 "UBS initiates coverage on DLF, Oberoi & Prestige, says sector in sweet spot")
UBS on real estate firms: Zurich, Switzerland-based brokerage firm UBS has initiated coverage of three Indian real estate companies, recommending a ‘Buy’ for DLF and Prestige Estates, while assigning a ‘Neutral’ rating to Oberoi Realty.
The global brokerage has set a target price of Rs 1,005 for DLF; Rs 2,175 for Prestige Estates; and Rs 2,230 for Oberoi Realty.
UBS analysts noted that the Indian real estate sector is in a ‘sweet spot,’ driven by an unprecedented combination of tailwinds that are expected to sustain the ongoing growth cycle for the next three to five years.
“While stocks have rallied significantly over the past year, we believe the tailwinds will drive further earnings growth and re-rating. While we do not rule out near-term softness due to a broader macro slowdown, we would use any dips as buying opportunities. We initiate coverage with Buys on Prestige and DLF, and a Neutral on Oberoi,” Aditya Chandrasekar and John Lam, analysts at UBS said in a joint note.
The recommendations, analysts said, reflect the strong execution capabilities, robust balance sheets, and diversified exposure of these companies, with Prestige Estates standing out for its multi-geography operations.
From a valuation perspective, analysts noted that the stocks are trading at 3.5-4.5 times their 12-month forward price-to-book value (P/BV) ratios, representing a 90-180 per cent premium to historical averages.
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The analysts project a topline compound annual growth rate (CAGR) of 26 per cent for FY24-29, a sharp contrast to the 3 per cent CAGR recorded during FY11-20.
Drawing comparisons with global property markets, they stated that peak multiples often reach 4.5-5 standard deviations above trough levels. Prestige Estates and DLF are currently at 3.9-4.1 standard deviations, suggesting potential for further upside. Conversely, Oberoi Realty's P/BV multiples, already 5 standard deviations from trough levels, imply limited scope for additional re-rating.
On the trading front, as of 11:05 AM, Prestige Estates was up 0.28 per cent at Rs 1,724.95 per share, while DLF declined 0.47 per cent to Rs 844.35. Oberoi Realty, despite hitting a new 52-week high, retreated 1.74 per cent to Rs 2,036.65. Meanwhile, the BSE Sensex was up 0.63 per cent at 80,756.64, while the BSE Realty index dipped 0.21 per cent to 8,194.
Here are the additional factors behind UBS initiating coverage:
UBS is bullish on Indian real estate stocks due to multiple structural and cyclical factors supporting growth across both residential and commercial segments.
In the residential market, the sector is benefiting from an unprecedented combination of favourable conditions, including historically low inventory overhang, peak affordability levels, supportive regulations, increased consolidation among developers, and likely easing of interest rates, analysts said.
Additionally, low developer leverage and favourable demographic trends, such as increasing urbanisation and rising affluence, further boost the outlook.
Therefore, UBS forecasts a 15 per cent compound annual growth rate (CAGR) in residential pre-sales for FY24-29, a major improvement compared to the declines seen in the pre-COVID years.
Analysts also pointed out that unlike other global property markets during their peaks, India lacks warning signals such as poor affordability, high household debt, or aging demographics. Drawing a parallel to China’s property bull run between 2005 and 2021, UBS analysts suggest India could follow a similar trajectory of sustained growth.
In the commercial real estate space, post-COVID recovery has been robust, driven by the resurgence of work-from-office trends, the expansion of global capability centres (GCCs), and favourable regulatory changes.
Thus, UBS projects a 26 per cent topline CAGR for this segment over FY24-29, a sharp turnaround from the 6 per cent contraction recorded during FY15-20.
“We believe this an attractive segment for developers that have the balance sheets to support upfront capex to later generate annuity high-margin (over 90 per cent) cash flows,” UBS said.