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Further re-rating of property counters on the cards
SHARES of Singapore developers have surged this year on the back of a recovery in residential transactions, which is seen as a prelude to a bottoming out of property prices.
Though the run-up has made the shares more susceptible to short-term pull-backs, most analysts see further re-rating for these counters should the property market recovery be sustained.
JPMorgan estimates that the rally in developers' shares this year has narrowed their trading discount to revalued net asset value (RNAV) from 36 per cent to about 25 per cent, compared to a 26-year historical average of 20 per cent.
"In general, developers trade in lockstep with volumes, prices and policies," said Brandon Lee, JPMorgan vice-president for Asean real estate and Asia-Pacific equity research.
"With volumes already on the up-trend and prices bottoming, they provide a positive backdrop to developers' share pricesd. Any further easing of property cooling measures would be a positive surprise."
Derek Tan, DBS vice-president for group equity research, noted that with property stocks hovering around the post-global financial crisis mean of 0.86 price-to-NAV, they are vulnerable to short-term profit taking. But he added that this was a "tactical call", with any correction likely to be not more than 5 per cent and an opportunity for investors to buy on dips.
Also commenting on the re-rating prospect for developer stocks in the next 12 months were Morgan Stanley analysts, who said in a recent report that a cyclical uptick in the economy, improved supply-demand dynamics and a surge in residential transactions were setting the stage for a property price inflection in 2018.
"Developer valuations empirically move six months ahead of property prices," they said.
What was more striking about the report was a longer-term projection that private residential prices would double by 2030, assuming a 5 per cent rise each year from 2018. No other analysts have, of late, ventured to make such long-term projections.
But on the whole, analysts acknowledge the potential downside risks: a sharp and unexpected increase in interest rates, steep price cuts by developers to move units in projects with looming deadlines to sell out or a turn for the worse in economic conditions and employment. With developers running low on their residential inventories and landbanks, this has become a limiting factor for them to ride the transactions recovery, they point out.
"Developers in Singapore have been conservative and many have not landbanked," Mr Tan said. "Of those with new launches, UOL and City Developments Ltd remain the ones with more residential exposure."
RHB Research analyst Vijay Natarajan noted that weak underlying rental yields pose a major bugbear to a decisive price recovery. Also, cheap loans from banks, which have been driving the property market, will be pulled back if interest rates rise sharply, he said.
Thirdly, there are still projects with unsold stock that will soon be penalised under the conditions of qualifying certificate (QC) and the additional buyer's stamp duty (ABSD), he pointed out. Other than the delisting route, such developers may cut prices to move units.
But a countervailing force in prices comes from the aggressive land bidding by developers since last year, which will lock them into pricing new launches higher, he added.
"With supply peak tapering off, demand picking up and a recovery in the economy, 2018 will be a better year for property in both volumes and prices."
On that note, the risk-reward for property developers appears balanced at this point, he concluded.
Data from the Urban Redevelopment Authority (URA) on Friday already showed non-landed home prices remaining unchanged in the first quarter, after a 0.8 per cent fall in the preceding quarter. The 0.4 per cent drop in private home prices was also the smallest fall in the last 14 quarters.
Developers sold 2,962 units in the first quarter - 28 per cent more than a quarter ago and the strongest showing since Q2 2013's 4,538 units. The total number of private homes transacted in the first quarter stood at 5,202, also the highest level in 15 quarters.
While any further easing of property measures - especially those targeted at buyers - is not expected in view of the Q1 data, the government's move in March to adjust the seller's stamp duty and lending curbs on home equity loans has had a signalling effect on the market, nudging fence-sitters to take action.
A recovery in residential volumes typically precedes price recovery by six to nine months, Mr Tan observed. "If volumes are sustained, we could see prices start to increase by the end of the year - the big caveat being that we do not go into a recession."
Mr Lee of JPMorgan said that he sees non-landed home prices recovering marginally from the second quarter, though it will not be a significant increase given the weak rental market. He also expects sales momentum to gather pace in the upcoming launches in good locations such as Martin Modern by GuocoLand; a lack of new launches in the second half may induce buyers to re-look launched projects with unsold units.
"Should the sales pick-up in recent launches be sustained over the next six to 12 months and land prices remain elevated, I will not be surprised if the government introduces more land supply for the upcoming second-half 2017 Government Land Sales programme."
Analysts' top picks for property counters include CDL, UOL, Frasers Centrepoint Limited (FCL), CapitaLand and OUE.
Mr Natarajan said: "We still like CDL because it has the highest ammunition in this kind of market - it has been clearing a lot of its inventory in the past few years and is able to acquire more land now given its low gearing of less than 20 per cent."
Mr Tan of DBS noted that UOL's stock valuation remains attractive and the success of future launches of recently purchased sites will be re-rating catalysts for the stock.
UOL has secured two residential sites of late: a freehold site at 45 Amber Road through a private treaty and an en bloc purchase of Raintree Gardens at Potong Pasir. Projects on these sites will be rolled out in 2018.
For FCL, whose stock has also been a laggard, it is slated to benefit from the well-timed completion of its office project Frasers Tower in 2018, when there is no major competitive supply, and the strong sales take-up at Seaside Residences. Its busy shopping mall Waterway Point is also ripe for divestment to its listed retail Reit, Mr Tan said.
Morgan Stanley, which picked CapitaLand and CDL, noted that their earnings were still meaningfully levered to property prices, with every 5 per cent rise in property prices potentially raising their earnings by 4.4 per cent and 11.4 per cent respectively.