SINGAPORE (Mar 12): OCBC is optimistic on the operational and earnings outlook of big Singapore developers with strong recurring income streams from diversified investment properties.

OCBC recommends investors skew their real estate equity portfolio bias towards Singapore developers or switch out of S-REITs to developers.

"We believe the Singapore residential market has now entered a nascent stage of a potential multi-year recovery, amid a firm economic backdrop and improving buyer sentiment," says Andy Wong Teck Ching in a Monday report.

Although the share prices of both S-REITs and Singapore developers performed well during the last major rate hike cycle from Jun 2004 to Jun 2006 and the current ongoing cycle since Dec 2016, Wong notes that developers outperformed S-REITs on both occasions.

"We expect this trend to continue," says Wong.

And although domestic benchmark rates for mortgages are projected to increase, the anticipated recovery in housing rentals ahead will also help to alleviate the pressure on rental carry from higher rates.

In addition, the sector is still trading at a large discount to NAV and also against historical averages despite the robust outlook for developers.

Wong notes that during property bull-cycles, developers have traded at a premium to their NAV. During the last upcycle in 2010, the forward P/B ratio of the FTSE ST Real Estate Holding and Development Index (FSTREH) reached a peak of 1.13 tomes, while the current forward P/B ratio stands at 0.69, or 0.7 standard deviations below the 10-year average.

The analyst therefore sees room for further re-rating in the sector and expects the discount gap to narrow as residential prices continue its upward trajectory. On the contrary, the S-REITs sector is trading at relatively unattractive valuations, with a forward P/B ratio of 1.04 times, or 0.7 SD above its 10-year mean.

"In conclusion, we believe developers offer a more attractive risk-reward proposition than S-REITs," says Wong.

OCBC is "overweight" the Singapore property sector, with a positive bias towards the residential sector. Its preferred picks are City Developments with fair value of $15.91, UOL Group with fair value of $10.63 and CapitaLand with fair value of $4.26.

As at 11.59am, shares in CityDev are trading 10 cents higher at $13.46; shares in UOL are trading 2 cents higher at $8.77 while CapitaLand shares are trading 5 cents higher at $3.65.