20151006-Maybank_KERPL-Can_developer_stocks_rally_when_home_prices_are_falling__16页_787kb

Singapore Property Market Summary

Core Content

The document provides an analysis of the Singapore property market and developer stocks, emphasizing that developer stocks can still rally even when home prices are falling. It highlights the importance of sales volume over home price changes as a key driver for stock performance, especially in the context of a market cycle. The analysis suggests that the government may begin to roll back cooling measures in 2016, which could serve as a catalyst for a rebound in sales volume and a re-rating of developer stocks.

Main Views

• Developer Stocks Can Rally Despite Falling Home Prices:
  The analysis argues that home sales volume, not home price changes, is a more significant driver for developer stock performance. This is supported by historical data showing that developer stocks rallied in 15 out of 31 quarters of home price contraction since 4Q97, with nine of these rallies coinciding with increased sales volume.

• Government Policy Influence:
  The government's policy changes, such as reversing cooling measures and introducing off-budget support, have historically had a positive impact on developer stocks. The document suggests that similar actions in 2016 could lead to a similar positive outcome for the sector.

• Market Valuation and Investment Outlook:
  The current market valuation for developers is at a 48% discount to RNAV and at a P/BV of 0.59x, indicating good value and a favorable risk-reward ratio. The analysis recommends maintaining an OVERWEIGHT rating for the sector.

Key Information

• Developer Stock Performance:
  Developer stocks have declined YTD by 9%, but still outperformed the broader market, which declined by 15%. The document suggests that this trend may continue if cooling measures are relaxed.

• Historical Rerating Catalysts:
  In 4Q01, despite a 4.3% decline in home prices, developer stocks rallied due to a 43% increase in sales volume and policy changes. This is expected to repeat in 2016.

• Valuation Metrics:

  • Wing Tai: 35% discount to RNAV, 51% current discount, 35% target discount, 4.07 latest BVPS, 0.42 P/BV, 1.8 2015E yield, 0.09 net gearing.
  • Ho Bee Land: 35% discount to RNAV, 58% current discount, 35% target discount, 3.90 latest BVPS, 0.50 P/BV, 2.6 2015E yield, 0.37 net gearing.
  • City Developments: 15% discount to RNAV, 40% current discount, 15% target discount, 9.00 latest BVPS, 0.89 P/BV, 2.0 2015E yield, 0.27 net gearing.
  • CapitaLand: 15% discount to RNAV, 36% current discount, 15% target discount, 4.04 latest BVPS, 0.73 P/BV, 3.1 2015E yield, 0.53 net gearing.
  • OUE: 50% discount to RNAV, 54% current discount, 50% target discount, 4.30 latest BVPS, 0.41 P/BV, 2.8 2015E yield, 0.34 net gearing.

• Government Measures in 2001:
  The government reversed cooling measures in 2001, including capital gains tax on short-term property sales, restrictions on foreign borrowing, and property tax exemptions for land under development, which helped boost developer stocks.

• Market Segmentation and Inventory:
  The document outlines the distribution of unsold residential inventory across different regions, noting that districts like Yishun and Sembawang have the highest levels of unsold units. It also provides details on government land sales and their impact on the market.

Investment Theses for Developers

• Wing Tai: Best proxy for potential lifting of cooling measures. Residential projects account for 60% of asset value. Risks include lower residential ASPs and high-end sentiment. Catalysts include rebound in high-end sentiment and privatisation.

• Ho Bee Land: Low-risk exposure to high-end properties. May benefit from a rebound in high-end sentiment or lease out unsold units. Risks include office asset devaluation and Sentosa property sentiment. Catalysts include rebound in high-end sentiment and sale of investment assets.

• City Developments: Diversified portfolio with potential for growth. Offers new financial platforms to unlock portfolio value. Risks include lower residential ASPs and market value of M&C. Catalysts include unlocking asset value through new financial platforms.

• CapitaLand: Offers stability with a diverse portfolio across Singapore and China. More than 70% of assets produce recurring income. Risks include lower residential ASPs and decline in asset values. Catalysts include rebound in buying sentiment in Singapore and China.

• OUE: Good value at a wide discount to RNAV. High unsold inventory in high-end properties. Risks include decline in office portfolio and lower residential ASPs. Catalysts include rebound in high-end sentiment and divestment of assets at favorable prices to REITs.

Market Trends and Valuation

• Home Price Declines: Home prices have declined for 31 quarters since 4Q97, with 15 quarters showing stock rallies. Sales volume is a more significant factor in these rallies.

• Sales Volume Correlation: Home sales volume has a higher correlation with developer stock prices than home prices, as shown in the data.

• Affordability and Interest Rates: Better affordability and normalisation of interest rates are expected to be key triggers for policy changes in 2016, which could lead to increased sales volume and improved stock performance.

Conclusion

The document concludes that Singapore's property market has passed the worst of policy intervention, and the government is likely to roll back cooling measures in 2016. This is expected to drive a rebound in sales volume and improve developer stock valuations. The sector is seen as undervalued, with a skewed risk-reward ratio, and the recommendation is to maintain an OVERWEIGHT rating.