How long will run-up in property counters last?

Analysts advise caution if developers have high exposure to local market

Published on Dec 22, 2012

By Goh Eng Yeow Senior Correspondent, Play of the week

THE contrast could not have been more striking: You couldn't give away property shares in June but since then they have been selling like hot cakes.

Back in the middle of the year, few investors were keen to buy into the developers even though they had fallen by as much as 15 per cent in the space of two months.

But there has been a change of heart. Property giant CapitaLand has surged 37 per cent since July while City Developments has gained 15.4 per cent.

Upmarket developers are on a roll, despite struggling to sell luxury condos.

Wing Tai Holdings has advanced 41.2 per cent and Wheelock Properties has risen 18 per cent over the same period.

One big catalyst for the re-rating is the spate of takeovers sweeping the sector. There is a bidding war under way for Fraser & Neave, which has a huge property portfolio, and a move by businessman Simon Cheong to take his company, SC Global, private.

That spells hope that other property developers languishing from similarly dismal discounts to revalued net asset value may enjoy similar attention.

That raises a key question: Is the exuberance justified?

For a company such as CapitaLand with a big exposure to China, an investor will have to look beyond Singapore's shores to find his answer.

Those who had believed naysayers like Unites States hedge fund manager James Chanos, who said China's hyperactive economy was headed for a crash, would have missed one of the biggest bull runs of the year - the remarkable rally in listed Chinese property plays in Hong Kong. Some are up as much as 80 per cent this year.

The feel-good effect has rubbed off on CapitaLand, as foreign investors switch from developed markets to pour money into property stocks in emerging markets.

Citi Research analyst Oscar Choi noted recently about China property: "The sector's powerful share price re-rating in 2012 is similar to 2009."

However, he cautioned that after such a powerful run-up, the sector may enjoy only moderate upside next year. "We foresee 2013 to be similar to 2010. The physical market should be unexciting. We estimate national sales may only increase 5 to 8 per cent year-on-year."

Property counters with considerably more exposure to Singapore's market are being seen with a strong dose of caution by some analysts.

Deutsche Bank analysts Elaine Khoo and Gregory Lui reported that some local and foreign banks have raised lending spreads on mortgages recently. This means a borrower will have to pay 1.2 to 1.3 per cent interest, instead of 1.1 per cent, on his housing loan for the first year.

"While 1.2 to 1.3 per cent is still low historically, this will erode housing affordability and could adversely affect demand, particularly for the low- to mid-end segment, which is more price-sensitive and dependent on mortgage financing," they added.

It adds to the considerable contradictions some investors are finding about the property sector.

Some developers found their share prices depressed to early 2009 levels during the first half of this year, even though home sales were brisk.

Yet just as their share prices recover, new home sales have slowed considerably, falling by 44 per cent last month from October.

Besides the sluggish demand, there is the worry about the record number of units that will be completed in 2014 and 2015.

"As most of these units are from buyers seeking tenants, there will be pressures on rental yields. If that happens, weaker holders may be tempted to sell out," warned Macquarie analyst Soong Tuck Yin in a report last month.

The run-up in property developers may look too good to last.

[email protected]