Take a break
Capital from China to take at least six months
On 1 July 2009, Taiwan’s government announced plans to open up investment in real
estate, as well as 192 other businesses, to China. Along with this, the government has
announced plans to relax current restrictions on Chinese individuals buying property in
Taiwan. However, we do not feel Taiwan is ready for capital from China, at least for the
next six months, given the complex application processes. In addition, we believe relevant
regulations, such as the memorandum of understanding (MOU), are to be amended from a
financing/mortgage perspective. Apart from these issues in Taiwan, our case study of
Hong Kong real estate shows that it takes time for significant investments to come from
China. Besides, strong price increases in the Hong Kong property from 2003-08 were
driven mostly by the strength in the economy, rather than due to Chinese capital, in our
view. While it is tempting to hold Taiwan property (due to political reasons), the low yield
from Taiwan real estate is a disadvantage, compared with real estate in other regions like
Hong Kong, Singapore and even Shanghai.
Taipei city still a better place to be
Regulation changes on county/city status upgrades by the government have boosted
market sentiment on property demand in select areas in Taiwan. However, we do not
believe market demand will really improve in these areas soon. In our view, Taipei city is
still one of the best in terms of the demand/supply outlook, given: 1) strong demand
(50-60% of island wealth is parked in the city and potential capital from China is likely to
veer more towards Taipei city), and 2) less pressure on supply (land bank is not easy to
acquire and current vacancies are better). Taichung and Taipei counties are still areas of
oversupply.
Property prices likely to consolidate in the near term
Fuelled by strong monetary liquidity and anticipation of Chinese capital, property prices in
Taipei city started to reverse from their downward trend in April. Following a 20-25% price
decline from their peak in 2Q08 to 1Q09, property prices increased by an estimated
10-15% in 2Q09, making a recovery to the 1Q08 level. We believe speculation from local
people will be the key driver of real estate demand in the near term. Although the longterm
outlook appears bright, we anticipate real estate prices will consolidate for a while,
given: 1) transactions are not large, 2) local speculators have already more or less
participated, 3) the increase in vacancies for commercial properties and 4) the digestion of
inventory left from residential projects in 2007-08.
Valuations are unattractive
We raise the NAVs of companies we cover by an average of 6.9%, due to decent sellthrough
in 2Q09 and assumptions of higher price increases for 2010 (up from 8% to 10%).
Property share prices have skyrocketed by 130% YTD, compared with a 44% increase for
the TAIEX. Valuations do not appear attractive now, based on historical P/NAV, as half of
the property companies are trading at a premium to NAV (versus the average discount of
22% since 2007). These stocks do not look cheap either compared with their regional
peers, which are trading at a 20-50% discount to NAV. Cross-strait market sentiment is the
major reason for the valuation premium over regional markets. However, we believe light
land bank inventory makes massive NAV upgrades less likely for Taiwan developers than
regional players, as land acquisition becomes more and more difficult in Taipei. Based on
stretched valuations, a flat property price outlook for 2H09 and the weak macroeconomic
environment, we downgrade the Taiwan property sector from Overweight to MARKET
WEIGHT. Given the limited potential upside, we downgrade Taiwan Fertilizer, Huaku,
Chong Hong, Hung Poo and Prince to NEUTRAL, and FET and Farglory from Neutral to
UNDERPERFORM.