Property Development and Inventory - CIMB Securities 2015-09-15: Quiet August.

CAPITALAND LIMITED C31.SI CITY DEVELOPMENTS LIMITED C09.SI

Property Devt & Invt - Quiet August

Aug primary home sales of 961 units (495 units excl ECs) higher yoy, lower mom.
Expect transaction volumes to remain lacklustre and prices to decline 5% yoy in 2015, with rising new inventory and declining rental yields.
Valuations are attractive, with sector trading at a 44% discount to RNAV, at the low-end of the 3-year discount range.

Aug’s primary home sales of 961 units was almost 2x that of a year ago but 54% lower mom due to the bumper quantum in Jul. Excluding ECs, take up of 495 units was a 69% mom decline but 13% above the quantum transacted a year ago.
With no major new project launch in Aug, transactions came largely from ongoing sales at High Park Residences, Botanique at Bartley and The Panorama, among others. MCL Land’s Sol Acres EC also saw another 259 units (of a total 1,327 units) taken up.

Excluding ECs, the Outside Central Region continued to see the bulk of transactions, accounting for 72%, while projects in Core Central Region and Rest of Central Region made up 9% and 19%, respectively, indicating that volume recovery is still not broadbased. With this, 8M15’s primary transactions totaled 7,401 units (5,665 excl. ECs), which is 26% and 4% higher on year, and making up 75% of last year’s volume.

We expect total transaction volumes in 2015 to be slightly lower than that of 2014 as developers deplete their land inventory, while demand remains modest, with higher transaction costs and financing limits still in place. Upcoming notable projects include UOL’s 663-unit Principal Garden at Prince Charles Crescent, and City Dev’s 505-unit The Criterion EC in Yishun.

We expect prices to continue to slide by an average 5% in 2015, dragged down by the large completions in the OCR over the next 2 years as well as declining rental market as vacancies rise. Some 23,000 private homes and ECs are set to complete in 2015, and 26,000 in 2016. As such, rising vacancies will be drag on the rental market, while declining rental yields and rising mortgage rates would narrow return spreads.

Stocks are now trading at 44% below RNAV, lower than the -1s.d. discount level and at the bottom of their 3-year discount range. We believe the subdued outlook has been priced in and expect developer stocks to remain range-bound in the near-term.
We continue to like Capitaland for its diversified business model and ROE-boosting activities.
We also like City Dev for its attractive valuations. The stock is trading below its -1s.d. discount levels and at 0.87x P/BV.
We maintain Overweight on the sector.

We like Capitaland for its diversified business model with recurring income making up 70% of its earnings profile. Potential capital recycling should also boost its ROE in the medium term.

Apart from its attractive valuation, a more active launch pipeline in 2H15 and higher recurring income from South Beach should provide some catalysts for the stock.

LOCK Mun Yee | http://research.itradecimb.com/ CIMB Securities 2015-09-15

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