Defying gravity
Positives priced in; downgrade Keppel Land to REDUCE
After a strong price run-up of 36-259% since the March lows, we believe
the recent positive developments – brisk sales, rebounding property
prices, falling construction costs and receding default risk are in the
price. Large-cap property names such as CapitaLand and Keppel Land
are now trading at 3% premium and 8% discount to our revised RNAV
estimates respectively; levels last observed during the 2004-07 period
when property prices started to recover before peaking in 2007. On
valuation grounds, we downgrade Keppel Land to REDUCE, and
maintain CapitaLand at REDUCE. City Developments, retained at BUY,
still offers good value at 29% discount to our RNAV estimates.
Property prices have bottomed out but…
The recovery in home sales following a revival in market sentiment and
aggressive price cuts by property developers suggests that a clearing
price level has been reached. Our price-gap analysis, looking at the
price differential between high-end and mass-market properties
(currently at 3x) has further reinforced our view that property prices have
bottomed out. We believe that mass-market homes should see support
at the SGD600 psf levels, while high-end home prices should hold up at
SGD1,800 psf.
…a sustained price recovery is questionable
The influx of excessive supply (2009: 11,102 units; 2010: 5,952; and
2011: 12,641), coupled with a markedly slower population growth will
translate to higher vacancy rate. This will exert downward pressure on
the already weak leasing market. In the absence of a strong rental
market, there is only so much that capital appreciation can stretch.
NEUTRAL on sector
Our analysis suggests that a sustained price recovery (which is the key
catalyst for re-rating) is not going to play out, given an imminent supply
glut and poor outlook for real demand. Despite the economic recovery,
there remains asset devaluation risk particularly for the commercial
property, and default risk for homes purchased under the deferred
payment scheme. Top pick: City Developments.
Contents
Positives priced in.......................................................................................................... 3
A sustainable recovery or false alarm? 3
Betting too soon on a sustained price recovery 3
Neutral on sector 4
Pent-up demand may not cool-off soon......................................................................... 5
Driven by affordability and liquidity 5
Foreigners’ participation another booster 6
Real demand has yet to knock on the doors 8
The aftermath of brisk sales ........................................................................................ 10
11,102 units entering the market in 2009 10
Inventory management: replenishing or clearing? 11
Property prices have bottomed-out ............................................................................. 13
Supported by price gap analysis 13
Property price index converges to per capita income 14
Too soon for a sustained price recovery 14
Too fast too furious...................................................................................................... 16
Positives have been priced in 16
When over-optimism rules 16
NEUTRAL; a dilemma between risks and catalysts 18
Key catalysts 18
Appendices ................................................................................................................. 19
1. Key industry trends (residential segment) 19
2. Key industry trends (office segment) 20
3. Transactions of selected developments 21
4. Selling price assumptions in our base case 22
5. Share price performance and valuation 23
6. P/BV band of developers under our coverage 24
Company updates ....................................................................................................... 25
CapitaLand – REDUCE; CP: SGD 3.50; TP: SGD 2.72 (from SGD 2.50) 26
City Developments – BUY; CP: SGD 8.50; TP: SGD 10.83 (from SGD 8.17) 28
GuocoLand – HOLD; CP: SGD 1.63; TP: SGD 1.79 (from SGD 1.37) 30
Keppel Land – REDUCE (from BUY); CP: SGD 2.18; TP: SGD 1.90 (from SGD 2.53) 32
SC Global – BUY; CP: SGD 1.08; TP: SGD 1.27 (from SGD 0.92) 36
Sim Lian – BUY; CP: SGD 0.405; TP: SGD 0.49 (from SGD 0.39) 38
Positives priced in
Property stocks have had a good run since their March lows, with gains ranging from
36% to 259%. We believe the following positive catalysts have been priced in:
􀂃 Rebounding property prices: The recovery in home sales, following a revival in
market sentiment, and aggressive price cuts by property developers suggests that
property prices have bottomed out. Anecdotally, we are hearing that sellers either
have raised their asking prices, or have decided to defer sales in anticipation of
higher prices ahead. Our price-gap analysis that looks at the price differential
between high-end and mass-market properties (currently at 3x) also points to a
bottoming out scenario.
􀂃 Receding deferred payment scheme (DPS) default risk: Following the
successful payment collections from buyers in projects that received temporary
occupational permits (TOPs) recently, the market’s earlier negative perception
toward DPS default risk has taken a softer stance. The two cases in point entailed
CapitaLand’s RiverGate and MCL Land’s The Fernhill projects. With property
prices on the mend, DPS buyers will now face less pressure to offload at fire sale
prices.
􀂃 Falling construction costs: We believe that construction costs have declined by
20-25% from their peaks.
A sustainable recovery or false alarm?
Following four consecutive months of brisk sales between February and May with over
1,000 new homes sold each month, crowds are still thronging to showflats, which
suggests that strong sales are likely to continue in the months ahead. We believe the
resurgence in interest came about from a rally in global stock markets that helped lift
the market sentiment. This was further supported by reasonably higher level of
affordability (reflecting lower property prices, low mortgage rates, high national saving
rate of 47% and well-contained job losses) and liquidity. We believe the depressed
savings rates of less than 1% might have encourage property purchases.
Betting too soon on a sustained price recovery
We believe that the influx of excessive supply (2009: 11,102 units; 2010: 5,952; and
2011: 12,641) coupled with a markedly slower population growth will translate to a
higher vacancy rate. This will exert downward pressure on the already weak leasing
market. In the absence of a strong rental market, there is only so much that capital
appreciation can stretch. We believe that mass-market homes should see support at
the SGD600 psf levels, while high-end property prices should be held up at the
SGD1,800 psf levels