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Bengaluru is India's second largest residential market with annual unit sales of 45,000-60,000 over the last six-to-seven years, marginally above NCR at 40,000-45,000 units.

It is also the largest commercial hub in India, with total grade-A leasable office stock of 186msf and an annual absorption of ~12msf. The Commercial segment is dominated by IT/ITeS players, which constitute ~50 per cent of total absorption.

As per the Naukri JobSpeak index, Bengaluru reported the highest growth (+3.2x) in hiring activity among the top seven cities through the peak of the first COVID wave in July 2020-September 2021, led by strong IT and BFSI (GCC) hiring.

IT employees have also seen robust salary increments. On a headline basis, while it indicates a 7-12 per cent YoY rise in cost per employee, due to a higher fresher mix, mid-tier employees have seen a 30-40 per cent rise in salary.

Bengaluru has the highest share (34 per cent) of global captive centers (GCC), which are expected to increase to 1,700 by CY25 from 1,450 in CY20.

Recovery in Residential demand in Bengaluru did take longer than the top four cities, but recovered fully to pre-COVID levels by 4QCY21.

We expect strong hiring trends across IT companies and GCCs, coupled with robust salary hikes for IT employees, to kick start the next leg of Residential growth in Bengaluru.

The Bengaluru residential real estate market is now on the cusp of a strong demand cycle, on the back of: a) strong hiring in the IT sector and rising count of global captives, b) salary increments for IT employees, and c) best-in-class affordability.

The low inventory overhang (15 months) and high affordability in Bengaluru, with the unit price-to-per capita income ratio of 16x v/s 24x for the top five cities, allows for gradual and consistent price hikes in a strong demand environment.

The relatively high affordability, low-inventory overhang, and strong demand environment will provide developers the comfort in taking gradual, but consistent price hikes, leading to an increase in the profit pool.

Based on our assessment, Bengaluru emerges as the most favorable market, given the overall demand-supply dynamics.

We initiate coverage on Prestige and Sobha/Brigade with a Buy rating. Prestige is our preferred pick, followed by Brigade.

: Buy | LTP Rs 486 | Target Rs 675 | Upside 38%
Prestige increased pre-sales performance can sustain over the medium term. With an improved cash flow trajectory, its Balance Sheet strength is likely to remain intact.

We expect its operational rental portfolio to quadruple to 12msf through FY24, resulting in a 3x rise in rental income to Rs 9 billion by FY25.

: Buy | LTP Rs 576 | Target Rs 720 | Upside 25%
Over the years, Brigade has scaled up all facets of its business through: a) a revamped Residential strategy, and b) aggressive capex in its Commercial business, which is now bearing fruit.

We expect a further scale-up in the Residential business as the management monetises its 35msf land bank over the next five-to-six years.

We expect rental income for BRGD to register 15 per cent CAGR over FY22-24 to Rs 7.5 billion on the back of a recovery in leasing.

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