SINGAPORE (July 23): Expected slowdown in demand for Singapore’s residential properties due to the recent cooling measures and gloomy near-term outlook for UK projects from slow progress of Brexit negotiations have forced RHB to downgrade City Developments to “neutral” from “buy” with $10.50 target price.

From RHB’s latest estimates, CityDev has unsold residential inventory in Singapore of around 3,300 units, with Singapore residential segment accounting for 25% of its RNAV estimate. RHB expects the latest round of property cooling measures to adversely impact margins at its developments, and have trimmed its selling price assumptions by 5-10%.

“Projects likely to see maximum impact are Amber Park en bloc, Handy Road, West Coast Vale site and Sumang Walk executive condominium (EC) – these were purchased at higher prices, compared to neighbouring sites in anticipation of a recovery,” says analyst Vijay Natarajan in a Monday report.

As at 1Q18, Singapore accounted for 51% of assets and 62% of revenue. Other key markets include UK which accounts for 12% of assets, China which accounts for 10% and the US with 8%. While management has been actively trying to diversify geographical presence, Singapore remains the core investment market. As such, RHB believes the latest policy measures will cool investors’ sentiment towards the stock.

Meanwhile, the outlook for Millennium & Copthorne Hotels (M&C), CityDev’s 65%-owned listed subsidiary, is positive with strong global economic growth providing tailwind for the hospitality sector. M&C plans to allocate a significant amount for capex for existing hotels for product improvement and maintenance. While CityDev did not succeed in the recent privatisation bid, management remains optimistic of prospects and will look at increasing a stake, if the right opportunity arises.

Finally, while net gearing -- excluding revaluation surplus -- is at a historical low of 10%. The healthy balance sheet shields it from any adverse impact from rising interest rates and gives ample debt headroom of more than $5 billion for acquisitions. However, with policy tightening and challenging market conditions for acquisitions in its core markets, RHB sees limited opportunities to deploy sizeable capital at the moment.

“We have lowered our RNAV to $16 from $16.69, after lowering our price assumptions for Singapore projects and mark-to-market listed M&C portfolio. We also raised our RNAV discount to 35% from 10%, as we expect sentiment towards the Singapore residential property market to be negatively impacted,” says Natarajan.

Shares in CityDev are down 5 cents at $10.01 or 16.4 times FY18 forecast recurring earnings.

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