Timber Hybrid Demand And Green Financing Will Support Long Term Real Estate Upside

Catalysts

About UBM Development

UBM Development is a Central European real estate developer focused on residential, office, hotel and timber hybrid projects in core DACH and CEE cities.

What are the underlying business or industry changes driving this perspective?

• Rebounding residential demand in structurally undersupplied cities like Vienna, Prague, Munich, Frankfurt and Berlin, combined with falling completions, is expected to support higher sales volumes and firmer pricing power, potentially lifting revenue growth and gross margins over the next development cycles.
• The growing preference for sustainable buildings and the rising cost of carbon intensive materials are accelerating the shift toward timber hybrid construction. UBM already has more than 300,000 square meters in the pipeline, which may translate into a mix of price premiums and lower lifecycle costs, supporting net margins and asset valuations.
• Standardization, modular prefabrication and serial construction, which have already raised prefabrication rates to over 40 percent in key projects, are expected to shorten build times and reduce interest and construction costs. This may enhance project returns and expand earnings resilience through the cycle.
• Access to green bond financing and a flattened maturity profile, combined with a solid equity ratio and strong cash management, may position UBM to fund projects that it considers attractive while weaker peers exit the market. This could enable market share gains that support higher long term revenue and more stable earnings.
• Gradual normalization in institutional appetite for hospitality assets, alongside UBM’s portfolio of five hotels ready to transact, offers optionality for value crystallization and capital recycling. This could unlock cash for higher margin developments and improve return on equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming UBM Development's revenue will grow by 38.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.2% today to 12.6% in 3 years time.
• Analysts expect earnings to reach €47.1 million (and earnings per share of €7.04) by about December 2028, up from €-25.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €61.4 million in earnings, and the most bearish expecting €41.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from -6.3x today. This future PE is lower than the current PE for the GB Real Estate industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term viability of UBM’s timber hybrid office strategy depends on a recovery in office demand in cities like Frankfurt, Munich and Mainz. Management openly concedes that nobody knows when offices will come back, so prolonged structural weakness in office leasing could leave assets such as Timber Peak and future German office projects under occupied and drag on earnings and net margins.
• UBM’s high leverage, with net debt of EUR 583 million against an equity ratio of 30 percent, leaves limited room for error. Any sustained tightening in financing conditions or loss of access to the green bond market could constrain its ability to fund the 2,800 apartment pipeline and new projects, slowing revenue growth and compressing earnings.
• The business model relies heavily on continued residential scarcity and political pressure to build more housing in Vienna, Prague, Munich and other hubs. Rising public backlash against large projects, legal challenges from neighbors and slow permitting, as already seen with Timber Living in Munich, could delay project starts and completions, pushing out revenue recognition and reducing short to medium term earnings.
• While carbon pricing and sustainability trends currently favor timber construction, regulatory changes, new competing low carbon materials or stricter technical standards could raise construction costs or erode UBM’s green premium. This would reduce project profitability and net margins in both residential and commercial developments.
• The expected normalization of institutional demand for hotels, a key part of UBM’s value realization plan with five hotels on the shelf, may take longer than anticipated or occur at structurally lower pricing levels. This would limit capital recycling into higher margin developments and cap potential improvements in return on equity and overall earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €29.08 for UBM Development based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €32.4, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €373.5 million, earnings will come to €47.1 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of €21.9, the analyst price target of €29.08 is 24.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.