Goldman Sachs analysts Xuan Tan and John Tsang have issued a downgrade on property developers City Developments Limited (CDL) C09 and UOL U14 after a further round of cooling measures announced at the Budget 2023.
During his speech on Feb 14, finance minister Lawrence Wong announced a round of demand-side cooling measures, which includes additional tiers of buyer’s stamp duty (BSD) rates for properties valued at $1.5 million at increments of 1%.
To Tan and Tsang, the cooling measures came as a “surprise… especially given [the] already weaker sales volumes and higher mortgage rates”.
“Although this marks the third cooling measure put in place, we do not rule out the potential for further cooling measures, which would negatively impact property developers,” the analysts write.
In their Feb 15 report, the analysts look at past periods where there were several rounds of cooling measures put in place, which reveals revised net asset value (RNAV) discounts for property developers such as CDL and UOL. These RNAV discounts, note the analysts, were as great as 60% during the global financial crisis (GFC) and during the cooling period between 2006 to 2011.
“Reflecting their relative exposures to [the] Singapore residential market, we downgrade CDL [which has the highest exposure at 20%] from “buy” to “sell” as we believe CDL is most likely to be negatively impacted by the latest round of residential cooling measures,” the analysts say.
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They have also downgraded UOL to “neutral” from “buy” due to its “weaker visibility on its strategy and increased risk of being negatively impacted by cooling measures at 16% exposure”.
With the downgrades come lower target prices. CDL’s RNAV-based target price has been lowered to $8.05 while UOL’s target price has been lowered to $7.60.
The lower target prices come as the analysts tweak their estimates to factor in capital redeployment risks for CDL and limited company guidance for UOL. They have also widened the RNAV discounts for CDL and UOL from 35% to 30% and 45% to 40% respectively. This is given the “expected weaker volume and likely downward pressure on valuation” as the analysts have seen in the past periods.
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To this end, CapitaLand Investment (CLI) 9CI remains the analysts’ preferred pick within the Singapore real estate sector due to its lack of residential exposure and fee-driven growth.
As at 10.37am, shares in CDL are trading 1 cent lower or 0.13% down at $7.80. Shares in UOL are trading 1 cent lower or 0.15% down at $6.72. Shares in CLI are trading flat at $3.85.
