HOCK LOCK SIEW

Time to switch out of developer stocks?

However, despite slower developer sales in June, some brokerages have continued to issue "buy" calls on property counters

Fri, Jun 15, 2018

Lynette Khoo


SUBDUED sales at the recent launch of two condominium projects in Serangoon, in the north-east of Singapore, have stoked concerns that buying momentum may be running out of steam. But there are others who expect the momentum to pick up again after the typical lull period of June, which coincides with the school holidays.

Depending on which camp equity investors fall into, they could either see this as a time to switch out of residential-centric property stocks or to accumulate on recent share price dips.

Should investors start pricing in the risk of slower sales ahead or anticipating a pick-up in buying momentum and prices from here?

If analyst reports are of any guide, many are still keeping "buy" calls on developer stocks or initiating "buy" ratings on mid-cap developers with substantial residential landbank here.

But at least one analyst, JPMorgan's Brandon Lee has flagged a preference for less residential-focused developers such as CapitaLand and Frasers Property since a few months ago on concern over potential market froth and the risk of more cooling measures in the second half of this year.

Some investors have taken profit from the strong run-up in developer stocks last year. Developer stocks have underperformed the Singapore benchmark Straits Times Index (STI) year-to-date, and are trading at 0.8 times price-to-book on average, based on Bloomberg data.

Stocks that are most exposed to the residential market here - including City Developments Ltd (CDL), Oxley Holdings, UOL Group and Bukit Sembawang Estates - have been trending down this year.

A slow start in the number of property launches by developers this year has done little to convince investors who are looking for hard evidence of strong execution in property sales. In the first four months of this year, developers moved over 3,000 units in first four months, fewer than the 5,972 units in same period last year.

While this is largely attributable to developers holding back their launch units to capitalise on higher prices later on, some investors are still sceptical of a price recovery and may be waiting for firmer price and volume recovery, says Vijay Natarajan, RHB Research Institute's property and Reits analyst. "The second leg of rally in property stocks might come after the confirmation of recovery."

It would seem that current market conditions remain conducive for the recovery to sustain. As at end of Q1 2018, developers' total unsold inventory with planning approvals, including executive condominiums, stood at 26,116 units, still well below the average 34,755 units in the last decade.

While there is another huge launch pipeline of close to 25,000 units without planning approvals that are ready for launch this year or the next, developers may not face massive unsold units if they can accelerate their sales pace.

If we assume that developers sell an average of 14,000 per year (below the annual average 14,580 units in the past decade) while the government continues to release an average 5,500 residential units in the GLS programme each year, developers' unsold inventory by end-2019 would still be well below the 10-year average of some 35,000 units.

In the near term, residential buying demand will enjoy a boost from an en bloc fever that has displaced close to 6,700 households since 2016, who are flushed with S$18 billion of sales proceeds.

With developers selling more than they launch each month since April 2017, it would appear that pent-up demand has been strong. Analysts are projecting double-digit growth for private home prices this year, following the steeper-than-expected 3.9 per cent rise in prices in the first quarter. But most market watchers would concede that the outlook after these two years will become more clouded.

Unfazed by slower developer sales in June, some brokerages have continued to issue "buy" calls on property counters.

Maybank Kim Eng initiated "buy" call on Oxley Holdings on June 1, expecting successful launches by Oxley in Singapore to narrow its discount to revalued net asset value (RNAV). It also expects the developer to capitalise on the office upcycle to create value from a repositioning of its newly-acquired Chevron House.

CGS-CIMB analyst Lock Mun Yee maintained an "add" rating on UOL Group on Tuesday, after seeing the take-up rate at the recently launched Amber 45 rising to around 65 per cent. UOL is slated to release The Tre Ver (former Raintree Gardens site), a 729-unit condominium project in Potong Pasir in the third quarter.

Last week, Deutsche Bank maintained a "buy" call on CDL, which is currently trading at over 30 per cent discount to Deutsche Bank's RNAV forecast for fiscal 2018 and one time price-to-book. "With the sector still in its early up-cycle, we see this an attractive entry level. The concern over policy measures as price recovers would be a major risk that could cap the stock's performance," its analysts say in a note.

Indeed, if developers are too successful in raising prices for new projects such that prices shoot up too quickly, that could stoke the government into action. But with a number of upcoming launches located close to one another, developers may also have to be calibrated in their pricing.

Collective sale sites and government land sales since 2017 have generated over 4,800 units available for launch in District 19, including the recently launched The Garden Residences and Affinity At Serangoon. There are another 1,200 units that can be launched at the former Shunfu Ville site, which can also be seen as a competing product targeting the mass-market segment.

With several projects in the Potong Pasir/Woodleigh area likely to start selling in the second half of this year, it remains to be seen if developers will choose to compete head-on or pace out their launches.

Market conditions are still working in developers' favour, albeit a gradual normalisation of interest rates being underway. Apart from prevailing demand and supply, developers' ability to sell well and price their projects at their projected premiums will still hinge on the project location and quality.

Those property counters that could enjoy a re-rating are probably the ones who will soon turn anticipation into reality with strong property sales at a good margin.