Property Sector 2H17 - CIMB Research 2017-05-30: To Pay Up Or Not?

Property Sector 2H17 - CIMB Research 2017-05-30: Overweight Singapore Property Sector Property Stocks Outlook 2017H2 CAPITALAND LIMITED C31.SI UOL GROUP LIMITED U14.SI CITY DEVELOPMENTS LIMITED C09.SI FRASERS CENTREPOINT LIMITED TQ5.SI

Property Sector 2H17 - Overweight


Key question: To pay up or not? 

  • Property stocks reported a decent set of 1Q17 results that were largely in line or slightly on the lower end of expectations. Results were underpinned by progressive billings in Singapore or new contributions from overseas.
  • The key question raised for developers was how aggressively they have to landbank given their dwindling inventory in Singapore. Most developers concur that it appears the residential market may have bottomed out but land cost remains elevated, thus implying very competitive development margins. 
  • The two latest government land sale tenders in Tampines and Stirling Rd saw a high level of participation, including the presence of new foreign names, and top bids came in ahead or at the top end of market expectations while selling prices for new projects launched were priced ahead of estimates.


2H17 Outlook 

  • We think with the low developer inventory levels, land acquisition will remain the key focus for developers’ Singapore operations. As such, we expect government land tenders, particularly for good locations, to continue to draw strong buying interest in addition to reflecting some forward pricing expectation. This will likely continue to underpin sentiment in the residential market in the near term. 
  • Looking towards 2H17, we think there is a possibility for more sites to be released under the land sale programme. This could mean less pressure on land prices and potentially translate into better margins as the residential market recovers.
  • Property stocks are currently trading at a 31% discount to RNAV after a good run-up in 1H17. We believe catalysts could come in the form of robust pricing expectations from both selling prices achieved at new launches as well as from strong land prices. 
  • In addition, RNAVs should remain robust as the threat of cap rate expansion dissipates with the slower interest rate trajectory seen so far. 


POSITIVE CATALYSTS TO LOOK FOR

  • Recent good take up from new launches is a vote of confidence for a market recovery. Any further increase in secondary market transaction should provide further booster to improved market sentiment and developer stocks.
  • Continued buoyant land bids for new land parcels could provide an indication of expectation of forward pricing and this would likely provide more RNAV up-cycle catalyst for share price recovery.
  • A slower pace of interest rate hike would mean sustainable affordability for home buyers and minimal threat of cap rate expansion for investment properties.


NEGATIVE CATALYSTS TO FEAR 

  • A slowdown in economic activity, elevated unemployment rates (vs recent low) would deter big ticket purchases and this could impact both investment and occupational demand for housing.
  • Slower than expected price recovery trend would mean little opportunity for further RNAV uplift to spur prices.



TOP PICKS: UOL Group, Frasers Centrepoint Limited FCL, City Developments CIT, CapitaLand CAPL
TOP SHORTS: NA




Singapore Research CIMB Research | http://research.itradecimb.com/ 2017-05-30
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.190 Same 4.190
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