Foreign brokerage UBS on Tuesday initiated coverage on real estate sector with two stock 'Buy' calls and one 'Neutral' recommendation, saying the sector is in a sweet spot due to an unprecedented combination of tailwinds that will sustain the ongoing cycle for the next three to five years.
It cited lowest inventory overhang in 15 years; strongest affordability in 15 years, despite the recent price increases; likely turning of the interest rate cycle; sector consolidation; strong regulations; increased participation of end-user versus investors and strong balance sheets with low leverage levels across top developers as key tailwinds for the sector.
While real estate stocks have rallied significantly over the past year, UBS believes 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 Estates Projects Ltd and DLF Ltd and a Neutral on Oberoi Realty Ltd," the brokerage said.
UBS said it likes all three of the real estate developers for their strong execution track records, healthy balance sheets and exposure to multiple segments.
The stocks, it said, are trading at 3.5-4.5 times 12-month forward P/BV (90-180 per cent premium to historical average. That said, UBS forecast a topline growth of 26 per cent over FY24-29 compounded annually against 3 per cent over FY11-20).
UBS said: "Our study of other global property markets shows that peak multiples are 4.5-5SD from trough multiples; Prestige and DLF's multiples are 3.9-4.1SD from the bottom, thus implying room for upside. Oberoi's P/BV multiples are already up 5SD from the bottom, implying limited room for further re-rating," it said.
UBS said there are multiple tailwinds for residential players to support volume growth adding that Covid-related uncertainties have eased for commercial players. It said inventory overhang at 16-17 months is the lowest in 15 years and around 40 per cent below the 15-year average, with similar trends visible in major individual markets. Affordability too across cities is the strongest in 15 years. The share of the top 10 developers is up to around 25 per cent against 7 per cent in 2011 and leverage of the top developers is down from around 1 time in FY17 to 0.3 time currently. Commercial vacancies are at, or below, pre-Covid levels, it said.
"Real estate stocks have re-rated over the past year and are trading at all-time high P/BV multiples (3.5-4.5 times, and at a 100-200 times premium to the historical average). However, we believe the past average is not the right benchmark, as it was impacted by high inventory levels, weak sales momentum, low affordability, regulatory uncertainty and weak balance sheet," it said.