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Time to switch from office landlords to residential developers, says Deutsche

October 16, 2014 3:25 PM SGT

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SINGAPORE (Oct 16): It’s time for investors to switch from owning office landlords to holding shares in residential developers.

In a 135-page report entitled ‘Time to switch?’, Deutsche Bank analysts Joy Wang and Man Chien-Fie said the best time to buy residential developers is when home prices are still falling and the declines have largely been priced in by the market.

Singapore homes prices have been falling for the past year following seven rounds of government measures to cool the market, with private home prices down 3.8% and HDB resale prices down 6.8% from their peaks in 2Q2013.

Some high-end private homes have even changed hands at steep discounts to prices in the market.

With more than 83,000 new private homes in the pipeline as at 2Q2014 and impending interest rate hikes, home prices could fall another 10% in 2015, according to Deutsche Bank.

Not surprisingly, shares in Singapore developers are trading at a 41% discount to the bank’s revalued net asset value estimates, which factor in a “rather negative” outlook for the residential sector and normalised cap rate assumptions, said Wang and Man.

“Singapore’s residential sector has been an unloved sector since the introduction of the first policy measure in 2010 with news flow and data points unilaterally on the negative side since 4Q2013.

“While the property price drop could worsen in the next two quarters (we expect declines of 9% in 2014 and 10% in 2015), the increased willingness of sellers towards price negotiation could help to establish a market clearing price and potentially trigger a recovery in transaction volume, presenting trading opportunities for the residential developers.”

Affordability may not be a concern for homebuyers even when interest rates go up, they said.

“Short-term rates have started to rise, but are not expected to rise significantly.”

Every increase of 25 basis points in mortgage rates would see a 1% deterioration in affordability, while every 5% decline in property prices would see a 2% improvement in affordability, they said.

Moreover, price-to-income ratios have been falling since 2Q2011 as household incomes go up, they said.

Deutsche Bank’s top picks for residential developers include City Developments, Wing Tai Holdings and CapitaLand.

Its price targets for the three stocks are $12, $2.15 and $3.95 respectively.

As for the office sector, rental growth could remain strong in the near term, possibly rising another 10% in 2015, but that is likely also the time when they would have reached their peak, said Wang and Man.

“With most of the REITs already pricing in substantial growth, we see any near-term strength in share price as good opportunity to switch out of office stocks.”

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