Navigating Singapore > Property Overall - CIMB Research 2017-12-13: Stay In The Game


Property - Overall - Stay In The Game

Overweight on Property Developers, Neutral on REITs 

  • We see 2018 as a turnaround year for the physical property sector in Singapore as it moves past the wall of oversupply brought about by over-investment in prior years. Fuelled by broadening economic growth and reduced supply drags, private residential prices should revert to a firmer uptrend, and office rents and hotel room rates should recover, in our view. 
  • That said, while we remain positive on the sector, we think the outperformance of property developers and S-REITs in 2017 may have priced in some of this recovery and hence we would be relatively more stock selective at this point.
  • We maintain our Overweight stance on property developers as we believe the sector may still have legs to run, underpinned by attractive valuations and robust demand. The sector is now trading at 32% discount to RNAV, which is still below its long-term mean discount. 
  • We project the residential sector to be propelled by still-strong developer reinvestment activities, aided by strong balance sheets, as well as the resumption of asset turn through more new launches. We expect end-buyer demand to remain robust, aided by new household formation and enbloc replacement demand. 
  • As office rents recover and negative reversion spread narrows, improved earnings outlook will also underpin the developers’ office portfolio value, thus supporting RNAV growth.
  • We expect S-REITs earnings to resume its northward trajectory on organic and inorganic prospects from 2018, based on our projection of a 2.2% sector DPU growth. Furthermore, with lower cost of capital, S-REITs are poised to tap new inorganic growth prospects, which have not been factored into our existing estimates. However, given the sector's FY18 yield of 5.6%, normalising to slightly above mean, and the prospect of incremental rate hikes, we retain our Neutral rating for now.


Residential – Spinning The En-bloc Wheel Of Fortune 

  • We anticipate the share price performance of property developers to be fuelled by strong end-buying demand momentum while investments into new land bank and deployment of balance sheet capacity continue to provide uplift to RNAVs.
  • Historically, the sector's share price outperformance, as evidenced by the FSTREH index, tracks fairly closely to residential sales momentum and take- up rates. Our correlation back-test, using annual sales, take-up rates and launch data since 1999, show that property stocks are most highly correlated to take-up rates, at 79% correlation, followed by sales volume at 68% correlation, and a much slimmer 59% for new launches. 
  • Based on our expectation of 10,000 units of new launches and volume demand of 11,000-12,000 for 2018, we project take-up rates to remain high in 2018. As such, we believe property developer stocks would continue to be in demand. Our top picks for developers are UOL (Add, TP S$9.62) and City Dev (Add, TP S$13.15), both of which have upcoming Singapore residential launches that could benefit from the ongoing buying momentum.

Office Continues To Shine 

  • Amongst the various property sub-sectors, the office segment shows the most supportive supply/demand dynamics for a rental recovery. New supply over 2018-2020 should average 1.2m sq ft annually, in our estimate. However, CBD supply would be much lower at 0.65m sq ft p.a. over the same period. This will be supportive of CBD office rents. 
  • We project office rents to rise by up to 10% in 2018, largely led by centrally located office properties. As the share prices of office S-REITs have run up significantly, we prefer to have office exposure via landlords such as UOL. We like KREIT’s (Hold, TP S$1.20) premium office portfolio and would be a buyer on share price weakness.

Upside Risk To Hotel Recovery 

  • We think there is upside risk to the hotel recovery story. The hotel industry was in the doldrums over the past three years with RevPAR declines even as tourist arrivals continued to grow. This was partly a function of changing profile of tourists as well as higher than average supply of new hotel rooms coming onstream over 2015-2017. 
  • Looking ahead, we expect new hotel room completions to decline to 1.7% of total stock in 2018 (vs. an estimated 4% in 2017). Meanwhile, visitor arrivals continue to be healthy -- we forecast growth of 3% in 2018. Against this demand and supply backdrop, we have raised our RevPAR projections to +5% for 2018 (against our previous assumption of +3%).
  • We believe the scope for rate recovery could be more meaningful towards 2H18. FEHT (Hold, TP S$0.69) is our preferred pick in the sector as it had been a relative valuation laggard. Potential acquisition of the Oasia Hotel Downtown could provide more upside to our current earnings estimates and target price for FEHT.

PROPERTY DEVELOPERS - A year of reinvestment and execution 

  • If 2017 can be seen as a year of reinvestment for developers, then 2018 would be a year of reinvestment and execution as developers begin to asset turn their land inventory, in addition to buying land. 
  • We think it will be another year of outperformance for property stocks, particularly those with launch-ready projects that could be rolled out over the next 12 months.

Outperformance of property developer stocks...

  • Property stocks have been on the rise this year, clocking a 28.7% YTD total return against 24.9% for S-REITs and outperforming the 23.3% total returns for the broader FSSTI Index. This was due to low valuations, further fuelled by growing signs of a property market recovery, especially in the office and residential sectors.

... as valuations normalise 

  • Property stocks are currently trading at a 32% discount to RNAV, still at midway between mean and -1 s.d. discount to mean. However, we note that RNAVs have been adjusted over time. 
  • To assess how much of the stocks’ performance were due to valuation normalisation, we compare current share prices to the trough RNAV in Jul 2016. Comparing these two points shows us that property stocks would have been trading at a 21% discount to the Jul 16 RNAV i.e. if RNAVs had not changed. This is at the long-term mean discount level and indicates that much of the run-up in share prices from Jul 16 to Dec 17 was due to a normalisation to long-term valuations. 
  • In terms of price-to-book ratio, developers are trading at 0.87x P/BV.

Improved earnings visibility from extending land bank 

  • Developers are expected to enjoy improved earnings visibility over the next few years thanks to the recent landbanking exercises. 
  • After the recent bout of buying, we believe some developers should have enough stock for an estimated 1-2 years’ worth of new launches, i.e. City Dev (Add, TP S$13.15), UOL (Add, TP S$9.62), Oxley Holdings (Non-rated, S$0.615), and Chip Eng Seng (Non-rated, S$0.935). This would likely enable them to leverage on the rising residential prices and extend their earnings visibility when these projects are launched. This could likely act as share price catalysts.

Balance sheets remain robust 

  • The net debt to total equity ratios of property developers remain well below 1x as at end-3Q17. We believe that even after factoring in the remaining funding costs for land acquisitions, their net gearing levels should likely remain healthy. This puts them in a good position to continue reinvesting for growth.


  • We retain our preference for developers (Overweight) over S-REITs (Neutral).
  • Against the backdrop of a Singapore property market recovery, we anticipate developers with more Singapore residential and commercial exposure to continue outperforming. 
  • Our top developer picks are UOL and City Dev for Singapore residential exposure with catalyst coming from new upcoming launches. 
  • For S-REITs, we like FCT and FLT and take a medium-term view on FEHT in view of its potential acquisition upside surprise.

UOL (Rating: Add, Target Price: S$9.62) 

  • UOL is our top pick among developer stocks. Its residential and commercial property portfolio is predominantly focused in Singapore. 
  • UOL has become a major office landlord post consolidation of UIC’s earnings. Together, they own a total of 5.69m sq ft of office and retail space in Singapore, located in both the CBD and city fringe areas. This put the group in a good position to benefit from the office sector recovery. 
  • On the residential front, it has c.729 attributable residential units that could be launched from 2018. These sites were acquired mainly in 2H16 before the run-up in land prices. 
  • Our TP of S$9.62 is pegged to a 20% discount to RNAV. Potential corporate exercise for its 49.8%-owned associate UIC may provide additional catalyst for share price performance.

City Developments (CIT, Rating: ADD, Target Price: S$13.15) 

  • CIT is the bellwether property stock in Singapore. It is trading at an attractive 24% discount to RNAV of S$16.44. 
  • The group has locked in c.S$1.76bn worth of total residential sales in 9M17. It plans to launch three projects totaling 1,175 units in 1H18. Recent acquisition of the Amber Park en-bloc site has potentially increased its total residential inventory to c.1,800-1,900 units. In Dec 2017, the group announced an offer to buy the remaining 34.8% of Britain's Millennium & Copthorne Hotels (M&C) it does not already own for £6.20/share. When completed, we anticipate the deal to further accrete CIT’s RNAV given that the offer price is below M&C’s book value. 
  • CIT's balance sheet remains strong with debt-to-equity ratio of 0.13x as at end-3Q17 and should remain low even after factoring in the funding required to complete the M&C and Amber Park deals. 
  • Our target price of S$13.15 is pegged to a 20% discount to RNAV.

Frasers Centrepoint Trust (FCT, Rating: ADD, Target Price: S$2.38) 

  • We continue to like FCT for its exposure to the more stable non-discretionary retail segment. We believe the trust will continue to deliver robust earnings growth as it has moved past the peak of asset enhancement initiative (AEI) at Northpoint North Wing. The latter is 95% leased, with average rents tracking 9% higher post renovation. 
  • The stock is trading at projected 5.6-5.7% FY18-19 DPU yield, based on our estimates.

Frasers Logistics and Industrial Trust (FLT, Rating: ADD, Target Price: S$1.20) 

  • We continue to favour FLT as one of our core REIT holdings. 
  • In addition to exposure to the favourable Australian industrial property dynamics, its ability to tap its sponsor’s Australian development pipeline, in an increasingly low availability environment of prime assets in Australia, would enable it to deliver inorganic growth over the medium term. 
  • The stock is trading at 6.5-6.8% FY18- 19 DPU yield, based on our forecast.

Far East Hospitality Trust (FEHT, Rating: HOLD, Target Price: S$0.69) 

  • FEHT is our preferred pick amongst hotel S-REITs as it is a relative valuation laggard. It is trading at 0.79x P/BV vs. CDREIT and OUEHT's c.1.08-1.13x P/BV. Although currently a Hold, investors with a strong view that an accretive acquisition of Oasia Hotel Downtown could occur soon could add the stock before the fact. 
  • Given FEHT's present low gearing of 32.1% as at end-3Q17, we believe this acquisition could be potentially more debt-funded, thus making it more accretive to bottomline.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-12-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.620 Same 9.620
ADD Maintain ADD 13.150 Same 13.150
ADD Maintain ADD 2.380 Same 2.380
ADD Maintain ADD 1.200 Same 1.200
HOLD Maintain HOLD 0.690 Same 0.690