Published February 13, 2007

Property stock values may be stretched

Sector is trading at 52% premium to net asset value: Credit Suisse


DEFYING current market bullishness on the property sector, Credit Suisse has warned that property stock valuations may be stretched.

According to reports by the bank, the sector is trading at a 52 per cent premium to net asset value (NAV), compared with a premium of 11-31 per cent in previous peaks.

However, Credit Suisse acknowledges that its call could be wrong if the flow of liquidity in the sector lasts longer than expected.

The bank has raised its target price for CapitaLand to $5.78. This is, however, about 20 per cent lower than the counter's closing price yesterday of $7.30. Its target price for City Developments (CityDev) was also bumped up - to $12.34 - though this is about 12 per cent below the counter's closing price yesterday of $14.

Keppel Land was singled out as top pick because it is the best proxy to the preferred office sector.

Credit Suisse believes office rents will continue to increase until 2010, and has raised its prime grade-A office rent targets by 25-30 per cent.

It reckons office rents will reach $11.50 per square foot (psf) this year, exceeding the previous peak of $10.40 psf back in 1996.

As new supply is likely to enter the market only in 2010, office rents should peak in 2009 at $13.30 psf, it feels.

Among developers, Keppel Land has the greatest NAV sensitivity to higher office rents, says Credit Suisse.

Keppel Land's NAV will rise 8.6 per cent for a 10 per cent rise in office rents, or more than double that of the next developer CityDev, believes Credit Suisse.

It has raised its target price for Keppel to $8.68. This represents an upside of 7.2 per cent from the counter's closing price of $8.10 yesterday .

In the residential sector, Credit Suisse believes the middle to high-end segment will continue to lead the increase in prices by a further 10-15 per cent, and sees 5-10 per cent upside for the mass market. Prices in markets could increase a further 5 per cent next year.

However, it sees downside risks for the residential sector, such as deferred payment schemes and an increase in unsold supply of 20-42 per cent from next year as new property comes on-stream as a result of en bloc transactions last year.

Credit Suiise is also conservative on second-line property stocks. Wing Tai, which closed at $2.72 yesterday, still has a target price of $2.42, while Allgreen Properties, which closed at $1.64, still has a target price of $1.33.