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CapitaLand remains RHB's top pick, as the brokerage upgrades the real estate sector to 'overweight'

Felicia Tan
Felicia Tan • 2 min read
CapitaLand remains RHB's top pick, as the brokerage upgrades the real estate sector to 'overweight'
While Covid-19 has affected the outlook of Singapore’s residential sector, RHB analyst Vijay Natarajan believes the market might see a price correction instead of a collapse.
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SINGAPORE (June 2): While Covid-19 has affected the outlook of Singapore’s residential sector, RHB analyst Vijay Natarajan believes the market might see a price correction instead of a collapse.

This is due to low interest rates, lesser room for developers to cut prices on limited margins, and sufficient policy buffers, he says in a May 29 report.

Over the last 10 years, the Singapore government has been trying to keep the republic’s property market stable with several rounds of cooling measures including higher Additional Buyer’s Stamp Duty (ABSD) rates and tighter loan limits. The most recent measure was imposed on July 2018.

However, owing to the recent pandemic, the government has announced temporary relief measures such as extending ABSD deadlines by six months. Looking ahead, Natarajan believes that the government is likely to further moderate land supply via government land sales, as well as a possible extension to ABSD remission deadlines, or even lowered ABSD rates for locals.

With higher land costs due to competition and increased construction costs, developers will find that there is less room to cut prices. Natarajan foresees more soft discounts arising from developers instead of outright cuts.

Key interest rates, which are currently at historic lows due to the injected liquidity from the central bank, are likely to remain low owing to the declined SIBOR rate.

Buying demand in the market over the past few years have been largely local-driven, with limited speculative buying; the average loan-to-value (LTV) ratios of housing loans have fallen to 49% in 3Q19, compared to the high of 54% in 2017.

The number of unsold units declared in 1Q20 has declined to 31,099 units, compared to 1Q19’s peak of 38,710 units, and overall vacancy rates have dipped to 5.4%.

Overall, Natarajan expects a 5-10% correction in property prices, and a 30-40% decline in private residential volumes for 2020.

With developer stocks trading at an attractive 40-60% discounts to RNAV, Natarajan has upgraded the real estate sector to “overweight” from “neutral”.

He has “buy” calls on APAC Realty, CapitaLand, City Developments, and Oxley, with target prices of $0.60, $4, $9.50, and $0.29 respectively. CapitaLand remains his preferred pick with a target price of $4.

As at 11.41am, APAC Realty shares are changing hands 2.7% up at 38.5 cents; CapitaLand shares 2.4% up at $3.04; City Developments 1.1% up at $8.18; and Oxley flat at 24 cents.

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