Second-liner property stocks now in play

Several small- and mid-cap property counters hit multi-year highs this week after URA figures hinted at market recovery

Oct 06, 2017

Lee Meixian

SMALLER property developers and even some construction players have been the biggest beneficiaries on the stock market following Monday's official estimates suggesting that the property market is finally turning around after four years.

Several of them, such as Oxley Holdings, Tuan Sing, Chip Eng Seng and Wing Tai Holdings, have even hit multi-year highs this week. From last Friday, Oxley has gained 14.7 per cent, closing at S$0.625 on Thursday at a three-year high. Tuan Sing has risen 8 per cent to close at a two-year high of S$0.405.

This stands in stark contrast to most of the big boys in the property sector which have hardly moved as much, mostly improving just 0-2 per cent in share price. Only CapitaLand outpeformed its big-cap peers with a 3.4 per cent increase this week.

But analysts say this was expected, as most of the big-caps had already chalked up increases at the start of this year when the housing market saw its first signs of renewed life.

OCBC Investment Research's senior investment analyst Eli Lee said: "As the housing recovery theme gained momentum over the last six months, investors gravitated towards large developers, such as City Developments and CapitaLand. This made sense as these were top-of-mind names and also, given their substantial scale and strong balance sheets, represented a safer profile in a still uncertain recovery."

The market kept chasing up these stocks as the recovery story grew. A valuation gap gradually opened up between the blue-chips and smaller developers.

He added: "Earlier this week, when the housing rebound became apparent with a positive URA (Urban Redevelopment Authority) flash estimate for home prices in Q3 2017, investors began to switch their focus to laggard plays - smaller and mid-sized developers that were more attractively priced and also construction players which could benefit from a residential construction boom."

Mr Lee added that due to these counters' smaller scale and often less diversified business models versus blue chips, many of these laggards actually enjoy a larger exposure (by percentage of their overall portfolio) to the Singapore residential sector.

In contrast, some of the listed property juggernauts here have extensive and diversified portfolios spanning commercial to hospitality to residential.

The latter segment could make up just 20-30 per cent of their portfolio value, which makes them not the best proxies for a housing recovery.

Investors are now looking for stocks that would enjoy the biggest impact as home prices rebound.

So is it a good time to get into small- and mid-cap property plays?

Views are divided. RHB Research analyst Vijay Natarajan thinks that the smaller-cap property counters probably still have room to run up another 10-15 per cent in share price.

Derek Tan, DBS senior vice-president for group equity research, warned however that some of these mid-caps could be "value traps". He has doubts that some of them will perform.

"The large-caps have done well, so now we see rotational interest into the more mid-cap names, but I caution that sometimes some of these mid-cap names can remain as value stocks for a long time," he said.

By the logic that the market goes in cycles, it may only be a matter of time before the large-cap developers surge again - perhaps at the next milestone when there is greater affirmation of a private home price recovery in 2018.

By Mr Natarajan's definition, this would mean anything exceeding a 2-5 per cent price increase in 2018.

He said: "Whenever there is a big property cycle, it's always the bigger players which benefit first, then the smaller players as the investors move down the spectrum and look at the small-to-mid-cap space where they can find value."