Why investors are bullish on real estate stocks Indiabulls Real Estate up 40% on fund raising, biz revamp plans
Global PE, pension investors eye big assets generating annuity income
Real estate stocks clocked sharp gains on expectations that demand, especially in Bengaluru, Pune, and Hyderabad, is likely to remain robust and would help developers with sizeable projects to reap benefits. Even as tenants are successfully bargaining down rents in the Mumbai office market, the pressure on rents in some other markets is not as high as in Mumbai. An analyst at a domestic brokerage says global institutional investors are taking a long-term view of prospects in the commercial real estate and are getting annuity projects at attractive valuations.
On Monday, Indiabulls Real Estate announced it will demerge its commercial assets into a separate entity to bring greater focus to its current operations. Earlier in the month, the Canada Pension Plan Investment Board committed an investment of ~1,600 crore for a 49 per cent stake in Island Star Mall Developers, a subsidiary of Phoenix Mills. Over 80 per cent of Phoenix Mills’ assets are in the commercial segment. Cushman and Wakefield had indicated that private equity investment in Indian commercial assets will hit $3.5 billion in 2017 led by stable commercial property and opportunity of listing assets under real estate investment trust (Reit).
Emkay Global’s Adhidev Chattopadhyay believes that low vacancy (five to six per cent in Grade A office space) in cities such as Bengaluru and Hyderabad, large leasing deals by multinational information technology (IT) industry and other sectors, and limited number of developers with quality assets have led to a surge in investments in commercial assets over the 2014-2016 period. This is expected to continue in 2017 as well. On the rentals front, although some experts believe that commercial real estate rents pay see some pressure in certain pockets, most believe it will remain stable or inch up in 2017.
Given the backdrop, it is not surprising that realty stocks have been big gainers in 2017, with many stocks rising 50-100 per cent. Emkay believes developers with a ready portfolio of office/retail assets (especially in Bengaluru) and presence in mid-income housing are in a sweet spot. Its preferred picks are Prestige Estates Projects, Brigade Enterprises, and Phoenix Mills. Though the office space leased out in March quarter was eight per cent higher over the year ago quarter at eight million square feet, IT is the largest segment accounting for 37 per cent of the leased space. While so far the trends are positive, any slowdown could dent the leasing offtake and therefore rents. Mumbai, National Capital Region, and Bengaluru accounted for 56 per cent of the leasing in the quarter and thus hold key for growth in this segment.
The residential segment is expected to take about two years to come out of the slowdown. The story of the players in the residential space is different, given the high inventory, weak pre-sales, and significant debt. In the near term, how the players in residential and commercial segments fare will be clear in the March quarter results, which are expected to be muted. Analysts at HDFC Securities believe that given the 30 per cent gain in BSE realty index over the last three months, it is prudent to remain cautious given multiple headwinds such as higher increase in customer litigation due to Real Estate Regulatory Act, lower liquidity, weakening of buyer sentiment, and margin hit for developers as they complete under-construction properties and offer discounts. Given the high debt and spending needs, net profit of realty companies is expected to fall 25 per cent year over year as well as sequentially (latter due to note ban). But impact for companies focused on commercial realty will be much lower, with profit decline seen in single digit.
It is rare for any stock to rise 40 per cent in just one trading session. And, this feat has been achieved by Indiabulls Real Estate, which closed the day at ~148 a share on BSE as compared to its previous close of ~105.85.
The stock’s reaction follows the company’s announcement to reorganise its businesses and/or raise funds from marquee investors.
A source said Indiabulls Real Estate is in the process of raising funds from one of the global marquee funds. And, Blackstone, Brookfield, GIC, and Canada Pension Plan Investment Board are the global funds vying for such opportunities in India. The company on Monday said it would carve out its commercial and leasing business under Indiabulls Commercial Assets as a separate holding company. This is to bring in strategic investments, informed the company to the exchanges. The company said the new commercial firm will have a net worth of ~2,311 crore and net debt of ~3,950 crore after restructuring. It expects annuity revenue of ~692 crore in 2017-18 and ~1,357 crore by 2020-21 with leasable area of 8.35 million square feet by then. Indiabulls Real Estate owns 55 per cent in their assets estimated at ~14,000 crore. “They can divest 30 to 40 per cent in the holding company to one of the global private equity investors,” said the source. “Though the company has its Real estate investment trust listed in Singapore, it would not come in the way of divesting stake in holding company,” says the source.