We recently visited Delhi-National Capital Region (NCR), Bangalore, and Mumbai as a part of our GS India Property Tour. We visited about 25 sites at various stages of completion, met management teams and property consultants and made some broad industry-wide observations.
Modest price hike
As we had highlighted in our 8 November report, we believe that property prices in pockets of Delhi-NCR and Mumbai in particular seem to have peaked, and we expect limited further price appreciation. Prices in Bangalore have remained fairly stable, but further appreciation should be held in check by high supply potential. We observed higher price inflation in city-centre properties during our tour.
We are forecasting a modest 5% price appreciation in our models, but are forecasting volume growth to be more robust.
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We have seen marked improvement in execution by most real estate developers and project delays have reduced. In our meetings with various management teams, most developers emphasized their focus on execution and this increased construction activity was fairly apparent in our site visits. We observed the largest increase in activity in Unitech projects on a year-on-year basis.
Most developers highlighted margin risks being posed by rising material and labour costs. In addition to rising labour costs, availability is also becoming an issue as the faster pace of execution has resulted in greater competition to attract labour. Companies such as DLF Ltd, Sobha Developers Ltd, and Puravankara Projects Ltd indicated the need for gradual selling to protect margins in an inflationary environment. We believe that the availability of skilled labour could be a potential risk factor in the execution progress demonstrated by some companies.
While commercial vacancy remains high, leasing could improve in select micro-markets, particularly retail leasing.
In the residential space, there is good construction activity across most locations.
NCR: We observed finishing activity across delayed projects in Gurgaon. We observed considerable price appreciation of 40%-plus across various locations in Gurgaon, which is partly driven by its re-rating as a preferred destination for business in the north. There was heavy incoming traffic from Delhi in the morning, indicating Gurgaon has become an important commercial destination.
Secondary pricing has now increased by at least 50% to about Rs 14,000 per sq. ft, indicating some pricing convergence in south Delhi.
Bangalore: Various management teams are indicating an increase in construction costs by 15%-plus, driven primarily by an increase in cement costs.
Most companies indicated a large launch pipeline. We expect completions in Bangalore to drop sharply after mid-2011 as there have been very few launches since early 2008.
We observed large price increases in central Bangalore versus moderate price increases in most surrounding locations.
Mumbai: We observed a desire to extract better pricing than to reduce inventory in most locations.
We also saw rapid price inflation across most locations, with pricing in Dombivali (40km from Nariman Point) at above Rs 3,000 per sq. ft.
There are a large number of new launches in the $2 million and above segment.
Private sector initiatives
We see some real estate companies now helping infrastructure development, especially if the company has a substantial interest in the development of a particular area in order to increase connectivity and, thereby, its selling prices.
DLF plans to invest Rs 150 crore in a road that would make the connection between the Delhi-Gurgaon Expressway and Golf Course Road signal-free. It plans to hold a 30% stake in intra-Gurgaon metro, with DLF’s contribution being land.
BPTP Ltd has constructed a small bridge over the Yamuna canal, aiding development of the area adjoining the bridge.
Jaypee Infratech Expressway has opened new development areas between Noida, Greater Noida and Agra.
Lodha Group plans to increase the frequency of trains between its project near Dombivali and Borivali stations.
Edited excerpts from a report by Goldman Sachs. Your comments are welcome at firstname.lastname@example.org