SINGAPORE (Aug 28): DBS Group Research is positive on Singapore’s property stocks and REITs given the real estate market is expected to continue enjoying firmer fundamentals going into 2018.
In a Monday report, DBS notes that investors are still keen on increasing their exposure to developers in the event their prices weaken in the near term.
That's because they expect developer stocks to continue trading up in tandem with improving residential market sentiment.
DBS likes property developers UOL Group and City Developments for their relatively higher exposure in the residential space compared to their peers. The two stocks have been rated “buy” at target prices of $8.73 and $12.63 respectively.
“Due to the close correlation between developer P/NAV and market transaction volumes, we see the projected higher transaction velocity in 2H17-2018 translating to higher developer valuations as a whole. At P/NAV of 0.9x and P/RNAV of 0.75x, we see potential to close the gap towards 1.0x (+1 SD). Landbanking activities are expected to remain robust as developers look to replenish their land banks,” explains DBS.
Meanwhile, DBS is maintaining its view that the sub-sectors of office/business parks and hospitality are to lead in the property market’s recovery, aided by a larger fall-off in supply.
Given Singapore’s GDP is expected to grow at a rate of about 2.5%, DBS expects stronger pre-leasing activities for office properties.
This in turn will support an eventual recovery and hence serve as a catalyst for office REITs.
Keppel REIT (KREIT) has been identified as a top pick among office REITs with a target price of $1.23.
Among the industrial REITs covered by OCBC, Ascendas REIT (A-REIT), Frasers Logistics Trust (FLT) and Mapletree Logistics Trust (MLT) are expected to drive earnings upside, due to their financial flexibility to pursue acquisitions or redevelopments. These also have been rated “buy” with target prices of $2.85, $1.15 and $1.28, respectively.
Lastly, DBS says it sees a “confluence of positives” for Singapore’s hotel REITs going into 2018, with a generally brighter revenue per available room (RevPAR) outlook implying that the subsector will enter an earnings upgrade cycle going into 2H17-2018.
Top picks CDL Hospitality Trust (CDL HT) – rated “buy” at a target price of $1.75 – as well as A-REIT stand to benefit in terms of DPU from recapitalised balance sheets, note the team, as it believes this would offer the trusts a higher propensity to deliver debt-funded acquisitions.
Far East Hospitality Trust (FEHT), too, has been given a “buy” rating with a price target of 70 cents.
“Most importantly, most hotel REITs are also sensing that the booking pace at their hotels are also improving in 2H17 with most expecting to be able to price up average daily rates (ADRs) come 2018 on the back of a stronger line-up in meetings and conventions throughout the year,” says DBS.
“Coinciding with a drop-off in supply growth in 2018, we still believe that the inflection point in RevPAR for the hotel REITs will be reached in 2018 and that there is upside potential to our conservative RevPAR estimates for 2018,” concludes the research house.
As at 1.16pm, shares in UOL and City Dev are trading at $8.12 and $11.44, respectively.
Units in KREIT, A-REIT, FLT and MLT are trading at the respective prices of $1.16, $2.63, $1.08 and $1.20, while units of CDL HT and FEHT are priced at $1.62 and 66 cents.
