CFA Society Singapore
SINGAPORE (Jan 18): UOB Kay Hian is maintaining “overweight” on Singapore’s property sector with a preference for stocks with exposure to the residential, hotel and office segments as the market heads deeper into the upcycle.
In a Friday report, lead analyst Vikrant Pandey shares some of his key takeaways from the Built Environment & Property Prospects Seminar 2018, which took place last week and saw industry experts echo UOB’s bullishness in the residential and office segments.
This included a strong pick-up in sales momentum and pricing in the local residential segment, led by the luxury market showing even earlier signs of recovery beginning in 2016.
In particular, Pandey believes the residential recovery has legs, fuelled by pent-up demand in the market.
“Since the implementation of the Total Debt Servicing Ratio (TDSR) in 2Q13, market impatience has been building. While the average length of a down cycle has been 8.4 quarters (between 1975-2011), Savills noted that this one was an extended one with 14 quarters of consecutive price declines. During this time, the gap between URA PPI and liquid assets per household has also grown, and is pent-up, and somehow has to be released,” notes the analyst.
Pandey says that other concerns such as the effect of interest rate hikes subduing the residential recovery are also likely to be “overblown” – as mortgagors can easily switch over from floating to to fixed rate schemes which have been benign, in his view.
As for the office segment, Pandey highlights an increase in “shadow spaces” – leased by empty spaces due to downsized companies with more leased space than they need, or tenants stuck in long-term leases with more space than they need – and says the excess of such spaces may pose competition going forward, especially for older buildings.
Highlighting the resilience of office REITs in the last down cycle, the analyst observes that the “stickiness” of the business which has helped boost earnings resilience could be due to some tenants not having enough capex to move out, while others may be staying put due to the staggering lease expiry.
While demand for industrial property was mainly driven by the burgeoning electronics segment over the past year, Pandey points out that a noticeable increase in industrial stock has led to declining occupancies. “The upcoming supply is expected to peak in 2018 and decline over the next few years, which hopefully will help to prop up occupancies going forward,” he comments.
A bright spot in the industrial segment is the Business Park sub-segment, he adds, which is seeing an increase in rentals amid the lack of new supply over the last two years.
Meanwhile, the analyst expects construction costs to bottom out in 2018.
“The Building and Construction Authority’s (BCA) Tender Price Index appears to have bottomed in recent quarters, likely on the back of imported inflation caused by higher steel prices, but any further increase could also be restrained by competition from the current excess building contracting capacity,” says Pandey.
Overall, UOB’s top “buy” picks are developers City Developments (CDL) and Wing Tai with target prices of $14.03 and $2.78, respectively, as well as real estate trusts CDL Hospitality Trusts (CD REIT), CapitaLand Commercial Trust (CCT) and Ascendas REIT (A-REIT) with the respective target prices of $1.88, $2.09 and $3.05.
As at 4.15pm, shares in CDL and Wing Tai are trading at $13.19 and $2.35. Units in CD REIT, CCT and A-REIT are trading at $1.81, $1.92 and $2.76 respectively.