Volumes on a pan-India level for the October-December period (typically, one of the strongest quarters for volumes due to the festive season) were healthy across cities with inventory levels also remaining stable across markets. However, Mumbai continues to be a laggard with volumes declining about 50% from peak of May 2009 on account of high prices and dampened buyer sentiment.
Volume decline in Mumbai has also led to inventory levels in Mumbai rising to 11 months as of December from about seven months in August. Although we believe that prices in Mumbai may eventually correct by about 10-15% by October 2011 as volumes continue to remain sluggish; in the near-term, Mumbai developers will look to hold on to quoted prices, anticipating a recovery in volumes.
Also See | Volume view (Graphic)
On a pan-India basis, we expect marginal appreciation of 5-10% in prices in 2011.
Commercial leasing steady
In the year 2010, commercial leasing activity across India saw an uptick with estimated absorption of about 40 million sq. ft, or msf, (including pre-leasing) across top seven cities (Mumbai, National Capital Region, or NCR, Bengaluru, Kolkata, Hyderabad, Pune and Chennai) against about 28 msf in 2009 and about 35 msf in 2007-08. Bengaluru was the strongest market with absorption of about 12 msf in 2010, which is above levels of about 10 msf leased in 2007-08.
Mumbai and NCR are also witnessing leasing activity in selected projects, but upcoming supply across markets in 2011 is expected to keep rental appreciation in check.
A string of negative news flow, largely on account of the loan syndication bribery/2G telecom licence allocation cases, coupled with Reserve Bank of India’s (RBI) policy intervention, has dampened sentiment. Our channel checks indicate that loan sanctions for developers may be delayed with interest rates also likely to see an upward bias. Also, volumes may see pressure on account of loan-to-value ratio for housing loans being capped at 80%. With debt repayment assuming significance in the light of tight funding to the sector and rising input costs, a key monitorable will be developers’ capacity to hold on to a margin maximization strategy.
Testing times ahead
Demand for housing in India continues to be robust on the back of increased hiring/salary hikes. However, rising interest rates, residential prices crossing 2008 peak levels in Mumbai and pockets of NCR and rising construction costs will continue to act as dampeners. Over the next six months, we see no significant upside risk to volumes on a pan-India basis, except in the case of price correction of 10-20% in overheated markets.
Graphic by Yogesh Kumar/Mint
Edited excerpts from a report by Edelweiss Securities Ltd. Your comments are welcome at email@example.com