How Godrej, Oberoi and other developers in Mumbai’s property market stack up

New and established real estate developers with strong cash flows and balance sheets are rushing to acquire development rights and growing their project portfolio in Mumbai, India’s most profitable property market.

This is after the Maharashtra government approved a 50% cut in approval charges early last year and eased the redevelopment policies (including slum rehabilitation and coastal norms).

And, Swiss investment bank UBS says real estate companies under its coverage have intensified their Mumbai plans. This move could drive higher pre-sales over the medium term as against present forecasts.

UBS remains positive but selective on the listed players. It maintains a ‘buy’ rating on Prestige Estates as well as DLF, and believes it is the “right time” for DLF to enter the Mumbai market.

Here’s what UBS is telling its clients.

Which developers are likely to get their Mumbai portfolios right?

Real estate developers under its coverage are looking to expand their Mumbai portfolios meaningfully. However, the pace of growth and success will depend on the success of their existing projects (cash flows), ability to grow (balance sheets), intent (growth track records), execution skills, and pricing/product flexibility. Looking at history provides insights as to what developers should do to get their Mumbai portfolios right this time, UBS said.

Over the past seven years, Godrej has more than tripled its gross development value in Mumbai. However, over the past five years, it has not been able to cross the Rs 10 billion sales mark in Mumbai. Most of Godrej's project additions in Mumbai have been based on the redevelopment or slum rehabilitation model (such as Bandra, Worli, Sundar Sangam, etc). This has proven difficult to start given the inherent challenges with these projects, UBS said.

While Prestige has added four residential projects in Mumbai thus far, it has launched only one to date and the response has been tepid. The company is yet to launch the rest of its Mumbai projects and so it is too early to comment on them.

Oberoi has managed to grow its pre-sales in Mumbai on the back of new launches in Goregaon and Borivali, and also improved sales across the rest of its Mumbai projects. However, it has been slow to add projects (only ShivShahi and Bhandup addition over the past five years in Mumbai). 

Valuations 33% higher than the average

UBS observed its real estate universe now trades at 2.6x one-year forward price-to-book value (P/BV) — 33% higher than its 10-year historical average of 1.9 times.

Godrej Properties trades at an expensive 3.8x one-year forward P/BV. Although Godrej's valuation is now closer to its 10-year average, UBS believes other leading developers are also displaying similar or better pre-sales growth than Godrej and hence it thinks its valuation premium compared to the sector is “unjustified”.

Selective Approach

The securities firm remains positive about continued momentum in property demand given a decade-low spread between borrowing rates and rental yields, and likely higher wage growth across most industries (driven by inflation).

Potentially higher interest rates would hurt end-user demand. However, it is hopeful this could be offset by investor buyers given expectations of higher property prices.

“Despite being positive on the property upcycle and coverage developers' strong pre-sales growth, we remain selective in our stock picks due to their relative valuations,” said Sourabh Taparia, analyst, UBS Securities India.

UBS reiterated its “sell” rating on Oberoi, given its expensive valuation, and slow pace of new project additions impacting medium-term sales growth.