Deutsche Bank Markets Research is bullish on the Singapore property sector in 2018 on the back of improved demand and supply dynamics.
“We expect 2018 to be another strong year for Singapore property and see an acceleration in the synchronized recovery across all sub-sectors,” the research house says in a Wednesday report.
While the property recovery in 2017 was largely supply-led, Deutsche Bank says a continuous decline in supply, together with a recovery in demand, could significantly improve pricing power for both developers and landlords.
“We expect price and rent growth momentum in the physical property market to pick up in 2018,” it adds. “We are most positive in our forecast for the residential sector given the potential 'squeeze' from a record low inventory level, a declining supply and an increase in demand.”
According to Deutsche Bank, the flurry of en bloc transactions will lead to a removal of immediate supply. At a time of record low inventory and declining supply, this could significantly enhance pricing power for both sellers and landlords.
“We also believe that the policy uncertainties and concerns on long-term supply are well reflected in the current share prices,” it says.
With Singapore’s GDP growth in 2018 forecast to come in at 2.8%, Deutsche Bank believes there is likely to be a synchronized recovery in demand across all real estate sectors. This is on the back of a healthy economic growth environment, with more positive business expectations for both services and manufacturing sectors.
However, the research house says it prefers developers over REITs due to its exposure to the positive Singapore residential sector; the better ability to realize RNAV, especially in a synchronized property up-cycle; and the more attractive valuations given developers are still trading below mid-cycle valuations.
“We like stocks that offer significant exposure to the Singapore property market and those stocks that could see most upside surprises,” says Deutsche Bank. “Our top picks are UOL Group, Wing Tai Holdings and OUE Limited.”
Deutsche Bank is upgrading UOL to “buy”, from “hold previously”, with a target price at $10.00.
The upgrade comes as it incorporates UIC's underlying asset value into its RNAV estimates for UOL, and raises its earnings-based SOTP on the back of stronger rental growth.
UOL in 3Q17 saw its earnings surge sevenfold to $618.1 million on the back of higher revenue. This was mainly due to the consolidation of UIC Group and the associated and joint venture companies of UOL Group and UIC Group, which contributed an additional $144.3 million in revenue.
“Given that more than 80% of UOL's assets are based in Singapore, we see the group offering one of the best proxies to the Singapore real estate market,” Deutsche Bank says.
As at 3.55pm, shares of UOL are trading 12 cents higher at $9.20, implying an estimated price-to-earnings ratio of 14.9 times and a dividend yield of 1.8% for FY18.
Meanwhile, Deutsche Bank also has “buy” calls on both Wing Tai and OUE, with target prices at $2.60 and $3.00, respectively.
Wing Tai saw its 1Q earnings ended September 2017 soar nearly eightfold to $8.2 million on the back of disposal gains and higher contributions from overseas associates.
However, revenue for the property group dipped by 4% during the quarter to $67.1 million.
As at 3.55pm, shares of Wing Tai are trading 1 cent lower at $2.28, implying an estimated price-to-earnings ratio of 28.8 times and a dividend yield of 2.6% for FY18.
OUE saw its earnings plunge 90% to $10.7 million for the 3Q17 ended September, as revenue fell 56.6% to $181.9 million.
The decrease was mainly due to the absence of $205.0 million non-recurring revenue recorded on the sale of the extension to Crowne Plaza Changi Airport (CPEX) to OUE Hospitality Real Estate Investment Trust in 3Q16, as well as lower contribution from OUE Twin Peaks.
As at 3.55pm, shares of OUE are trading 1 cent higher at $1.90, implying an estimated price-to-earnings ratio of 17.1 times and a dividend yield of 2.7% for FY18.
This article was first published on The Edge Singapore.