apr-19
213
Brigade Enterprises
May-19 May-19 May-19
Jun-19 Jun-19 Jun-19
Jul-19 Jul-19 Jul-19
Aug-19 Aug-19 Aug-19
(INR) (INR) (INR)

1,100
1,300
370
430
490
550
440
510
580
650
700
900
250
310
300
370
300
500
Oct-18 Oct-18 Oct-18
Nov-18 Nov-18 Nov-18
Dec-18 Dec-18 Dec-18
Jan-19 Jan-19 Jan-19
Feb-19 Feb-19 Feb-19

Mar-19 Mar-19 Mar-19
Sobha
Apr-19 Apr-19 Apr-19
Sunteck Reality
Godrej Properties
May-19 May-19 May-19
Jun-19 Jun-19 Jun-19
Edelweiss Securities Limited

Jul-19 Jul-19 Jul-19
Aug-19 Aug-19 Aug-19

Sunteck Realty

Real Estate
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Sunteck Realty
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Real Estate

The Charge of the Consolidating Brigade

Parvez Akhtar Qazi Archit Ranka

Consolidation wave to burnish organised players’ fortunes

Worse over for organised residential players, commercial on cloud nine

1 Edelweiss Securities Limited

Our preferred segments/geographies to play

Top picks: We prefer companies with diversified geographical/segmental footprint and

Table 1: New valuation framework for realty companies

2 Edelweiss Securities Limited

Investment Thesis .................................................................................................................... 4

A typical real estate cycle – Howard Marks ........................................................................... 15

Residential: Worse Over, But A Long Way To Go ................................................................... 16

Light At The End Of The Tunnel ............................................................................................. 23

Housing: Hyderabad Well Placed, NCR Struggling ................................................................ 41

Commercial: In Fine Fettle ..................................................................................................... 74

Office: Bengaluru, Hyderabad On A Strong Footing .............................................................. 83

Retail Space: On its way up .................................................................................................. 107

Fund Flow To Sector Improving ........................................................................................... 112

Godrej Properties ................................................................................................................. 139

Oberoi Realty ....................................................................................................................... 154

Sobha ................................................................................................................................... 169

Brigade Enterprises .............................................................................................................. 182

Sunteck Realty...................................................................................................................... 198

3 Edelweiss Securities Limited

Chart 1: Significant consolidation in India’s property market

Decline in developers (%)

2011-12 2017-18 % Decline in number of developers (RHS)

4 Edelweiss Securities Limited

Share of top 10 developers in

2011-12 2017-18 2011-12 2017-18

Chart 4: Consolidation underway in commercial realty market as well

Office stock (msf)

5 Edelweiss Securities Limited

Multiple factors, same result: Significant gains for organised developers

Net disbursals by NBFCs/HFCs to

realty developers (INR bn)

Net disbursals by NBFCs/HFCs to realty developers

As far as the commercial segment is concerned, the entry of PE players/financial

6 Edelweiss Securities Limited

Residential segment over the hump

CY17 CY17 CY17

330,000 30 45 CY17 CY17

7 Edelweiss Securities Limited

Consequently, we expect affordable and aspirational housing segments to gain better

8 Edelweiss Securities Limited

Fig. 1: State of India’s property market

Source: Edelweiss research

Commercial segment thriving

Absorption (msf) Supply (msf)

9 Edelweiss Securities Limited

Buoyancy in retail segment

Mall quality split (%)

Vacancy levels (%)

New completion Net absorption

Institutional fund flow to real sector on an upswing

10 Edelweiss Securities Limited

CY17 Hyderabad Kolkata

Improving fundamentals to prop up valuations

Table 2: New valuation framework for realty companies

11 Edelweiss Securities Limited

Chart 19: Soft interest rate regime to give a leg-up to valuations

Repo rate (%)