UBS bullish on Prestige Estates, DLF, and Oberoi Realty amid real estate boom

The real estate sector is experiencing robust momentum, as evidenced by the Nifty Realty Index’s 8 percent rise in FY25 year-to-date (YTD), outperforming broader market indices by 4 percent. This positive trend has attracted the attention of brokerage firms, with UBS initiating coverage on the sector and projecting a promising trajectory for the coming years.

UBS expects the sector to sustain its growth trajectory, driven by a combination of record-high affordability, supportive regulatory reforms, increased consolidation among developers, stabilizing interest rates, and favorable demographic trends. The brokerage expects the sector to sustain its upward momentum over the next three to five years, driven by a forecasted 15 percent compound annual growth rate (CAGR) in residential pre-sales between FY24 and FY29.

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UBS has issued ‘Buy’ ratings for Prestige Estates Projects Ltd. and DLF Ltd., highlighting their strong execution capabilities, geographic diversification, and healthy balance sheets. Meanwhile, Oberoi Realty has been assigned a ‘Neutral’ rating due to its current valuation nearing peak levels.

Prestige Estates, with its diverse portfolio across residential, commercial, and retail segments, is well-positioned to capture growth opportunities. UBS has set a target price of ₹2,175 for Prestige, indicating almost 26 percent upside. Similarly, DLF, a leader in the luxury real estate segment, is expected to benefit from strong demand for premium properties. The brokerage has set a target price of ₹1,005 for DLF, representing an over18 percent upside.

Oberoi Realty has been assigned a ‘Neutral’ rating by UBS, with a target price of ₹2,230, reflecting a 5 percent upside. While Oberoi remains a strong player in the sector, UBS believes its valuation, currently 5 standard deviations above trough levels, limits further re-rating potential. In contrast, UBS notes that Prestige and DLF are trading at price-to-book multiples 3.9 to 4.1 standard deviations from trough levels, offering significant upside potential.

Investment Rationale

UBS attributes its optimistic outlook to several factors. Inventory levels in the real estate sector are at their lowest in 15 years, reducing supply pressure. Despite rising property prices, affordability is currently at its highest since 2010, making homeownership accessible to a broader population. Regulatory reforms, such as the implementation of the Real Estate (Regulation and Development) Act (RERA), have enhanced transparency and boosted buyer confidence. Additionally, favorable demographic trends, including increasing urbanization, higher disposable incomes, and a shift towards nuclear family structures, are driving sustained demand for residential properties.

The commercial real estate segment is also showing signs of a strong rebound from the disruptions caused by the COVID-19 pandemic. UBS projects a 26 percent compound annual growth rate (CAGR) in topline growth for the segment between FY24 and FY29. This growth is being driven by the resurgence of work-from-office trends and the expansion of global capability centers. Developers with strong balance sheets are expected to benefit significantly from this high-margin segment.

On the interest rate front, UBS believes that the rate cycle has peaked. The Federal Reserve has already reduced rates by 75 basis points, and UBS anticipates further cuts of 100 basis points in 2024 and an additional 125 basis points in 2025. This would bring the terminal rate to around 3.00–3.25 percent by September 2025, further boosting demand for real estate as borrowing costs decrease.

While UBS acknowledges potential near-term softness in the market due to macroeconomic uncertainties, it advises investors to view such dips as buying opportunities. The brokerage emphasizes the importance of consolidating gains made through regulatory reforms to ensure sustained growth in the sector. Overall, UBS remains bullish on the Indian real estate market, citing a sustainable upcycle supported by strong fundamentals, favorable market dynamics, and supportive policies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.