Maybank Kim Eng Research 2015-07-01 Real Estate Sector (Part 1): OW Developers; UW REITS.

Policy moves and macro weakness

  • Latest news flow supports our preference for high-end over mass-market residential segment. 
  • Economic data suggests weak leasing activity to continue. 
  • OW developers with potential easing of cooling measures as catalysts. UW REITs on unfavorable supply-demand dynamics amidst a rising interest rate environment. 

Downside risk for mass-market residential, prefer high-end 

  • Possible increase in EC income ceiling. 

    • Minister for National Development Mr Khaw recently hinted at a possible increase in the HDB and EC income ceiling. This could potentially enlarge the pool of eligible EC buyers. 
    • We deem this positive for developers with large EC exposure, though it could be marginally negative for mass-market developers. 
  • Uptick in high-end sales. 

    • We also believe the recent uptick in high-end sales bodes well for launches in this market segment, such as Gramercy Park by City Developments. 
  • Bulk sale remains a possibility. 

    • Lastly, we reckon high-end developers facing time pressure under the Qualifying Certificate (QC) rules could explore the bulk sale of their assets. This was an avenue taken by Lafe Corp last month.
  • Weak macro data: continued softness for REITs 

    • Jobs contract first time since 1H09. Employment levels contracted by 6.1k in 1Q15. 
    • Main drag was manufacturing, while service employment expanded, albeit at a markedly slower pace. Factory and warehouse occupancies to continue to slide. Forward indicators for manufacturing point to low level improvements ahead, but we expect factory and warehouse occupancies to drop further on oversupply. 
    • Industrial GLS bids were lower in 1H15 than in 2H14, to SGD73.60 psf ppr from SGD80.60. Retail sales slide into contraction YTD. Lower employment, tepid income growth and marginal improvements in visitor arrivals. 

MAS proposals’ potential impact – 3 negatives, 1 neutral, 3 positives 

We revisit MAS’s consultation paper published Oct 14. If implemented,
  • re-appointment of managers, acquisition fees on cost recovery, and divestments to interested parties may be negatives. 
  • Single-tier leverage should be neutral. 
  • Fee alignments, higher development limits, and the regulation of income support positive impact. 

OW Developers; UW REITS 

  • We reiterate our preference for developers over REITs with an expected lifting of cooling measures as catalysts. 
  • We continue to UNDERWEIGHT REITs on a weak economy and over-supply of retail, industrial and office space. 

(Derrick Heng, CFA; Joshua Tan)

Source: http://www.maybank-ke.com.sg