Can the 3 big listed property groups overturn their underperformance?

Singapore

BANKING and property have historically been major sectors of focus for equity investors in Singapore. Over the last five years, however, the share price performance of Singapore's three listed local banks has diverged sharply from that of the three largest listed local developers.

Shareholders of the largest bank by market capitalisation, DBS, have seen their shares roughly double over the five-year period to end-February. Shares of the the largest developer by market cap, CapitaLand, have gained just 8 per cent.

City Developments and UOL Group have also lagged UOB and OCBC in terms of share price performance.

The banks have also been generous with dividends.

For FY2020, the Monetary Authority of Singapore had required the banks to cap their dividend payouts at 60 per cent of what was paid in FY2019 to conserve capital. But prior to this, the banks had been steadily increasing their dividends - with increases ranging from 47 per cent to 105 per cent, between 2016 and 2019. Should dividends of the banks return to 2019 levels, investors will get yields of 4 to 5 per cent based on current share prices.

The superior ROE of banks

The difference in return on equity (ROE) for the banks and property groups may explain the differing share price performances.

For the five-year period from 2015 to 2019, the average ROE for the three banks was 11.1 per cent. For the three property groups, the average was 6.7 per cent.

Even with the Covid-19 pandemic, which resulted in banks reporting lower profits for 2020 due to higher allowances, the local banks still chalked up ROEs in the high single digits.

Banks and developers may both be enjoying the benefits of wealth creation in Singapore and across Asia. But developers appear unable to prevent margins from declining as the cost to secure land has also gone up.

Last year, amid the Covid-19 pandemic, the Singapore government extended support that benefited both banks and property players - helping to keep people employed, for instance.

But the government has also indicated it will continue to actively intervene to keep the growth of residential property prices in check.

Future disruption

Past performance is not indicative of future results. Both banks and property groups are subject to disruption amid digitalisation. DBS for one has been widely lauded for its digital banking efforts.

Come early 2022, digital-only banks will begin competing with Singapore's local banks. The digital banks will not have the same operating costs of legacy banks with physical branches.

Property players, meanwhile, are being challenged by online shopping and remote working - lifestyle changes that are displacing physical retail outlets and offices.

Uncertainties, therefore, abound for both groups. But while the banks are trading above their book values, the three largest property groups are trading below their recently impaired book values by more than 20 per cent.

Meanwhile, people will still need physical spaces in which to live, collaborate and play. Hence, there will be a continued need for companies that can create spaces of relevance.

Different strategies

How each of the developers performs will depend on strategy and business model.

CapitaLand offers good exposure to China, with 37 per cent of its total assets there. This may be attractive as China is leading the way among major economies in its recovery from the Covid-19 pandemic.

City Developments may also be able to see more meaningful contributions from China once it overcomes ongoing problems with its investment in Sincere Property.

As for UOL, the group has a China presence but this may not be a big contributor.

In the China market, the Singapore groups would need to be wary of competition from big China players, Hong Kong developers and various funds; and be cognisant of changes in the economy and lifestyle.

In terms of property asset classes, CapitaLand - helped by its acquisition of Ascendas and Singbridge - wants to pivot more into the so-called new economy asset classes. It currently has around 8 per cent of its total assets in business park, industrial and logistics properties.

CapitaLand is also continuing to grow in serviced residences. City Developments and UOL, with large exposure to hotels, would be eagerly awaiting the return of international travel.

As for business models, a key area of difference is the embracing of real estate investment trusts (Reits) and private funds. Here, CapitaLand has moved most aggressively among the trio.

But that also means there is upside for City Developments and UOL from launching Reits. Both have sizeable Singapore commercial portfolios that could be injected into Reits.

As debt remains and economic prospects improve, the property groups may be operating in fairly favourable conditions.

But whether they will outperform the local banks is another matter.