Singapore Property - Maybank Kim Eng Research 2016-04-19: Implications of lower interest rates

Singapore Property - Maybank Kim Eng Research 2016-04-19: Implications of lower interest rates Singapore Property WING TAI HLDGS LTD W05.SI  HO BEE LAND LIMITED H13.SI  CAPITALAND LIMITED C31.SI  CITY DEVELOPMENTS LIMITED C09.SI 

Singapore Property - Implications of lower interest rates 


Raising RNAV-based TPs; CAPL now top pick 

  • We see positive implications on property developers with the recent reversal in benchmark interest rates: 
    1. lower cap rates for properties and higher unit prices for REITs; 
    2. stronger home buying demand; and 
    3. lower borrowing costs for developers could make it easier to finance monetization deals. 
  • We update our RNAVs and raise TPs by 3-9%. 
  • We cut Wing Tai to HOLD as upside appears limited. 
  • While we retain our BUY rating for CityDev, its strong share price performance implies that its upside is now less attractive. Hence, we advocate a switch to sector laggard CapitaLand. 
  • Ho Bee remains a BUY

Lower benchmark interest rates 

  • Benchmark interest rates reversed its uptrend over the past quarter. 
  • The 10Y Singapore government bond yields just 1.92%, which is a significant 96bps off the peak in Sep 2015. Similarly, the 3M SIBOR has corrected by 25bps to 1.00% as rate hike expectations has dampened. 
  • We see the following implications for property developer stocks: 

Implications on developers 

  1. Lower cap rates for properties; higher unit prices for REITs. 
    • The recalibration of benchmark rates implies that cap rates for physical property assets could stay low despite the difficult physical market outlook. Hence, we lower our cap rates assumptions for Singapore commercial properties by 25bps to 3.75-4.00% for office and to 5.25- 5.50% for retail. 
    • Similarly, prices of yield assets, such as REITs, could also see some support. 
    • We raised our TPs for REITs recently to reflect lower target yields (note) and reflect the changes to developers’ RNAV accordingly. 
  2. Stronger home buying demand. 
    • We expect mortgage rates to fall together with the lower SIBOR. This implies that home buying demand will be supported and prices could stay resilient despite the market oversupply. However, it also implies that property cooling measures will stay for longer as the government will be cognizant not to stoke a rebound in home prices by lifting measures too early. 
    • We lift residential prices in our RNAVs by 0-7%. 
  3. Lower borrowing costs for property developers could make it easier to finance monetization deals. 
    • Bond yields for major developers have also corrected substantially in recent months. Asking yields for CapitaLand and CityDev’s bonds due in 2020 have corrected by c.50bps from their respective peaks in Sep 2015. 
    • The lower borrowing costs also imply that it would be easier to finance deals to monetize assets. 

Sanity check post share rallies; CAPL now top pick 

  • We update our RNAVs to reflect the changes highlighted above and raise our TPs by 3-9%. 
  • With limited upside for Wing Tai, we cut our rating to HOLD. 
  • Our BUY ratings for CapitaLand, CityDev and Ho Bee remain intact. 
  • While we continue to like CityDev as a proxy to asset monetization theme, we now see smaller upside for the stock following substantial outperformance over the past month. We advocate a switch into sector laggard CapitaLand, which is now our top sector pick. 

CapitaLand (CAPL SP) 


Sector laggard; Top pick RNAV updates; TP up to SGD3.95 

  • We raised our RNAV to SGD5.00 from SGD4.88 to incorporate the following changes: 
    • Higher valuation of CCT and CMT using our revised TP of SGD1.40 (from SGD1.25) and SGD1.97 (from SGD1.66) respectively (note) is the key source of upside. 
    • Raised Singapore home price assumptions by 0-7% for unsold inventories as the pace of decline may be smaller than our initial estimates. However, the impact is minor due to its small exposure. 
  • Consequently, our TP is raised to SGD3.95 from SGD3.83. Maintain BUY. 
  • CAPL is now our top sector pick. 

City Developments (CIT SP) 


Best proxy to monetization theme RNAV updates; TP up to SGD9.84. Maintain BUY 

  • We raised our RNAV to SGD11.94 from SGD11.39 to incorporate the following changes: 
    • We lowered the cap rates used in our valuation of the commercial assets by 25bps to 3.75-4.00% for office and to 5.25-5.50% for retail. 
    • Raised Singapore home price assumptions by 0-7% for unsold inventories as the pace of decline may be smaller than our initial estimates. 
    • Updated the market value of City e-Solutions and M&C to HKD2.74 (HKD1.50) and 445pence (from 420pence) respectively. 
  • With better disclosures for its overseas projects, we apply a smaller 15% discount (previously 30%) in deriving our TP. 
  • Consequently, our TP is raised to SGD9.84 from SGD9.04. Maintain BUY. 

Ho Bee Land (HOBEE SP) 


Tight cap rates for commercial assets to support valuations RNAV updates; TP up to SGD2.47. Maintain BUY 

  • We raised our RNAV to SGD3.94 from SGD3.77 to incorporate the following changes: 
    • We lowered the cap rates used in our valuation of its commercial assets by 25bps to 4.00% for office and to 5.25-5.50% for retail. 
    • Sentosa properties are now valued at SGD1,650 psf from SGD1,600 psf. 
  • Consequently, our TP is raised to SGD2.47 from SGD2.33. Maintain BUY. 

Wing Tai (WINGT SP) 


Limited upside RNAV updates; TP up to SGD1.93. D/G to HOLD 

  • We raised our RNAV to SGD2.29 from SGD2.22 to incorporate the following changes: 
    • We lowered the cap rates used in our valuation of the commercial assets by 25bps to 4.00% for office. 
    • Raised Singapore home price assumptions by 0-7% for unsold inventories as the pace of decline may be smaller than our initial estimates. 
    • Updated the market value of Wing Tai Malaysia and Wing Tai Properties to MYR1.21 (from MYR1.15) and HKD4.41 (from HKD4.25) respectively. 
  • Consequently, our TP is raised to SGD1.93 from SGD1.86.



Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-19
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 1.93 Up 1.86
BUY Maintain BUY 2.47 Up 2.33
BUY Maintain BUY 3.95 Up 3.83
BUY Maintain BUY 9.84 Up 9.04


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