SINGAPORE (Nov 17): Maybank Kim Eng Research remains positive on the Singapore real estate sector, even as its stock prices have rallied strongly, climbing close to 30% so far this year.
“We believe the sector is in the early stages of a recovery and recent share-price weakness on the back of profit taking should be an opportunity to raise exposure,” says analyst Derrick Heng in a report on Thursday.
In addition, he says the positive stance is validated by a quarter-on-quarter rebound in the Urban Redevelopment Authority’s (URA) 3Q17 property price index (PPI), which marks a “turning point” in home prices.
In the recent rush of collective sales amid a resurgent en bloc market, Heng believes accretive land deals could see some property developers re-rated on the back of revalued net asset value (RNAV) upgrades.
“Tenders for at least 13 residential sites are scheduled to close at year-end. These could add 3,600 units to the pipeline for property developers and improve their earnings visibility,” says Heng.
At the same time, the analyst reckons that vacancy rates of private homes could fall due to a lower net supply of new units next year, which could lead to a recovery in rents.
This could embolden investors who have been cautious due to a weak occupier market.
Heng estimates that a net supply of only 4,900 units will be added in 2018. “This is significantly lower than the average annual absorption of 13,200 units in the past five years,” he says.
He says the lower supply could see vacancy rates, which hovered at 8.4% in 3Q17, potentially improve to 6.5% by end-2018. And if vacancy rates do improve, it could see rent start to recover after falling 13% from its peak in 3Q13.
“We think an improving economy and accelerated demolitions from the current en bloc fever could provide further upside to rents in the next two years,” Heng says.
Among the property developers, UOL Group and City Developments Limited remain the research house’s preferred large caps to benefit from the unfolding rebound in the Singapore property market.
UOL reported a sevenfold increase in earnings to $618.1 million for 3Q17, from $87.1 million a year ago.
Revenue from property development, which accounted for 54% of the group’s revenue, was up 41% at $291.5 million.
See: UOL's 3Q earnings up sevenfold to $618.1 mil on higher revenue
Maybank has a “buy” rating on UOL with a target price of $9.85.
As at 2.59pm, shares of UOL are trading flat at $8.59.
Meanwhile, CDL posted an 8.3% decline in earnings to $156.1 million for 3Q17, mainly due to the absence of one-off gains compared to a year ago.
Excluding the one-off items, CDL’s earnings would have increased by 3.5% in 9M17.
Revenue fell 6.5% during the quarter to $863.1 million, from $922.8 million a year ago.
In a statement accompanying CDL’s results announcement, CEO Grant Kelley said new acquisitions and investments both locally and overseas will be key focus areas for the group, backed by a strong balance sheet.
See: City Developments posts 8.3% fall in 3Q earnings to $156.1 million on absence of one-off gains
Maybank has a “buy” rating on CDL with a target price of $13.80.
As at 2.59pm, shares of CDL are trading 22 cents higher, or up 1.8%, at $12.12.
For investors with lower liquidity thresholds, Heng says GuocoLand offers compelling relative value with improving fundamentals.
GuocoLand saw its earnings surge more than sixfold to $165.6 million for the 1Q ended September, mainly due to a higher share of profit of associates and joint ventures, which skyrocketed to $170.5 million.
Revenue grew 79% to $362.0 million during the quarter, from $202.8 million a year ago, mainly attributed to higher sales and progressive revenue recognition from residential projects in Singapore.
See: GuocoLand 1Q earnings surge sixfold to $165.6 mil on higher share of profit of joint venture
Maybank has a “buy” rating on GuocoLand with a target price of $2.90.
As at 2.59pm, shares of GuocoLand are trading 1 cent lower at $2.18.
