Broker's Take: Maybank Kim Eng picks office Reits over developers

GIVEN this risk-averse environment, investors should pick office real estate investment trusts (Reits) over property developers, said a Maybank Kim Eng research report this week on the Singapore property market.

"With another challenging year ahead for the physical market, we struggle to turn more positive on property counters despite cheap valuations," the brokerage said.

"We prefer exposure in office Reits ahead of a potential bottom in early 2018," it added, noting that office Reits trade at a discount to their underlying office assets. This discount comes despite strong institutional interest in office properties and high replacement cost as seen by elevated land prices.

It likes Capita Commercial Trust and Keppel Reit for the attractive valuations and low lease expiry in the near term.

Meanwhile, all property developers will not meet their cost of capital in the year ahead, the brokerage said. "The market is rightly bearish in pricing them below book. Intense competition for land could weigh on margins."

Among developers, the brokerage picked UOL to replace CapitaLand as its top sector pick, noting that persistent concern over potential headwinds in China property could weigh on stock performance in the year ahead.[1][2]

"We expect almost every property asset class to remain oversupplied in 2017. Occupier market remains weak as population growth and job creation slows," it added.