Buoyed by strong demand for new homes, the property development and investment sector is set to carry “stable” volume demand into 2021 despite the pandemic, says CGS-CIMB Research analyst Lock Mun Yee.
Lock is maintaining “overweight” on the sector, highlighting preferred picks CapitaLand, City Developments and UOL Group. Lock recommends “add” on all three companies, with target prices $3.42 for CapitaLand, $10.10 for City Developments and $7.60 on UOL Group.
“December 2020 new home sales rose 130% y-o-y and 54% m-o-m to 1,265 units,” highlights Lock in a Jan 15 note. “We project home sales of 9,000 [to] 10,000 and 0-5% hike in home prices in 2021F.”
December figures were boosted by the launch of UOL’s District 5 property The Clavon, which accounted for 37% of the month’s sales. Excluding Executive Condominiums (ECs), monthly sales also saw a 126% y-o-y (+57% m-o-m) jump to 1,217 units.
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“Other projects that continue to do well include Ki Residences at Brookvale and Parc Clematis. Outside Central Region (OCR) projects made up 76% of total ex-EC take-up for the month while suburban projects accounted for another 19%,” says Lock.
Pent-up demand
2020 primary sales totalled 10,320 units, a slight 3.2% dip from 2019’s volume. That said, Lock notes that the figures are “commendable” in light of the Covid-19 pandemic.
According to Singapore Real Estate Exchange (SRX), the non-landed resale market saw 1,236 units changing hands in December, a 5% m-o-m decline but up 79.4% y-o-y, led by active transaction volumes in the Outside Central Region.
This brings 2020 resale transactions to 10,712, or 18.1% higher y-o-y. “We believe demand was underpinned by the low interest rate environment and a measure of pent-up demand,” says Lock.
Price hike
Private home prices increased 0.1% for 9M2020 compared to end-2019 levels and Lock anticipates a further uptick in 4Q2020. “We expect private home prices to rise by a slightly better 0-5% for 2021F, thanks to robust demand. Overall, we expect prices to pace economic recovery as developers continue to price their projects competitively in order to move inventory.”
See also: Singapore home sales rise amid positive economic outlook
Although share prices have risen, developers’ valuations “still look inexpensive”, says Lock, trading at a 50% discount to revalued net asset value (RNAV), close to the 1.5 standard deviations below long-term mean discount. “Our strategy for developers would be to prefer those with high recurring cashflow base and strong balance sheets that would enable them to tap into any opportunities during this slower cycle.”
Analyst picks
As Asia’s largest diversified real estate group, CapitaLand's strong capital recycling and deployment into new investments would continue to drive its return on equity (ROE), says Lock. The stock is trading at a 44% discount to RNAV.
As at 10.12am, shares in CapitaLand are trading flat at $3.47.
Next, City Developments’ land restocking activities would extend its residential earnings visibility, says Lock. New investments in Europe and strategic investments in China would enable the group to deploy balance sheet capacity. The stock is trading at a 58% discount to RNAV.
As at 10.12am, shares in City Developments are trading six cents higher, or 0.78% up, at $7.72.
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Finally, UOL has a high recurring income base, supported by rentals, hotel operations and investment holdings, says Lock. It has good office exposure through United Industrial Corp. UOL is now trading at a 38% discount to RNAV.
As at 10.12am, shares in UOL are trading three cents lower, or 0.38% down, at $7.86.
