Valuations of property stocks down, but it's not time to jump in yet

Singapore

FOLLOWING the July 6 measures to preempt runaway prices in the Singapore housing market, valuations of real estate stocks have fallen somewhat.

But analysts caution against jumping in too quickly, unless the counter is a diversified play.

On July 5, the government announced adjustments which saw higher additional buyer's stamp duty (ABSD) and tighter loan-to-value (LTV) limits on residential property purchases.

The day after the measures were announced, the FTSE ST Real Estate Holding and Development Index dropped to its year-to-date low of 779.25, but has since recovered to 811.46 as at Aug 31. Still, the index is 120.25 points off from the year-to-date peak of 931.71.

Using the index as a benchmark for Singapore developers, "we acknowledge that valuations are undemanding, as it is trading at a blended forward price-to-book ratio of 0.57x, which is 1.5 standard deviations below its 10-year mean of 0.78x", said Andy Wong Teck Ching, research analyst at OCBC Investment Research.

RHB Research and OCBC Investment are among those which have downgraded their outlook for the Singapore residential sector to "neutral".

"The tightening of LTV and increase in ABSD have raised the barrier of entry for property buyers and developers now face the risk of slowing sales," said analyst Royston Foo, who publishes on Smartkarma.

Developers which acquired expensive land banks in the prime districts during the last collective sale cycle which ended with the cooling measures are most exposed to negative impact of the stepped-up restrictions.

RHB Research property analyst Vijay Natarajan also said the cooling measures have shifted the market balance from developers to buyers.

"While developers were hoping to fetch higher prices on new launches on the back of bullish bids, they are now recalibrating their pricing expectations lower to mitigate the impact of the measures," he said, adding that existing property launches are also seen to be offering discounts of 3 to 7 per cent.

But with the en bloc frenzy gone, further supply build-up will moderate, resulting in more modest and sustainable price increases, Mr Natarajan said.

Among buyers, demand has also eased and will likely remain so for the near future, with the real impact only becoming apparent in the coming months, said OCBC's Mr Wong.

"Buyers and developers have adopted a 'wait-and-see' approach, taking time to adjust and see how the situation pans out," he said.

Despite the hazy outlook, it is also "not all doom and gloom" as there will still be a ready market from first-time buyers and HDB upgraders.

Mr Wong said that with the implementation of the tightening policies, he expects developers to shift their focus more to growing their recurring income streams and to overseas development opportunities.

The cooling measures are likely to "instil a stronger sense of discipline" among developers when they submit bids for Government Land Sites and collective sales, Mr Wong said, with the possibility that the measures could allow the property market to become more sustainable over the long run.

RHB's Mr Natarajan shares this view, noting that developers who have already diversified away from Singapore might start finding favour again with investors.

"We believe CapitaLand and Ho Bee are in this category," he said.

For Smartkarma's Mr Foo, Sing Holdings is among his top picks.

"Sing Holdings' recent new launch Parc Botannia was a success." Parc Botannia is now 60 per cent sold and Sing Holdings will benefit from the profit recognition from Parc Botannia over the next two to three years, he said.

"Sing Holdings did not acquire any land bank during the collective sale cycle and cooling land prices could provide opportunity for the company to replenish its land bank at reasonable prices."

Mr Foo warned that despite the current attractive prices, investors need to watch out for a possible "value trap" - where valuations remain depressed for prolonged periods as investors adopt a wait-and-see approach and look for evidence of strength in the property market.

"Even as value appears to be emerging in developer stocks, investors should be selective in their investments in property counters," he said.

Both Mr Natarajan and OCBC's Mr Wong like CapitaLand for, among other reasons, its relatively low exposure to the local residential scene relative to its peers, and active capital recycling efforts.

"Additionally, CapitaLand's well diversified presence also provides it with more avenues to efficiently deploy capital and mitigates the impact of country specific policy risks," Mr Natarajan said.