DLF, Godrej Properties, Oberoi Realty: Property Cycle is all set for revival

Investors are increasingly hopeful of a property cycle revival, which coupled with continued consolidation would help listed developers. UBS analysis shows sales of struggling projects increased in the last quarter, and many stressed projects have been revived. UBS thinks this may risk consolidation (as landowners demand a bigger share of the pie) and delays a potential property price upcycle (as new launches increase and inventory is revived). If a property cycle recovery is delayed (as we expect), our analysis suggests developers are most vulnerable given the pressure on project realisations amid rising costs. DLF share price today is Rs 287, up Rs 8 or 2.8% and Godrej Properties share price today is Rs 1412, up Rs 60 or 4.4%.

UBS remains cautious on developers after recent share price gains (up 55% in the past five months) leave valuations close to a 10-year peak. With its valuation close to the last bull cycle leader implying little room for disappointment, Godrej Properties loses if consolidation is delayed. UBS believes a re-rating is part pending at DLF (Buy). UBS upgraded Prestige from Sell to Buy on its post-deleveraging rebuild strategy.

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Property registrations picked up in Maharashtra recently and raised hopes of property cycle revival. However, primary sales were not as strong and struggling projects have revived.

UBS believes this has two main implications:

1)      It increases the inventory that is relevant to customers. While we view headline inventory-to-sales as misleading, a revival of stressed projects could reduce the adjustment factor (from 25% to 20%)
2)      Small landowners could get ambitious and raise near-term supply. While the outlook for property purchases has improved, changes in interest rates could affect that at the margin.

UBS analysis suggests that a property price recovery (not price normalisation or some form of inflation pass-through) is at least two years away if all stars align, ie, inventory-to-sales would take a minimum two years to go below 1.5-1.6x, a level conducive for an upcycle. If not, UBS is in for being at the bottom for longer for prices.

Rising tide lifting most boats; restructuring may impact consolidation theme:

UBS sales-split analysis suggests projects with four-or-more-years inventory (stressed) have sold the most in Q3FY21, versus previous quarters, denting the customer consolidation thesis. UBS channel checks indicate many stressed projects have been revived due to the restructuring of project loans being allowed.

Valuations: cautious on developers—prefer Prestige Estate / DLF over Godrej Properties /Oberoi Realty

UBS increased their price targets as they now factor in the lower cost of funding and roll forward our sum-of-the-parts-based valuations to March 2022E.