Friday, January 9, 2009

Real Estate Sector ; Sector Update ; Focus: Mid-Housing Segment

Real Estate Sector


Focus: Mid-Housing Segment

In our recent update on the real estate sector "RBI's measure for realty sector, will it help?", we highlighted that boost to the housing sector shall be induced by lower property prices and declining home loan rates. Historically it has been observed that mortgage rates are at 250/300bps higher than the 10-year GOI bond yields. Our banking analyst expects 6% bond yield for CY09. With decline in the bond yield mortgage rates should, therefore, decline to 8-8.5%. Though PSU banks have reduced home loan rates upto Rs.2mn to 9.25%, we believe rates should fall further to boost demand for housing.  Private sector banks and HFCs have played a crucial role in home finance in the last few years. Though home loans rates have been reduced by them as well, they are still way higher than interest rates offered by PSU banks.

From developer's perspective, though lot of noise of mid-housing has been created, very few developers have mid-housing projects under offering. DLF Limited and Puravankara Projects Limited (amongst company under our coverage) is developing residential projects in the range of Rs.35-45mn. We believe, these two companies are relatively better placed to take advantage of the falling interest rates which shall in tern induce demand for home. For DLF Limited, 12.8% of the gross NAV is contributed by mid-housing segment. In case of PPL, residential accounts for 63.9% of Gross NAV.

Historically, residential rental yields in India have hovered between 5-5.5%. Over the last few years' yields declined substantially to 2-2.5% driven by higher property prices. Our channel checks suggests that mid-housing projects of DLF and PPL have been launched at attractive prices and have rental yields of 4-4.5% based on the rents prevailing in the neighboring areas.


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