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21-Jun 2012 Thursday 4:23 PM (4329 days ago)

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21-Jun 2012 Thursday 4:23 PM (4329 days ago)

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21-Jun 2012 Thursday 4:24 PM (4329 days ago)

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21-Jun 2012 Thursday 4:26 PM (4329 days ago)

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We upgrade property developers from MARKETWEIGHT to OVERWEIGHT as we are turn less negative on the residential market on the back of prolonged low interest rate expectations and reduced risk of severe policy measures. We thus lower our discounts to RNAV on developer stocks by 5-10 ppt and have raised our target prices by 7% on average. We upgrade City Developments (TP:S$11.10/share) to HOLD from SELL and GuocoLand (TP:S$1.95/share) to BUY from HOLD. Our top picks for the sector are CapitaLand (BUY/TP:S$3.65), Ho Bee (BUY/TP:S$1.80) and OUE (BUY/TP:S$3.10). Key Highlights are as follows. Do let me or Vijay know in case you need any further details.

Property Developers: Strategy 2H12 – Play the valuation gap
Analysts: Vikrant Pandey/Vijay Natarajan Tel: (65) 6590 6623/6590 6626

· Developer stocks offer a cheaper entry into property than physicals. While physical property prices have surged about 25% over the past two and a half years (since 2010 beginning), developer stocks have retreated by more than 16% over same period, a divergence of over 40% between the two. The market has over discounted the negative prospects for the sector pricing in about 40% fall in property prices. We believe that policy measures for the sector have peaked and a price fall of more than 10-15% is unjustified. The developer stocks that are trading at steep 30-50% discount to their RNAVs offer a much cheaper entry to the property market than the direct physicals that is likely to come down 8-10% over the next year.

URA VS Developers stock index - Physical property prices up 25% since 2010 vs developers retreat of 16% (a divergence of over 40%)

· Risk-reward ratio favours developer stocks. Our analysis of the peaks and troughs of the P/B multiples for the past cycles suggests that developers under our coverage offer an upside potential of 195% vs a downside risk of 32% on average from the current share price levels. The developers are trading at a 41% discount to their long term P/B levels implying a 59% upside to their long term valuations. Ho Bee and CapitaLand offer the highest risk/reward ratio in the large and mid-cap space respectively.

Sector P/B Valuations

Peak-Trough P/B valuation

	Sh Price		Current P/B	LT Average	Upside to Curr	Upcycle Peak Average	Upside to Curr	Trough Average	Downside
Company	20 Jun 12	BV ps	20Jun 12	P/B	P/B	P/B*	P/B	P/B*	to Curr P/B
	(S$)	(S$)	(x)	(x)	(%)	(x)	(%)	(x)	(%)
CapitaLand	2.69	3.51	0.8	1.1	47.4	2.1	180.3	0.4	(43.2)
City Devt	10.78	7.66	1.4	1.9	34.7	2.7	92.2	0.8	(45.7)
GuocoLand	1.56	2.02	0.8	0.9	15.2	1.8	137.0	0.3	(63.8)
Ho Bee*	1.14	2.24	0.5	0.9	82.8	2.2	335.4	0.3	(38.0)
Keppel Land	3.15	3.81	0.8	1.2	42.6	2.5	199.0	0.3	(61.2)
OUE	2.07	3.53	0.6	1.1	92.1	1.7	191.0	0.7	23.4
SC Global	0.965	1.56	0.6	1.3	106.6	2.7	331.0	0.7	6.7
Wheelock	1.725	2.45	0.7	1.1	56.6	1.6	129.9	0.6	(20.9)
Wing Tai	1.32	2.47	0.5	0.8	55.2	1.4	157.6	0.3	(48.9)
Average			0.7	1.2	59.2	2.1	194.8	0.5	(32.4)

· Prolonged low interest rates boosting affordability. Overall household affordability, based on average disposable income level measured as the ratio of monthly mortgage payment to household disposable income, stood at 36% as at end-1Q12. This is comfortable compared to the long term level of 48% and the stretched level of 60-70% in 1996-97. Although median prices of condos have surpassed the peak levels, affordability is still low predominantly due to the extremely low interest rate environment and strong growth in median income in 2011(+11%). SIBOR rates in Singapore are at a historical low of 0.39% compared with the 15-year average of 2.2% and peak levels of 6-7% during the AFC. With the interest rates likely to remain low till end-2014 we believe that affordability levels are unlikely to creep above alarming levels.

Historical Affordability

· Expect near-term price correction, but long-term outlook remains stable. The supply for private residential homes is likely to outpace the demand in the next three years with a supply of more than 13,000 units p.a compared to an average annual demand of 10,000 units. However, the spill-over demand as a result of the backlog of public housing shortage over the last decade will partially soak the huge oncoming private residential supply. While we expect the prices to fall by 8-10% over the near one year as the market adjusts to the huge oncoming supply, we believe that prices are likely to remain stable over the medium to long term supported by an extremely low interest rate environment, stable employment levels and growth in wages. We expect it to move in tandem withthe GDP (3-5% pa growth) after the initial near term fall.

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