How Bengaluru Countered The Real Estate Slump Better

Bengaluru is known for its unsatiated appetite for offices and commercial properties on demand from startups and software services providers. That has helped India’s equivalent of Silicon Valley counter the residential real estate slowdown better than other metropolises.Sales of apartments in the southern city jumped the most in the last two years, after the National Capital Region, among the top seven metros, according to data shared by property consultants. More importantly, the absorption rate of unsold apartments is the highest in Bengaluru since the slump began.Prime Minister Narendra Modi’s decision to scrap 86 percent of the currency overnight in November 2016 virtually halted property sales as cash was substantial part of the sales. The Real Estate Regulation Act, which penalises developers for delays and not delivering what was promised, amplified the slump after its rollout in May 2017. While the recovery has been slow, Bengaluru leads the way because a strong demand from the commercial segment also lifted the residential market.Burgeoning startups over the last few years have inevitably raised the disposable incomes which has not only led to an unprecedented growth in the commercial segment, but also the residential market, Anuj Puri, chairman of Anarock, said. Hiring from software services providers has been robust, said JPMorgan’s Saurabh Kumar, and that aided the demand for homes.While the real estate revival is largely led by affordable housing, in Bengaluru premium properties are also in demand. Sales rose around 80 percent since March 2017, led by demand for mid-luxury and premium segment, according to Anarock’s research. That betters the average growth of 71 percent for the top seven cities..To be sure, what also aided better absorption was that new supply was added at a slower pace than other cities in Bengaluru.Unsold stock in the city declined by the highest 44 percent since the slowdown began..High Demand For OfficesThe virtuous cycle of demand for commercial real estate aiding residential market is likely to continue as startups and companies add more space and hire more people.Demand for commercial properties outstrips supply in the city, according to Knight Frank’s Global Outlook. That’s why office rentals are expected to grow at the fastest pace in the city in India. It also ranks third globally, after Melbourne and Sydney, on rental growth outlook..Who Stands To GainIndia’s large real estate developers rallied this year as they are expected to gain from the revival, unlike smaller peers hobbled by cash ban and RERA. Godrej Properties Ltd. outperformed on the back of higher sales..For the next 12 months though, analysts are most optimistic about Prestige Estate Projects Ltd. and Brigade Enterprises Ltd., the two Bengaluru-based developers. Both have the highest ‘Buy’ ratings and 12-month return potential, according to estimates compiled by Bloomberg..Brigade EnterprisesThe company’s area sold jumped 89 percent to 2.96 million square feet in 2018-19 and cash flow rose 25 percent to Rs 2,241.6 crore, according to its filings.The developer is launching another large affordable housing project with an area of about 6 million square feet, MR Jaishankar, chairman at the group, told BloombergQuint. He expects that to drive sales revenue, besides the leasing segment business for which it has set a target of 3 million square feet for FY20.Brigade Enterprises’ surging lease portfolio will provide stable cash flows as its two big commercial projects Tech Garden, Bengaluru and World Trade Centre, Chennai will be launched over the next two years, Deepak Purswani, research analyst at ICICI Direct Research, said in a note. A sustained sales momentum is expected in the residential business, he said.Prestige Estate ProjectsPre-sales surpassed the company’s guidance of 30 percent, growing 38 percent to Rs 4,557 crore in FY19, the management said in a conference call. The annuity rental portfolio grew 20 percent to Rs 748 crore.The company has around 7.84 million square feet of commercial projects, predominately in Bengaluru, of which 90 percent is office portfolio, according to its investor presentation.Prestige Estate Project’s rental business is growing at 25 percent per year and is on track to double in the next four years based on the existing under-construction pipeline, Saurabh Kumar, analyst at JP Morgan, said in a note. The residential business will see margins reflating back to normalised levels due to rising pre-sales and increase in the positive free cash flow, he wrote.SobhaIt’s not expected to do as well as its cross-city peers because of a residential-only portfolio and debt worth Rs 2,433.7 crore. Average realisation price dip 2 percent to Rs 7,749 per square feet in 2019, according to its filings.Still, Deutsche Bank remains optimistic. Bengaluru is one of the best placed residential markets in India, Bijay Kumar, research analyst at the brokerage, said. The developer, he wrote in a note, is expected to gain market share in a consolidating market with a strong demand in housing units in the range of Rs 1-2 crore segment continuing in financial year 2020.

How Bengaluru Countered The Real Estate Slump Better

Why analysts are most optimistic about Bengaluru developers...

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