Property Singapore - UOB Kay Hian Research 2015-11-30: 1H16 Strategy ~ Interest-ing Times For Real Estate

SGinvestors.io

Singapore Property WING TAI HLDGS LTD W05.SI  CITY DEVELOPMENTS LIMITED C09.SI  ASCOTT RESIDENCE TRUST A68U.SI  MAPLETREE LOGISTICS TRUST M44U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI 

Property – Singapore 1H16 Strategy: Interest-ing Times For Real Estate 

• We recommend an OVERWEIGHT stance on the sector as we believe concerns over a rise in interest rates have been overblown. 
• We prefer developers over REITs. 
• Developers are trading near undeserving crisis valuations and offer an attractive 6:1 reward-to-risk proposition. S-REIT yield spreads remain the most attractive regionally, with upcycle yield spreads indicating 30% upside potential. 
• Our top picks are CDL, Wing Tai, ART, MLT and CCT which offer deep-value and diversification. 

WHAT’S NEW 

• 1H16 Strategy. 

• We recommend an OVERWEIGHT stance on the sector as we believe concerns over a rise in interest rates have been overblown. 
• We prefer deep-value and diversified property stocks with City Developments, Wing Tai, Ascott Residence Trust, Mapletree Logistics Trust and CapitaLand Commercial Trust as our top picks. 

• Concerns over interest rate hikes have been overblown. 

• We believe an unwarranted 150bp rise in interest rates has been built in at the current share price levels. 
• Past cycles have demonstrated that sharp rate hikes are contingent on a strong economic recovery and heightened expectations of inflation. REITs are able to transform into growth vehicles in an inflationary interest rate environment, contrary to the conventional inverse relationship between dividend yields and interest rates.
•  The direct impact of higher interest rates is low for developers as interest account for a minority of overall development costs. The TDSR framework provides safeguards against the indirect affordability impact. 

• Developers: Analysis of peak and trough P/B valuations implies attractive 6:1 reward-to-risk proposition. 

• We believe the market has over-discounted the negative prospects for the residential segment by pricing in a 40-50% correction in property prices. 
• We expect a healthy 10-15% correction (from the peak) in property prices beyond which prices should trend in line with GDP growth (1-3%). Developers should rally once there is reasonable indication that prices are unlikely to correct more than 12-15% on average. 
• The key re-rating catalyst will be demand-side policy easing by the government. We prefer deep-value and diversified developers with City Developments and Wing Tai Holdings as our picks. 

• REITs: We have taken a fresh look at Singapore REITs’ valuations as observed yields ignore forex risks and optimal gearing levels. 

• We have levelled the playing field for REITs by adjusting for forex, gearing and volatility. 
• Our top picks - Ascott REIT, CapitaLand Commercial Trust and Mapletree Logistics Trust - offer the best risk-adjusted return potential under our coverage. 
• Regional yield spreads also remain the most attractive for Singapore REITs with upcycle spreads indicating 30% upside potential.

TOP PICKS 

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-30

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