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Phoenix Mills, Brigade Ent: Mall operators not out of woods, say analysts

Rental collections are likely to remain under pressure, at least over the near-term
Shares of real estate firms, especially malls and commercial building developers, have clocked stellar gains at the bourses over the previous fortnight on optimism that a steady decline in new Covid-19 cases will nudge state governments to ease pandemic-led restrictions and unlock economies.

Indiabulls Real Estate, for instance, has surged 31 per cent during the period while DLF, Godrej Properties, Sunteck Realty, Oberoi Realty, Brigade Enterprises, and Phoenix Mills have gained between 5 per cent and 13 per cent. In comparison, the benchmark S&P BSE Sensex and the sectoral S&P BSE Realty indices are up 4 per cent and 9 per cent, respectively, during the period, ACE Equity data show.

Analysts, however, caution against chasing the momentum as even though the retail realty space seems relatively better placed than before, the sector isn’t completely out of the woods.

“Despite the sentimental positive triggers for the real estate sector, I believe the space will still take a while to come out of the woods as it will take some time to clear the inventories and for the real estate developers to regain pricing power,” says Sanjeev Hota, head of research at Sharekhan.

Demand in the sector took a hit in April 2021 and fell 60 per cent month-on-month (MoM), but was up 92 per cent year-on-year aided by low base, on an aggregate level as the country battled the second wave of Covid-19. Data compiled by Edelweiss Securities show that demand in the Mumbai Metropolitan Region (MMR) plunged 64 per cent YoY during the month, while Pune witnessed a fall of 65 per cent YoY as the special stamp duty rate cut window in Maharashtra ended.

New launches too slid 53 per cent MoM (up 110 per cent YoY) pan-India last month. By share of launches in April, MMR, NCR, Kolkata and Chennai notched up gains of 2–5 per cent MoM each, while Bengaluru and Hyderabad logged declines of 7–9 per cent MoM, the report noted.

As regards unsold inventory, MMR accounted for the bulk of unsold inventory in the country, followed by the NCR, Bengaluru and Pune. That said, at pan-India level, unsold inventory dipped 13 per cent YoY to 29 months (from 33 months in April 2020).

Second wave hits recovery

According to rating agency Icra, the weakening financial profile of tenants, particularly of highly impacted sectors, such as multiplexes, family entertainment centres, food courts and restaurants, due to localized restrictions is expected to hit the income of mall operators. “Thus, rental collections are likely to remain under pressure, at least over the near-term,” it said.

ICICI Securities, meanwhile, suggests that a fresh round of lockdowns may lead to another round of rental negotiations/waivers in FY22E as seen in FY21. According to reports, National Restaurant Association of India (NRAI) has written to all prominent mall owners and other landlords seeking their support in the wake of the second wave of the Covid-19 pandemic.

This, G Chokkalingam, founder and chief investment strategist at Equinomics Research, says has not been priced-in by the markets.

“Revision of rentals and possible defaults of rental payments to mall owners is likely to hit the sector. I believe, markets haven’t priced in these adverse developments for companies which depend heavily on rental incomes from malls,” he says.  

Against this backdrop, analysts suggest picking stocks with cleaner balance sheets and low inventory levels. JM Financial has a ‘Buy’ call on Phoenix Mills with target price of Rs 920 while Edelweiss Securities has a ‘Buy’ on DLF with a target price of Rs 370. Global brokerage CLSA likes Oberoi Realty (TP: Rs 532).

“With lockdown led closure in Q1FY22 owing to the second wave, Brigade Enterprises has indicated that it would continue to follow a similar formula of waiver,” noted ICICI Securities. However, given its comfortable debt-equity and sufficient liquidity from operational commercial assets, the brokerage has a ‘Buy’ call with a target price of Rs 320.

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