Real Estate – Equity Dilution an Overhang

A significant increase in risk appetite, capital flows and preference for high-beta names have largely driven the 55% out performance of property stocks over the past 3 months. While $1.7bn raised last month (more on the anvil) has eased liquidity, we believe it’s coming at the cost of sizeable dilution, which would take time to digest and act as an overhang.

Fundamentals are still weak. Some pick-up is seen in volumes with new launches and B/S concerns addressed, but there are no signs of a meaningful recovery yet. Risk of cancellations/bad debts is high, and there is a marked slowdown in leasing and mortgage growth to 8% in 4Q (vs. 10% in 3Q) despite the recent price/rate cuts. We await sustainability of sales, improved execution and cash flows to get positive.

India’s narrowing NAV disc. similar to China – This is unwarranted given China’s strong and more sustained recovery in volumes. Trends in China suggest property stocks offer maximum upside when trading around 40% or more NAV disc. But downside risks are high at 20%