The real estate sector is expected to experience growth in the coming years due to favorable conditions. UBS, a foreign brokerage, has initiated coverage on the sector and has given 'Buy' recommendations for DLF Ltd and Prestige Estates Projects Ltd, while assigning a 'Neutral' rating to Oberoi Realty Ltd.
The positive outlook for the real estate sector is based on several factors. Firstly, there is the lowest inventory overhang in 15 years, which indicates a healthier market. Additionally, strong affordability levels and a potential shift in the interest rate cycle contribute to the positive forecast. UBS also highlights the consolidation in the sector, with more participation from end-users and robust regulations that enhance market stability.
Leading developers in the real estate sector have shown strong financial health, with low leverage levels and healthy balance sheets. The leverage of top developers has decreased from approximately 1.0 times in FY17 to just 0.3 times currently, indicating a more sustainable financial structure. The market has also seen a trend towards greater market concentration and stability, with the share of the top 10 developers rising to around 25%, up from just 7% in 2011.
Despite the recent rally in real estate stocks, UBS believes that the underlying factors will continue to drive earnings growth and further re-rating of these stocks. The brokerage forecasts a remarkable topline growth of 26% compounded annually from FY24 to FY29, supported by UBS's analysis of global property markets.
UBS acknowledges that while real estate stocks are trading at all-time high price-to-book value multiples, this should not be compared to historical averages. The current market dynamics, characterized by reduced inventory and improved affordability, suggest a more favorable environment for sustained growth. Commercial real estate players are also seeing a recovery as Covid-related uncertainties ease, with commercial vacancies reported to be at or below pre-Covid levels.
In summary, UBS's positive stance on the real estate sector is based on favorable market conditions, strong financial health among leading developers, and a significant shift in market dynamics. Investors are encouraged to view any near-term softness as potential buying opportunities, particularly in the stocks of DLF and Prestige Estates Projects.