RBI cuts repo rate by 50bps; will this translate into lower mortgage rates? The RBI positively surprised by cutting repo rate by 50bps on September 29. A 50bps rate cut (if transmitted to mortgage rate) would be equivalent to 3-4% reduction in housing prices. Although we concur that rate cuts help rate-sensitive sectors’ sentiments, we believe mortgage rates impact the sector more. Since January this year, RBI has cut repo rate by 75bps, but banks transmitted 30bps only to mortgages. Only a few public sector banks have reduced mortgage rates by 25-40bps. However, we await mortgage rate cut announcements from private sector banks that hold the lion’s share of India’s mortgage book.
Only volume recovery (led by price cuts) can trigger stock performance: We believe housing volume is strongly correlated to mortgage rates, income growth and prices. In 2009, volume recovery was aided by a rate cut of 350bps within three months. This looks unlikely now given RBI’s outlook on inflation/GDP. Also volume recovery led by income growth (currently in single digits) seems unlikely as well. Therefore, price cut seems the only hope for any volume recovery. Historically, stock performance has preceded volume recovery by two-three quarters.
Quoted housing prices up; effective prices down:
Average quoted prices in primary markets of Gurgaon, Mumbai and Bengaluru have increased by 4-5 % annually since CY13. However, effective price is down considering inflation as well as freebies and the staggered payment plan offered by developers. Gurgaon has been the most adversely affected followed by Mumbai. Bengaluru has resisted any price rationalisation thus far. However, with rising inventory levels, we foresee pricing pressure.
Price correction -> volume recovery -> sector turnaround in 2HCY16
In our view, as prices correct (actual or time correction), markets will start pricing in a volume recovery similar to CY09. We expect this turnaround to take place starting 2HCY16, well supported by further rate cuts by RBI.
High-debt stocks rallied on back of rate cuts; we advise being selective
High-leverage stocks such as DLF, UT and HDIL rallied 8-15% in the past few days on the back of rate cuts. We advise being selective as physical market fundamentals continue to remain weak (poor housing demand). We advise clients to stay invested in our stock picks.
Our stock picks – Sobha,
Prestige and Oberoi
We prefer developers (Sobha, Prestige and Oberoi) that rank high on our five parameters with a three-year outlook namely:
(i) pre-sales growth, (ii) execution track record, (iii) corporate governance, (iv) healthy balance sheet and (v) free cash flows.
Maintain Underperform on DLF, Unitech and HDIL
We maintain Underperform (U/P) on DLF and Unitech due to (i) slow housing market recovery in core housing markets of Gurgaon/Noida; (ii) the company will remain cash-flow negative through FY17E; and (iii) debt levels to remain elevated up to FY17E. We reiterate U/P on HDIL because (i) although HDIL could see topline growth in period FY16E-18E, we believe margins will shrink due to rising costs of delayed projects and (ii) although debt levels have come down, the same has been slower than management guidance and our expectation.
Quoted vs Effective housing prices
Quoted housing prices up; effective prices down: Average quoted housing prices in primary markets of Gurgaon, Mumbai and Bengaluru have increased by a nominal 4-5% annually since CY2013. However, as the property cycle turned to favor home buyers starting 2HCY2013, sales velocity wilted pushing developers to offer varied discount schemes to attract home buyers. Consequently, the effective price of transactions has gone down considering discounts, freebies such as free parking, floor rise waivers, stamp duty waivers etc. and the staggered payment plan offered by the developers.
Notable difference in quoted v/s effective prices in 1H2015
As the property cycle turned to favour home buyers starting 2HCY2013, the difference between quoted housing prices and effective housing prices has risen with every passing year. The difference between quoted and effective in CY2014 was 1-2% across cities which rose to 5% in CY2015, except Bengaluru (1-2%).
High stress seen in Gurgaon
As shown in charts above, the Gurgaon housing market has been the most adversely affected followed by Mumbai. There has been negligible growth in quoted prices in CY14 and 1HCY15. Effective prices are down 2.5% in 1HCY15. To make matters worse for developers (primary sales), secondary (re-sale) market in Gurgaon has fallen by as much as 15-20% depending on the micro-market and / or developer.
Mumbai housing remains a paradox!
In our view, the Island city and Eastern suburban areas of Mumbai shall see over-supply over the next 2-3 years with major completions of projects launched in period CY13-15. Other areas have limited supply, thus the difference between quoted and effective prices is narrow. Discounts in Mumbai are limited to Grade B developers in specific locations. Although, Grade A developers have managed to keep prices firm, any increase in prices is project specific, limited to projects with visible execution progress.
Bengaluru is better placed despite rising unsold inventory
Bengaluru has resisted any price rationalization thus far. We attribute this mainly to (i) affordability as majority of Bangalore’s 2BHK houses are priced $100,000–$125,000 per unit, (ii) office leasing has picked up in Bengaluru which is a lead indicator of a pick-up in housing demand, and (iii) rising inventory shall keep price rise in check, which shall maintain the city’s affordability.
| Subscribe To Our Free Newsletter |
