A Credit Suisse report suggests that one must avoid investor-driven markets as cash flow of real estate companies dry up during tight liquidity. The report underlines that the the southern market appears to have bottomed out and Bengaluru appears better positioned for a recovery and NCR-based developers are not good bets as cash flows can continue to deteriorate in a prolonged tight liquidity cycle due to high investor demand risk. “South Indian residential markets appear safer haven in the current environment as the proportion of investor demand to overall absorption appears lower, implying lesser cash-flow risk,” the report underlines.

Moreover, the office and retail segments, which account for about 40% of the gross asset value of large developers have been weighed down by rising vacancies since 2008 and has affected the rentals. The report says that as returns on equity (RoEs) are near cyclical troughs, an average through-cycle ROE indicates long-term potential. Credit Suisse has an outperform rating on South Indian developers like Sobha Developers, Prestige Estates and Oberoi Realty and is cautious on NCR-based real estate developers like DLF and Unitech, who have a high inventory overhang.

The scheduled commercial banks account for nearly 60% share of the mortgage market in the country as of March 2010 and the major housing markets like Mumbai, the National Capital Region, Chennai, Kolkata, Bangalore and Hyderabad of listed companies have witnessed minimal net account additions during 2007-10.

In contrast, the report points out that the net addition in these cities was very strong from 2002 to 2007, driven by a low interest rate and affordable property prices. Now Caluclate your loan Emi with emi calculator. It says the pace of slowdown in account additions indicates sign of market maturity in end-user demand as property prices increase.

However, a 15-20% price correction and lower mortgage rates can improve affordability levels from the current high levels. Analysing RBI data on credit and absorption data from Propequity, a property research firm, the report says that there is increasing investor participation in mid and high-income residential markets of R2.5 crore-plus category. However, it says that not all investor activity is speculative and could also be viewed as a sign of real estate emerging as an asset class in India.

The report cautions that during times of property price stagnation and tight liquidity (high interest rates), cash flows from investors get delayed as an investor's ability to churn is limited. For office markets, the supply overhang remains a major concern as a host of factors, including government policy, have led to the current weakness. A key demand driver for the office segment remains the IT and ITEs industry, which accounts for about 50% of the total demand. “Headcount additions continue to remain strong, while greenfield developments have been postponed due to lack of bank lending. High interest rate (cost of capital) and a weak cycle (falling rents) have had a negative impact on capitalisation rates, which in turn lower valuations of rent-yielding assets,” the report underlines.