The following content was posted in the NextInsight forum recently by our reader 'Sumer', who has long shown that he knows property stocks and the Singapore property market very well. We re-publish it here for readers who missed his high-quality post on a significant milestone in the market.
THE LATEST government measures on property purchases, while harsh, are necessary for the property market as 4 previous measures have all failed to bring about a price correction or a dampening of demand.
The obvious effects are apparent to most investors, but here are a few interesting "other" angles to consider:
1. Many property stock prices have corrected substantially, and their prices reflect possible physical property price correction of about 20%. Hence, if the new measures do lead to a 20% price correction, it would not surprise property stock owners.
2. Many investors who are bearish about the physical property market have already exited property stocks. So, the remaining holders are expectng that physical property prices are going to correct about 20% (or even more) anyway. I will not be surprised if some investors who had previously sold out may actually use further stock price weakness to buy back some shares.
3. Many developers, save for a few, have pre-sold a substantial percentage of their projects. In fact, some of them will, going into the next few years, be flushed with cash. Compared to 2007/8, many are now much better off in that (1) they have much better balance sheets (ie, more cash or lower gearing), and (2) they are holding fewer unsold units.
4. The new measures could also be positive for developers which have not been able to replenish their land bank due to high prices. For eg, Hiap Hoe has not been able to clinch any residential land although it had participated in the GLS (govt land sale) program as its bids were too low. Stiff competition has forced some developers to bid too aggressively previously, thus putting them at risk in a weakening market.
Now, with the new measures, bids could be more reasonable, and thus winners would be buying land at prices that are "less risky". Developers which previously worried about the flow of projects beyond 2014/5 because they could not buy any land, could see a weakening market as a blessing in disguise.
5. One positive side of the measures is that this drastic move is necessary so that the supply side will not be continuously and mistakenly boosted to meet what seemed like unstoppable demand. If cheap loans and hot money from overseas were the main reasons for the huge demand, it is dangerous to keep satisfying this demand by simply increasing supply. This is because once those 2 reasons disappear, we will be left with a huge supply looking for non-existent real demand.
Hence, the latest measures are not only necessary but good for the market in the longer term - the intention is not to allow the creation of a bigger supply (and not just price) bubble.
6. Analysts' expectations of price declines of 15-30% in the physical market is not new or unexpected. Many research reports had been "neutral" or "negative" on the sector for many quarters. In fact, based on the huge supply that is resulting from the GLS, I had expected prices to start correcting as early as 1 year ago.
Many analysts have been surprised that the physical market price correction had not come sooner, with price falls delayed one quarter after another as unexpectedly strong demand kept surprising analysts and property bears. Hence, if the latest government measures lead to that long awaited price correction, it's not a grave concern and, in fact, to me, it is but the natural course of things - what had gone up, must plateau and then correct.
7. Investors should not forget that it is highly likely once the latest measures have achieved their intended effect, the government may remove them. In Hongkong now, for eg, there is already talk that their govt measures may be removed as demand has slumped substantially. Likewise, if the Singapore government sees that the effect is greater than it had expected, removal of these measures, or even the earlier measures, may happen.
8. On the micro level, instead of painting the whole lot of developers with the same big brush, investors could study each developer individually. Many second liner property counters have interesting "side stories" or "hidden values" that make them more than just another developer.
For eg, the companies may be substantially exposed to the strong hotel sector (eg, Roxy Pacific, Hiap Hoe, Superbowl, OUE, Orchard Parade and soon, Chip Eng Seng), working on listing their hotel arms (eg, OUE and Orchard Parade), are possible privatization candidates because they are so substantially undervalued (eg Hiap Hoe, Superbowl, Heeton), good dividend yield stories (eg, CES - possibly10%), etc.
At the same time, traders may want to identify stocks that have high liquidity and targets of traders and ask whether some of these counters which come down substantially may be shorted down, and hence be poised for short covering at some point.
The latest property measures, in my opinion, are just the catalyst and the excuse for what is eventually due to happen anyway. Analysts have long been negative on the residential sector, with some expecting 10-20% price declines. Investors have to decide how much of all this is already worked into share prices, and if the measures could in fact, be a positive thing for developers in the long run.
On net, compared to stubbornly strong demand at new launches and stubbornly strong prices, as well as the dangers of the government over-supplying the market with land sites just to meet unsustainable demand, the latest property measures may not be as negative as they appear at first look.
Recent story: PROPERTY OUTLOOK 2012: 'The big unknown is demand"
Comments
Developers' private homes sales slides to 632 units in December
By KALPANA RASHIWALA
Developers' private home sales dropped to 632 units, excluding executive condos (ECs) in December. This was 62.9 per cent lower than the 1,702 units developers sold in November, show latest figures from Urban Redevelopment Authority released on Jan 16.
December's sales decline followed the government's announcement of the additional buyer's stamp duty on Dec 7.
The 632-unit sales figure for Dec 2011 was the lowest monthly sales figure since June 2010, when developers sold 847 units. Including executive condos, which are a public-private housing hybrid, developers sold 670 units in December, down 63.9 per cent from November.
Fragrance is not under my radar, but after taking a quick look at it, the fundamentals are not as attractive as the counters I mentioned in my note. For eg, Fragrance's NAV is 9.3 ct. In its 9M report, the company said that should it list its hotel arm and its hotels are revalued at market, the RNAV will improve to 21.5cts. I have not worked in profits yet to be booked from its residential projects, but because of the huge supply of scrip (3.36 billion post the bonus issue), I doubt the NAV per share from this is substantial. Compared to the stock price of 33ct now, I would say there is hardly any hidden value in the counter. In fact, I suspect Fragrance is actually trading above its RNAV.
By comparison, for example, Hiap Hoe has a RNAV of close to $1.30 if (a) its hotel and commercial project in Balestier is revalued and (b) its future profits (substantial part of it pre-sold) are taken into consideration. Compared to Hiap Hoe's current share price of about 42ct, this means the counter is trading at a 68% discount to RNAV.
From the above, it is clear which stock I prefer, and own. However, having said that, how well a stock perform is due to several factors, of which fundamentals are just one. Demand (which can be due to many reasons) and supply of scrip is the ultimate reason for a stock's share price performance, and for that alone, my take on Fragrance's fundamentals is not a good indication of its future stock price direction.