Medium Term Real Estate Play

I will reference an old blog that I believe had captured the state of the real estate market quite succinctly. We shall review certain views and facts regarding the linked blog. The below diagram is a very good explanation of the real estate cycles.

The linked blog makes a case, stating that the first Real Estate (RE) cycle started in 1991 when the economy got liberalized. The prices peaked in 1995. Then started the slow decline that bottomed out in 2008. The second RE cycle started then and peaked in 2012. The phase 4 i.e. the recession stage of the cycle was set to start from there. The gradual decline in the number of new launches (as shown below).

The current scenario: Non-Commercial RE (NCRE)

Now in 2018, (the linked blog predicted that the scenario may stretch till 2018), we find that the decline in new launches has persisted.

Hyderabad is the worst hit, followed by Pune, B’lore & Chennai. RE sales have also declined 7% YoY:

Prices as a result has declined considerably, and in many cities they are at an all time low.

Current Scenario: Commercial RE (CRE)

New completions are up, and it is expected that the trend will continue. The vacancy levels in CREs have reduced consistently, and it is expected that new demand will result in the picking up of new launches. The CRE situation currently is showing signs of revival.

Overall vacancy level trends. Source: Knight Frank

Vacancy levels by city. Source: Knight Frank

Thus it is evident that it is a good time to play both the markets. Builders with heavy commercial offerings in Blore & Hyderabad should be those who will report the best numbers. With CRE comes Residential demand usually with a lag. The base assumption is that CRE will invariably cause increase in the number of people relocating to the city in search of work. This will lead to an uptick in the residential market. With CRE demand picking up, certain stocks should not be ignored.

Exploring individual stocks

Blore & Hyderabad focused Companies with most project listings @ proptiger (Categories: launching soon/new launch/under construction/ready to move in)

Prestige estates: ~120 projects
Brigade Enterprises: ~25 projects
Phoenix Mills: Malls in Blore, Chennai, Mumbai and other major areas
Sobha developers: ~120 projects
Puravankara: ~50 projects
Kolte-Patil: ~93 projects

Revenues of the companies:

Prestige Enterprises is leading by quite a margin.

Operating Margins

In terms of operating margins Brigade Enterprises and Puravankara are the best performing

Total Assets

Most assets are currently held by Prestige Estates and Puravankara

Inventory

Inventory wise Prestige Estates & Sobha Developers are the highest. This is not good as with oversupply reduces the ability to price the assets.

Asset Turnover

Kolte Patil & Brigade developers are the ones using their assets most judiciously.

Asset Composition

Brigade enterprises have the least amount of other assets, its main capital is locked in Net Block, CWIP and inventory. This appears to favor brigade again as it appears as though it maintains a good balance between churning new properties out vis a vis converting it to sales, this is also substantiated by the asset turnover ratio.

RoE & RoCE

RoE & RoCE wise Brigade Enterprises is way ahead of others.

Valuation metrics


Inspite of the metrics favorable to Brigade Enterprises, it appears as if it is undervalued by the market both P/E wise and P/B wise.

Liabilities composition

Brigade has a high proportion of debt compared to its peers, and the interest payments would be eroding their net profitability.

Net Profit Margin

Due to high debt, Brigade, inspite of leading on many operational indicators, the high gearing affects the net profit margins, where Kolte Patil takes the cake.

Thus, to play the sector in the near term Brigade Enterprises seems to be a good bet.