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Developer stocks may rise above flat property prices

Goldman says that physical market correction already priced in

(SINGAPORE) Goldman Sachs predicts that private home prices will remain flat this year, but is sticking to its view that Singapore’s strong structural story is driving a sustainable multi-year residential upswing.

The US bank does not expect a repeat of the mid-1996 (anti-speculation) regulatory measures that caused Singapore’s residential market downturn or an economic environment like in 1998, when property prices fell sharply amid negative economic growth and job creation, and an interest rate spike. Goldman Sachs has also upgraded CapitaLand from Neutral to Buy.

‘We argue that the share prices of developer stocks have priced in a severe physical market correction, which we believe is unwarranted.

‘Notwithstanding near- term headwinds, we recommend investors start accumulating Singapore property developer stocks. We believe developer stocks will start trending up to their RNAVs (Revalued Net Asset Values) once investors get comfortable that property markets in Singapore and China are not heading for a severe correction,’ Goldman Sachs said in a report dated Feb 8 and authored by its analyst Leslie Yee.

Even after lowering its RNAVs for Singapore developers, Goldman’s 12-month target prices (set at parity to 2008 Estimated RNAV) offer potential upside of around 28-37 per cent.

Goldman Sachs attributed its lowering of 12-month target prices and valuations to Singapore private home prices staying flat, lower values of listed investments and a lower multiple of 15x (from 20x) for asset management fees.

Although Goldman Sachs assumes zero growth in overall private home prices this year, it acknowledges that prices may increase in the second half of the year.

The property market is currently caught between the negatives of macro concerns over the fallout from a US-led recession on the Singapore economy and equity market weakness, and the positives of strong Singapore domestic growth drivers such as robust job creation and wage growth, Goldman’s report said.

‘We have greatest confidence in the private mid- to mass-market segment, based on our analysis of different key drivers, such as affordability, income growth, population growth, and HDB resale market trends, among others. We believe strong Singapore fundamentals support this segment, which is likely to benefit most from any reduction in mortgage rates.

‘In the prime residential segment, we see a dampener from a fall in speculative activity but would not underestimate the appetite of bulk buyers such as the Middle Eastern funds. We note affordability for the mass market remains strong, while the prime segment should benefit from the rise in the number of people with high incomes,’ it added. Besides the Singapore residential market, other key drivers for developer stocks are the performance of the Singapore office market, the Chinese residential and commercial markets, and real estate investment trusts, the US bank said.

It argues that new office supply here in 2011/2012 can be absorbed without significant negative impact on rental and occupancy rates, and expects capitalisation rates across various property asset classes in Singapore to remain stable.

Goldman Sachs also sees little downside for residential prices in the China market, and has a positive bias on the outlook for Beijing, Shanghai and selected second-tier cities.

As for Singapore Reits, Goldman sees their unit prices rising from current levels over the next six months – given firm property rentals and the possibility of the overhang from primary and secondary equity raisings being removed.

Goldman has lowered its 2008 estimated RNAV for City Developments from $15.80 to $14.70 and for CapitaLand from $8.30 to $7.70.

‘Amidst a more uncertain environment, our top pick is CapitaLand, which we upgrade to Buy from Neutral. With its multiple growth engines, highly regarded management team and low gearing, our Buy rating on CapitaLand is premised on its attractive and resilient valuation which performs well in various stress tests,’ Goldman said.

The US bank is maintaining its neutral rating for CityDev.


Source: Business Times 12 Feb 08

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