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Further upside for developers that can deliver on strong sales, higher selling prices - The Straits Times

January 18, 2018

SINGAPORE (THE BUSINESS TIMES) - Shares of property developers have had a good run over 2017 in anticipation of a property market recovery; investors are now looking to the companies to deliver.


Those who can turn anticipation into reality with strong property sales and higher selling prices will even enjoy further re-rating, analysts say.


Property counters favoured by analysts are hence those supported by a robust line-up of new launches to ride the market upswing, particularly if their landbank was shored up before the spike in land prices.


DBS senior vice-president for group equity research Derek Tan believes developer stocks could rise at least 10-15 per cent.


"2018 is all about execution," he said. "Developers will have to deliver on market expectations that the strong rebound in transaction volumes will continue in 2018, translating into strong take-up rates for upcoming new launches."


But he cautioned that while there is still pent-up demand from home buyers in the first half of 2018, there may be greater uncertainties in the second half of the year as more projects from sites acquired at higher prices come onstream.


Reflecting the surge in the share prices of Singapore-listed developers, FTSE Straits Times Real Estate Holding and Development Index, a weighted index tracking the sector's performance, jumped 26.8 per cent last year.


Analysts expect developers' share price discounts to their revalued net asset values (RNAV) should narrow, buoyed by a multi-year market recovery. JPMorgan property analyst Brandon Lee also see a re-rating of some property stocks this year, after last year's 30-40 per cent jump in share prices, adding that the risk of an immediate profit-taking is low as the property market is still in the nascent stage of what could potentially be a three-year upswing.


Based on Mr Lee's analysis of major land tenders last year, prices must increase by at least 6-13 per cent over the next one to two years for developers to achieve a pre-tax profit margin of 5-10 per cent.


Another analysis by Jefferies Singapore equity analyst Krishna Guha on collective and GLS sites suggests breakeven prices are at an average 40 per cent premium to current residential prices in the vicinity.


Though the estimated price premiums for new projects vis-a-vis comparables may vary from one analyst to another, what is clear is that there is a bigger margin of safety for developers who have land-banked earlier at lower land prices, given the uncertainty over whether buyers will bite at higher prices.


RHB Research Institute's property and Reits analyst Vijay Natarajan noted that developers have paid a hefty price for the intense competition for land lately. He expects a 3 to 7 per cent rise in property prices this year, which is lower than his estimate of a 10-40 per cent price appreciation factored in by recent winning land bids, assuming developers maintain their typical profit margin of 10-15 per cent.


But developers still have to build, sell and complete a project within five years or else pay additional buyer's stamp duty (ABSD) on land cost with interest. Also adding pressure is that banks have already started to tighten some of their home loan packages, which reduces affordability for buyers.


The overly optimistic land bids thus limits developers' profit margins, and also raises the risk of more supply-side cooling measures from the government, Mr Natarajan said. "For developers who have acquired land bank recently, the price upside will depend on how fast the market recovers, their marketing strategy and timing of their launch."


There are yet others who see higher home prices already being accepted by buyers today, going by the strong take-up in some new project launches last year with high price premiums over comparable projects.


"With household balance sheets in a growing net cash position, a low overall mortgage loan-to-value (LTV) of 27 per cent and macro-prudential measures such as the LTV and total debt servicing ratio (TDSR) restrictions in place, we believe households are well positioned to withstand a rising interest rate environment into 2018," Credit Suisse property analysts said in a note this month.


Concurring, Maybank Kim Eng analyst Derrick Heng noted that the recent uptick in mortgage rates is manageable, even as loans pegged to the Sibor or Singapore interbank offered rate have effectively risen by 50 basis points year on year to about 2.5 per cent.


The rise in mortgage rate should not come as a surprise and home buyers have already been "stress-tested" to a normalised rate of 3.5 per cent under the total debt servicing ratio (TDSR) framework introduced in June 2013, he said. "Even after the recent pick-up in home prices, we estimate healthy home price-to-income ratio of 4.5 times for mass-market private homes. Overall, affordability of homes in Singapore is not excessive."


City Developments (CDL) and UOL Group are seen by most analysts as among the best large-cap proxies to ride the impending market ascent given their sizeable Singapore residential landbank and decent exposure to the Singapore office sector, where there is also an ongoing upcycle.


Mr Lee noted that CDL's potential acquisition of the remaining 35 per cent stake in Millennium & Copthorne Hotels and UOL Group's potential acquisition of the remaining stake it does not own in United Industrial Corporation could also result in operational synergies and more capital recycling opportunities.


DBS Group Research's top picks also include Frasers Centrepoint and small-cap developer Roxy-Pacific. The latter has land-banked ahead of peers with seven freehold residential projects in Singapore that are ready to launch this year. Roxy-Pacific has also beefed up its recurring income and diversified geographically last year with the acquisition of four new commercial buildings in Australia and New Zealand and one hotel in Japan.


Mr Natarajan favours the small-mid cap space where stocks are still trading at relatively higher discounts of 30-50 per cent.


"We believe the best way to play the recovery is a volume-driven play," he said. "We expect the property transaction numbers (in primary and secondary markets) to remain strong irrespective of price movements as developers are bound by ABSD timelines to launch and sell their units. Thus, our top pick is APAC Realty.


"For large cap stocks a re-rating could come if the property prices start increasing better than what market expectation is," Mr Natarajan added. "In my view, if property prices climb more than 5 per cent, there should be another rally in large-cap developers."


Mr Heng noted that potential catalysts to watch include an improvement in residential vacancy rates and a rental recovery that would follow. He also sees more value in the mid-cap space given the trading discounts to RNAV.


"While lower stock liquidity is a concern for smaller players, we believe a significant valuation gap between mid-cap developers and their large-cap peers more than compensates for this. GuocoLand and Bukit Sembawang Estates are our preferred mid-cap developers."

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