Morgan Stanley: Singapore developers undervalued as home prices set to rise, not fall

On Singapore’s National Day, 9 August 2014, helicopters fly the flag toward the National Day Parade.On Singapore’s National Day, 9 August 2014, helicopters fly the flag toward the National Day Parade.

Shares of Singapore’s developers are trading at crisis levels, pricing in home price declines, when instead, residential property should see solid price increases, Morgan Stanley said in a note last week.

“Developers are trading at distressed valuations, pricing in an 8 percent year-on-year fall in home prices in six months’ time. In contrast, we
expect home prices to rise 10 percent by end-2019,” the investment bank said.

It noted that developer shares are down around 18 percent year-to-date, compared with an around 4 percent decline in the Straits Times Index, leaving the sector trading at an around 48 percent discount to revalued net asset value (RNAV), levels last seen in 2009 during the Global Financial Crisis.

The selloff in developer shares came after Singapore’s government implemented a fresh round of property cooling measures in early July.

“We see the recently implemented cooling measures resulting in a deceleration home price inflation, but not causing an actual decline in prices,” Morgan Stanley said. “The measures have also caused en bloc activity to dry up, which has dampened supply growth and reduced the level of unsold inventory.”

The en bloc, or collective sale, cycle began in 2016 and reached S$14.97 billion as of the first quarter of this year, with S$5.83 billion over 17 deals in the first quarter alone, up from S$4.51 billion in the fourth quarter of 2017, according to Colliers data; since the July property cooling measures, the number of successful en bloc transactions has evaporated.

Morgan Stanley said none have succeeded since the 6 July cooling measures, which raised the stamp duty on developers by 5-15 percent.

En bloc beneficiaries to drive demand

While the cooling measures cast a pall over residential property market sentiment, Morgan Stanley pointed to two clear demand drivers: upgraders and en bloc beneficiaries.

“En bloc beneficiaries could be putting up to S$18 billion of unlevered capital back into the S$10 billion-a-year property market, mostly in 2019,” Morgan Stanley said.

In addition, it noted that upgraders from HDB, or Housing and Development Board, housing — Singapore’s public housing system — represent half of private housing buyers.

“The pool of eligible upgraders is growing significantly from 2019,and recently announced public-housing enhancements could support resale HDB prices and encourage more HDB owners to sell their flats and upgrade to condos,” Morgan Stanley said.

Don’t forget offices

Singapore housing may make up an average of 10 percent of developers’ RNAV and 28 percent of their forward earnings, but Singapore commercial assets, particularly office buildings, make up 18 percent of average RNAV and 14 percent of earnings, Morgan Stanley estimated.

“We find that developer valuations are also well correlated to office building values (in addition to home prices),and we estimate that current share prices are pricing in a 22 percent fall in office values, which we last saw in 2009 during the Global Financial Crisis,” the investment bank said. “Instead, we believe office prices will grow by a steady 2-4 percent per annum through 2020.”

Raising target prices

Morgan Stanley tipped City Developments as its top pick in the sector, calling it “undervalued and underappreciated.” It raised its target price on the stock to S$14.20 from S$13.60, keeping an Overweight call.

It estimated City Developments’ share price implies either zero value for both its residential business and its S$2 billion in London-listed M&C, or a 12 percent drop in home prices.

Top pick

“We believe both cases are ascribing overly distressed valuations to the stock,” it said, pointing to an earnings recovery, the company starting share buybacks this year, and higher dividends over the past 12 months.

It raised its target price on CapitaLand to S$4.20 from S$3.80, keeping an Overweight call. ‘

It kept UOL at Equalweight and its price target unchanged at S$8.00, saying CapitaLand and City Developments are at more attractive discounts.

“We could be more positive on the stock if we see meaningful progress in simplifying the group structure, or evidence of unlocking value in the large commercial portfolio through profitable divestments and redevelopment projects,” Morgan Stanley said.

It noted that UOL has a cost advantage from “astute” timing of its land acquisitions, which should limit margin pressures from price competition. It also estimated that 75 percent of UOL’s RNAV was completed commercial buildings, with the developer set to benefit as commercial asset values edge up.

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