Singapore Property & REITs - DBS Research 2016-01-08: Time for developers to shine

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Singapore Property & REITs - Time for developers to shine

Singapore property market remains in correction; downside risk for cyclical sub-sectors.
Developer top picks: CAPL, CDL and FCL as valuations are too cheap to ignore.
S-REIT top picks: A-REIT, FCT, MAGIC and CRCT for stable growth amidst attractive yields.

We expect lower prices and rentals across most major real estate sub-sectors on the back of a more modest economic outlook for Singapore.
Cyclical sectors especially office and hotel sectors, will feel the brunt of the economic slowdown on top of downward pressure from heightened supply completions over 2016-2017.
We believe retail sector to remain resilient with preference for malls with sizable scale in the suburban space.

We believe that it is time to re-look at property developers, now trading at an attractive 0.7x P/Bk which is close to cyclical troughs (vs normalized 0.9x P/bk).
While residential prices remain on a downward trend, we see limited negative impact for most developers given exposure to residential sector is at a manageable c.8% of RNAVs.
For property developers’ under our coverage who have stayed nimble in trimming their exposure in Singapore residential market, being selective in and diversifying exposures to overseas markets (mainly Australia, London and Europe) will see higher ROEs from 2016 onwards.
A wildcard will be potential unwinding of government policies, a scenario which we believe are likely to when prices drop by 13%-15% from the peak (vs currently 8% from the peak).
Our top developer pick is CAPL, City Dev and FCL for their improving ROEs, diversified earnings base respectively and conservative balance sheets.

SREITs currently offer forward yield spreads of 4.0%. While it is above 10-year historical average, we believe it is fair given the uncertainty stemming from FED rate hike momentum over 2016 (DBS economists expect a more aggressive 4 hikes vs consensus’ 2- 3 hikes in 2016).
Moreover, with potential downside risk from a further slowdown in economic growth outlook, our preference is to position in resilient sectors and selected offshore-focused S-REITs with continued ability to deliver consistent growth.
We like A-REIT, FCT, MAGIC and CRCT.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-08

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