Real Estate capital markets predictions for 2013:JLL
In 2013, the availability of debt capital is likely to increase while the flow of equity capital will remain more or less stable. The bid-ask spreads will reduce, increasing overall transaction volume even as additional cuts in CRR and repo rates will infuse more liquidity into the system. Cross-border capital will begin to make a gradual comeback in the coming year and cap rates for office and retail properties are likely to descend to 10.5% and 11.5% from 11% and 12% respectively.
Investors will focus more on transparency, governance and liquidity before investing. Given the on-going challenges that the Indian real estate sector faces on these fronts, even fewer development companies will be successful on the public equity markets. Nevertheless, private equity deals volumes will increase, and there will be more M&A activity within the PE industry. A number of vintage funds from 2007-2008 will have to look at exiting in 2013, some of them at low IRR’s. Given the overall uncertainties, these funds would look at postponing their exits to 2014.
Insurance firms will start investing directly in low-risk, income producing office real estate. Investment bidders per property will increase, this time around with lower return expectations. Investment periods of funds will reduce from 5 years to 4 years.
In 2013, after a lull of two years, banks are likely to start offering construction finance to residential projects with approvals. They will also become marginally more flexible on interest rates, collaterals, LTV’s and upfront fees. Established funds will get back into the fund raising mode after a 3-year hiatus.
As before, developers with longer operating history such as Oberoi, Shobha and Prestige who have managed growth effectively over the years and predictability of income will find it easier to raise funds in 2013. It is unlikely that any major player will venture out nationally, with the accent for 2013 remaining firmly on local expansion. Also, we will see developers focusing more on joint ventures with landlords rather than on buying land.
In 2013, we will see most PE deals being structured to give the investor the first preference to cash flows. Most real estate PE investments will be focused on Tier I cities. Funds with a good track record that have a strategy to target a narrow asset class within specific locations such as last mile funding for residential under construction projects in Tier 1 cities and having strong delivery teams will be able to raise funds more easily. Regulatory authorities will increase their scrutiny of private fund raising offerings and closely monitor if the funds raised by the companies are being used for stated objectives.
Private Equity funds will raise distressed real estate funds and get traction from bank NPA’s and ARC’s. A number of new domestic real estate PE funds backed by corporate entities are likely to be launched in 2013. Also, large family offices will now begin creating dedicated real estate teams.
PE fund terms such as waterfall structure, carried interest, general partner commitment and management fees will change to address investor concerns such as governance, transparency, reporting and operating controls post the global financial crisis. Limited partners will scrutinize fund platforms lot more carefully before investing on the heels of previous negative experiences with issues such as integrity of the general partner and quality and sustainability of earnings. Many more funds will adopt a conservative cash flow-driven investment approach and focus on investing in income producing office assets, with an accent on asset repositioning, refinancing and refurbishment.
We expect new guidelines for non-banking HFCs to assist in pushing funding for the housing sector in 2013. There will be more liquidity available in the housing finance market as rules for raising external commercial borrowings will be relaxed for HFCs, and with SEBI allowing debt funds to invest an additional 10% in HFCs. HFCs will also look at tapping the QIP market to raise funds in 2013.
DLF Q2 cons net profit at Rs1.39bn
DLF Limited, India’s largest real estate company, recorded consolidated revenues of Rs 2,157 crore for the quarter ended September 30, 2012, a decrease of 7% from Rs 2329 crore in Q1 FY13.
EBIDTA stood at Rs 864 crore, a decrease of 28% as compared to Rs 1198 crore in Q1FY13. Net profit is Rs 139 crore, as compared to Rs 293 crore in Q1FY13. The non-annualised EPS for the quarter was Rs 0.81.
The Company has made significant strides in achieving its business objectives built around net debt reduction, delivery of all past committed volumes and enhancing product mix through launches of higher margin products. In order to achieve this, the Company has completely re-tooled its business model and putting in place the ‘best in class’ project management and construction agencies. The large rental portfolio of the company continues to perform well with better rental realizations. However the leasing volumes remains muted due to overall economic conditions. Read more…
In Focus Stories
IIFL Institutional Equities recommends on 'Sell' on DLF
IIFL Institutional Equities, a part of the IIFL Group, one of the leading players in the Indian financial services space, recommends “Sell” DLF.
According to IIFL Institutional Equities report, DLF's reported revenue, Ebitda and PAT were significantly below estimates on low value tier II city sales booked during the quarter. PAT for 1H is the lowest first half PAT reported since the public listing. Net debt increased by Rs9bn over past the one year. This is despite non-core asset sales of Rs21bn over the same period. Interest expenses continue to outstrip operating cash flows.
DLF reported its worst 1H contracted sales volume (<3m sq ft) since its public listing. Contracted sales values have been below Rs10bn per quarter in five out of the past six quarters even as DLF keeps booking >Rs15bn per quarter from sales. We think a slowdown in revenue recognition is inevitable. The company projects 10m sq ft of new launches in 2H but has not launched anything meaningful in Diwali, IIFL report stated.
DLF’s turnaround is predicated on lowering interest outgo via cRs50bn of asset sales over FY13 (Rs30bn achieved). Marquee launches in Gurgaon would help create visibility of cash flows over FY14-16. But CCI’s “cease and desist” order on DLF’s current sale agreement could create challenges in launching new projects in Gurgaon, the brokerage added.
The report was published by IIFL’s Institutional Equities Research desk.