DLF may underperform on valuations, commercial portfolio concerns

Residential segment sales and outlook however remains robust

Despite a better than expected performance in the March quarter, the stock of India’s largest listed developer shed over 3.5 per cent on Monday. While valuations, after a 21 per cent rise since the start of May, have factored in gains on the residential portfolio, concerns on the commercial portfolio were an additional cause for the correction. 

DLF Cyber City Developers or DCCDL, which is DLF’s rental arm and houses its office and retail portfolio, saw occupancies dip to 89 per cent as compared to 91 per cent in the December quarter. Given the uncertainty around the pandemic post the start of the second wave, tenants are deferring decisions on lease. 

The company expects vacancies to rise by 1-2 per cent in FY22 with a pick up in FY23. This would be due to ongoing hiring of the Indian IT sector which forms a key part of the commercial real estate sector. The management expects exit rentals for FY22 to be around Rs 3,700 crore to Rs 3,800 crore rising to Rs 4,300 crore next year.  Kunal Lakhan of CLSA maintains a cautious stance on overall new office leasing demand amid low physical occupancy levels in offices in key metro areas. 

While the near term outlook for the commercial space is weak, the street will keep an eye out on the listing timelines for the company’s real estate investment trust or REIT. Though the company has restructured its operations within DCCDL and expects to be REIT ready in the next four quarters, a listing decision will be taken jointly by DLF and its joint venture partner, Singapore’s sovereign wealth fund, GIC. 

DCCDL’s cost of borrowing has come down by 145 basis points to 7.5 per cent now as compared to the year ago period. On gross debt of Rs 19,700 crore, this would help it to save annual interest of Rs 270 crore to Rs 280 crore. Debt had increased in the March quarter on a sequential basis due to the acquisition and consolidation of One Horizon Centre and is expected to be at these levels with a reduction expected once the REIT is listed.

The residential segment, however, is posting robust bookings with pre-sales of Rs 1,000 for the second consecutive quarter. This was led by demand for new product launches including sales of independent floors in Gurugram and the luxury project, Camellias. The latter accounts for two thirds of DLF’s inventory. Though Q1FY22 is expected to be a bit muted, the company expects the current run rate (Rs 1,000 crore per quarter) to continue in FY22 with presales crossing Rs 4,000 crore on the back of existing offerings as well as new launches of 8.3 million square feet. 

What should support the sales trajectory over the medium term are plans to launch 35 million square feet of projects with an inventory value of Rs 39,200 crore. These projects will be launched in the next three years across locations and segments of luxury and mid-income housing. 

While analysts at Kotak Institutional Equities are optimistic about the residential cycle, they say that the current market price factors in the positives. The brokerage has maintained its reduce rating on the stock. Residential sales booking trends and commercial occupancies are key things to watch out for; investors can look at the stock on further dips.