Property Sector: Grab the Bull by the Horns
By DMG Research
We are upgrading our sector call on the Property sector to OVERWEIGHT, on the back of (1) physical prices leveling off, (2) a comfortable mid-prime price disparity paving the way for return of interest in prime properties, (3) mass market volumes to transition to mid-prime properties and (4) expected return of foreign buyers. On the ground, confidence is sky high, which is best documented by a shift from fleeting enquiry interests (buyers' market) three months ago, to the present genuine and immense buying interests (sellers’ market).
While property stocks have already soared 98.9% qtr-on-qtr and 32.7% mth-on-mth, we believe upside potential remains for the blue chip developers under our coverage. Pegging 0 – 30% premium (which transpired during initial phases of property recovery cycles) to their new RNAVs, we derive BUY recommendations for City Developments (Target Price: S$12.18), Keppel Land (TP: S$3.15) and CapitaLand (TP: S$4.27).
We reckon physical prices have already bottomed in 1Q09, assisted by developers' aggressive downward price adjustment (10 – 30%) to move inventories. We believe current price disparity between mid-prime projects stands within 1Q05 – 3Q05 levels, which should drive sales and buying interest into prime projects for the next six to nine months.
More importantly, we reckon this implies more upside potential than downside, thus erecting a good entry point for investors. We expect end-2009 vacancy rate to hit 6.7 – 6.9%, which is still under 20-year average and past crises' levels. Supply in the pipeline for the next three years have plunged 41.5% year-on-year (yoy), ending any initial concerns over a supply glut.
We believe the pick-up in domestic buying activity and current mid-prime price gap would trigger a return in foreigners' buying appetite. Signs of foreigners' purchasing interest have begun to emerge, based on caveats lodged from Apr – May 09, recent prime project launches and anecdotal evidences. We foresee an increased quantity of foreigners to enter the market within the next six – nine months.
We prefer developers with a reasonable exposure to the domestic residential market. With 34% of its RNAV (vs. CapLand's 16% and KepLand's 22%) exposed to Singapore's residential sector, CDL is our top pick. We believe this accords it a slight edge over the strengthened balance sheets of KepLand and CapLand post-rights, notwithstanding their higher proclivity for NAV growth through opportune land acquisitions. Key risks include a slower-than-expected economic recovery, negative newsflow emanating from the US and failure of Integrated Resort (IR) to take off.
Disclaimer
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.
|
