Singapore Companies
Published November 16, 2006

Property stocks poised for further gains?


THE latest results of major listed property groups for the quarter ended Sept 30 underscore the ongoing recovery in the Singapore real estate sector.

Even CapitaLand, which posted a 38.4 per cent drop in Q3 net profit to $273.4 million because of the vacuum left by CapitaLand subsidiary Raffles Holdings when it sold off its hotels business last year, reported strong earnings growth otherwise.

Eleven major property groups have just posted combined net earnings of $710.5 million for the July-September quarter this year - up 7.3 per cent from the corresponding months last year.

The modest increase reflected CapitaLand's earnings drop.

Most of the 11 painted a rosy outlook. City Developments said it was 'confident (that it will) continue to perform strongly in the next few years', riding on the Singapore real estate market's recovery.

Ho Bee Investments, the dominant developer on the upscale waterfront district of Sentosa Cove, was also upbeat about its earnings outlook for the fourth quarter, as well as for the next three years.

Ho Bee said its bottom line would be underpinned by strong contributions from its residential projects on Sentosa Cove as well as elsewhere in Singapore.

CapitaLand said: 'The long-term outlook for our businesses in Singapore and the other overseas markets remains favourable.'

Property stocks have put on a sparkling performance, with the All-S Equities Properties Index rising 34.5 per cent since the end of June, outpacing the 14.1 per cent gain in the Straits Times Index over the period.

Despite the run-up in property share prices, most analysts are maintaining their ratings for property counters.

In fact, revalued net asset values (RNAVs) are expected to head further upwards, driven by increases in share prices of listed units of property groups as well as continued improvement in values in the physical property market, an analyst for a foreign broking firm said.

The research head of a foreign bank-backed stockbroking house gave an additional reason why property analysts are likely to keep raising RNAVs of listed property groups: 'There has been a compression of property yields in the physical property market, where investors are prepared to buy, say, office buildings at lower rental yields. And if rentals continue to rise, that implies an increase in property values - supporting an upward revision in RNAVs of property groups.

'An additional factor supporting this trend is the fact that long-term interest rates have peaked.'

As property stocks continue to head upwards, analysts can be expected to further raise their RNAV estimates, as they play catch-up again.

'It's a case of the tail wagging the dog,' laments JP Morgan's Christopher Gee.

'The question analysts should be asking is: What are the market implications for underlying property prices arising from the increase in share prices? In other words, how much of the movement in share prices has already discounted future increases in RNAV?'

Based on Mr Gee's estimate, most major counters are currently trading at about 20 per cent premium to his RNAV estimates.

Despite the dizzying gains in property counters, most analysts are holding back from making downward revisions on their recommendations for major property stocks.

'The liquidity which is driving up share prices is very strong and it's risky to downgrade at this time,' said a seasoned analyst.

However, one analyst who is bucking the trend is David Lum of Daiwa Institute of Research, who recently downgraded CapitaLand from 'hold' to 'sell'. He points to negative price triggers on the horizon - if CapitaLand fails to bag the Sentosa integrated resort (IR) site or if the government were to release office sites to help ease the shortage of office space building up on the island. Mr Lum has also had a 'sell' recommendation on CityDev for a while.

'I think that share prices are way above whatever underlying value we want to assign to the business (of property groups),' he says.

But Mr Lum readily admits the risks of making 'sell' recommendations on two property heavyweight counters because 'the momentum is very strong'.

'Sentiment is improving. At some point, it will change - but I don't know when.'