Property and REITs:
Staying defensive in times of uncertainty
By Carmen Lee, Head, OCBC Research

Recent developments in the local property market have sent mixed signals to investors. Several property developers have indicated the willingness to delay launches as residential property prices are showing signs of weakness, while others are pointing to still strong demand.

We remain positive on the outlook for the Housing Development Board (HDB) housing segment, which should be supported by the positive supply and demand dynamics, but expect to see further weakness in residential property prices.

Sentiment is likely to remain cautious against the backdrop of a weaker economic outlook, tighter credit market and rising inflation. Meanwhile, the de-rating of the S-REIT sector has given investors an opportunity to take a fresh look at S-REITs as defensive vehicles offering stable cash flows and high yields.


Delay in launches regulates property supply.
Recent developments in the local property market have sent conflicting signals to investors. Several property developers have indicated the willingness to delay launches as residential property prices are showing signs of weakness, while others are pointing to still strong demand.

Meanwhile, market data from the Urban Redevelopment Authority (URA) has indicated that the pace of increase is slowing. In fact, the 2Q08 increase was the slowest rate of increase since 3Q04. While the delay in property launches looks negative at first glance, it is actually a good move to regulate the supply of units coming onto the market and should not be viewed wholly as a negative move.


Pricing dynamics of HDB flats still look healthy.
We remain positive on the outlook for the HDB market segment, which should be supported by the positive supply and demand dynamics. Supply remains capped and demand should continue to grow with the increase in the number of Singapore PRs (permanent residents) and new household formation.

In addition, HDB pricing is also getting support from rental demand from foreigners. While we are positive on the outlook of the HDB market, we note that some of the notable HDB transactions in choice locations commanded excessive valuations and these are special cases that have benefited from the wealth generated from en-bloc sales.


Expecting weakness in high-end segment.
Going forward, we expect to see further weakness in residential property prices. Sentiment is likely to remain cautious against the backdrop of a weaker economic outlook, tighter credit market and rising inflation. This should deter buyers from spending on big-ticket items.

If prices trend lower, smaller developers with comparatively lower holding power are likely to offload their units onto the market to reduce gearings and holding costs. The high-end segment is also likely to be at risk to price correction as this segment has been the driving factor in the run-up in property prices since the beginning of 2006. With foreign investors turning wary and together with the decline in global equities, this could affect demand for high-end property units.


Positive on office and industrial
Overall, we are positive on the office and industrial segments, but neutral on the retail segment. For the residential sector, we see pockets of weakness especially for high-end residential units, but fortunately the bigger listed developers have secured earnings for the next 1-2 years due to strong pre-sold units' revenues, which will be recognised in 2008-2010.

On the REIT space, present good yields for commercial space will continue to support rental income for REITs with exposure to good-class commercial assets. We have BUY ratings on UOL and Suntec REIT.



For detailed report: http://www.ocbcresearch.com/pdf_reports/company/Property 20Sector-080710-OIR.pdf





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For and on behalf of OCBC Investment Research Private Limited:

Carmen Lee
Head of Research

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