Sameer Baisiwala, India pharma and property analyst at Morgan Stanley, in an interview on the sidelines of Morgan Stanley Annual India Summit, spoke about the peak in residential pre-sales, price hikes, real estate investment trusts (REIT) among other things. Edited excerpts:
What are the key takeaways from the 2021-22 performance of listed developers?
The key highlight was that each of the listed developers reported one of the highest pre-sales in the last 5-7 years. Business is back in motion. Pre-sales is a leading indicator of future cashflows and earnings, so this is the most important metric tracked. Secondly, with the recovery in volumes, we are also seeing companies going ahead and taking some price increases. That’s a good sign and what is even better is that they are not going overboard, and limiting price increases to containing inflation. Prices increases mostly started in Q3 and then accelerated in Q4. Thirdly, companies did a decent job with balance sheet management, and whatever surplus cashflows they got, they used it to deleverage. The theme of deleveraging continued during the course of the year. Now, companies want to invest money back into business, into new capex cycles.
Are debt levels in control and will listed developers deleverage further?
Leverage is meaningfully low for one-third of the listed companies today, and if this were to continue, they may actually turn cash positive soon. The other two-third developers have brought their debt down from the high-risk, red level mark to a comfort zone, but they can do more to reach a safe balance sheet level. Some of these (two-third) developers want to deleverage more, but the pace of debt reduction will slow down. More importantly, their surplus cash from operations will actually increase. So the difference between the two will get reinvested into the business, either in construction spend, capex for rental assets or new project acquisitions, and a little bit for deleveraging.
Will home price hikes continue this year? What about sales momentum?
Developers will get a little opportunistic and they can take some risks, in terms of taking price hikes, but it would depend on the project, competitive intensity of a micro-market, or perhaps projects where they have already sold 80-90%. That could run through the course of the year. New project launches could be pre-adjusted for a price increase. Keeping an eye on inflationary pressures, developers may have to raise prices further. Frankly, it’s a welcome change for developers. They are more focused on sales volumes, and want to increase prices to make their margins rather than going overboard with it.
Listed developers have a high level of sales achieved in FY22 to match this year. Sales in FY22 as we know saw a multi-year peak. Our expectation is that the growth in sales in FY23 will be between 8-12%.
Are we going to more debt-raise this year and have borrowing costs significantly come down?
In FY21 and FY22, all the listed developers have refinanced their debt at an about 200 basis points lower cost of capital. But interest rates have bottomed out and are on the upswing now. Going forward, we should expect rates to be flat or maybe go up a bit more. In terms of raising debt, I think that will happen for the listed REIT side of the business because they need to pay almost 100% of their profits as dividends. So for capex and new projects, they will need to lever.
Are developers eyeing land acquisitions and geographical expansion again?
Developers will be doing either outright land purchases or joint development agreements and joint ventures because they would need to replenish their land bank or project portfolio. In the last 6-9 months, this has gained pace compared to the preceding 1-2 years. More transactions are happening and we should see this more of this taking place.
Developers are geographically diversifying out of their home markets but they are still not going out of the top six markets. Some developers are moving to other cities and will densify there, or places where they already have legacy land.
What’s your outlook on REITs?
India has generated about 35-40 million sq ft of annual leasing demand for the last 10 years or more. In the two covid years, that fell to half. In 2023, that should reach pre-covid levels and in 2024, there could be full restoration. Vacancies in rental office assets have peaked out and every quarter, we should be 100 basis points of improvement over the next four quarters.
The credit rating of listed REITs is quite high and they are backed by solid and resilient rental income. Availability of credit isn’t any issue for them. Sponsorship for each of these REITs is strong. Their underlying assets are city-centric, with top quality tenants.
Higher inflation may hit overall construction cost, which may go up by 15%. It’s a little premature to worry about the interest rate upcycle now. But as we go forward, this will keep biting into these companies. On the cashflow side, office REITs have high leverage in absolute terms. Some cash outflow towards higher interest expense will leave a little less for the unitholders. It will impact valuations.
“Exciting news! Mint is now on WhatsApp Channels ???? Subscribe today by clicking the link and stay updated with the latest financial insights!” Click here!
Related Premium Stories
Updated: 08 Jun 2022, 10:50 AM IST
Source: livemint.com
