Battle of Singapore property plays in a risk-averse environment

SINGAPORE (Dec 6): Maybank Kim Eng is maintaining a “neutral” stance on Singapore’s property sector while positioning defensively at the lower end of the risk spectrum, expressing a preference for exposure to stable platforms over trading portfolios.

“With another challenging year ahead for the physical market, we struggle to turn more positive on property counters despite cheap valuations,” comments analyst Derrick Heng in a Monday report.

“We prefer exposure in office REITs [over developers] ahead of a potential bottom in early 2018. Office REITs trade at a discount to their underlying office assets despite strong institutional interest in office properties and high replacement cost as evidenced by elevated land prices,” he explains.

Heng has therefore picked CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) at the respective target prices of S$1.81 (RM5.66) and S$1.21 as their preferred stocks for sector exposure. This is because the analyst believes they are “well-placed to ride through the storm” with their strong weighted average lease expiry (WALEs) and low lease expiry profiles in the near term.

Conversely, Maybank projects that all property developers will not meet their cost of capital in the year ahead, and the market is therefore “rightly bearish” in pricing them below book, as intense competition for land could weigh on margins.

Heng thinks developers in such an environment could outperform should they possess “stable streams of recurring income and good development earnings visibility”. As such, UOL Group has been selected as Maybank’s top developer pick at a target price of S$7.39.

“We expect almost every property asset class to remain oversupplied in 2017. Occupier market remains weak as population growth and job creation slows,” says Heng, who expects residential sales volumes to stay weak due to persisting cooling measures.

He also foresees that Grade A office rents will continue their decline, albeit at a slower pace, while capital values should “hold firm” on tight transactional cap rates and high replacement cost of office properties.

“A full sector re-rating may not materialise until fundamentals improve,” he concludes.

As at 11:25am, units of CCT and KREIT are trading at S$1.52 and S$1.04 respectively, while shares of UOL are trading at S$6.06. — theedgemarkets.com.sg