UBS sees Indian property market in a sweet spot, initiates "buy" coverage on Prestige Estates, DLF

Over the past one month, Nifty Realty index surged over 4 percent

Global brokerage firm UBS initiated "buy" coverage on Prestige Estates and DLF, while assigning a "neutral" rating to Oberoi Realty, citing a favorable outlook for the Indian real estate sector. UBS believes the industry is poised for growth amid record-high affordability, supportive regulations, increasing consolidation among developers, a likely peak in interest rates, and strong demographic trends.

The brokerage preferred Prestige, DLF, and Oberoi for their robust execution capabilities, diversified portfolios, and healthy balance sheets. UBS highlighted that historical global trends indicate significant upside potential for Prestige and DLF, whose price-to-book multiples are 3.9 to 4.1 standard deviations (SD) from trough levels. In contrast, Oberoi Realty's multiples are already 5 SD from the bottom, suggesting limited room for further re-rating.

UBS projected a compound annual growth rate (CAGR) of 15 percent in residential pre-sales and 25 percent in commercial revenue for FY24-29, a sharp reversal from the negative growth seen during FY15-20.

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Despite rising interest rates over the past two years, premium and luxury housing segments, which are less rate-sensitive, have driven growth, said analysts. However, the affordable housing segment lagged due to higher borrowing costs.

On the interest rate outlook, UBS expects the rate cycle to have peaked. The Federal Reserve has already reduced rates by 75 basis points (bps), and UBS predicts further cuts of 100 bps in 2024 and 125 bps in 2025, bringing the terminal rate to 3.00 to 3.25 percent by September 2025.

Meanwhile, the Reserve Bank of India (RBI) is expected to follow suit, cutting rates by 25 bps in February 2025 and an additional 50 bps later in the year. This potential easing could provide further tailwinds to the real estate sector, particularly for affordable housing, added UBS analysts.

Over the past one month, Nifty Realty index surged over 4 percent, outperforming benchmark Nifty 50's 0.5 percent rise.

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