While India’s Residential Real Estate (RRE) market has seen a slowdown over CY14-18 compared to a stellar run over CY09-13, the Commercial Real Estate (CRE) office market has seen contrasting fortunes with a painful CY09-13 period being followed by a strong recovery and consolidation over CY14-18. The CY14-18 period has seen falling vacancy levels, rental appreciation and consolidation within the space with just a handful of 8-10 large pan-India office developers dominating the market. At the same time, the office space has seen healthy inflow of institutional money from foreign investors (private market deals) to these developers’ portfolios to add incremental space.
As we head into CY19, we continue to retain our bullish stance on office asset developers and reiterate our BUY ratings on DLF, Oberoi Realty, Prestige Estates and Brigade Enterprises. A possible listing of India’s first Real Estate Investment Trust (REIT) by Embassy Office Parks in H1CY19 may provide clarity on the cumulative yields that Indian REITs may offer as a mix of existing rental income and capital appreciation.
Prefer players with strong annuity asset portfolio
The volatile nature of the stock performance of listed real estate players means that investors need to seek the right entry point to make outsized returns. We argue that companies that already have an operational portfolio of annuity assets and are significantly investing in capex to add more such assets will have a sizeable recurring revenue stream in another 2-3 years which will account for 60-70% of their EV. Further, all the large annuity players in India have access to a pool of global capital to fund their growth rather than taking on more leverage on their own balance sheets. In our view, these annuity assets would act as a cushion for valuations.
Rental portfolio of annuity players to see robust growth
DLF’s rental arm DCCDL which will have an exit rental Ebitda of Rs 30 bn by FY19e will continue to see at least 10% rental income growth over the next 4-5 years driven by another 4msf of assets becoming operational along with ~24msf of balance land bank in that entity. Prestige Estates should reach an exit rental Ebitda of over Rs 11 bn by FY21e from Rs 7.3 bn as of FY18 while Brigade Enterprises should see its rental Ebitda rising to Rs 5.3 bn by FY22e from Rs 2.4 bn as of FY18. Phoenix Mills should see its existing malls cross Rs 11 bn of rental Ebitda by FY21E from Rs 8.7 bn in FY18 and is also expected to add over Rs 5 bn of rental Ebitda from fresh capex across malls by FY23e. Oberoi Realty has also changed its upcoming project mix to include 50% of annuity/hotel assets vs. a 24% share in its ongoing projects.