Excerpts from analyst's report
Maybank Kim Eng analyst: Derrick Heng, CFA
 Can developer stocks rally when home prices are falling? » We think yes. Home sales volume can be a bigger driver of developer stocks than home prices. » Sector re-rated in 4Q01 despite a sharp 4.3% decline in home prices. Sales volume increase of 43% and lifting of cooling measures the likely reasons. » Maintain OVERWEIGHT on developers. Sector past the worst of policy tightening. We expect the government to start rolling back cooling measures in 2016 and see it as a rerating catalyst. |
Developer stocks can rally even as home prices slide
While home price changes are often used as an indicator for developer stocks, we argue that home sales volume can be a bigger driver at different parts of the market cycle. Hence, we believe developer stocks can still rally despite the dire home price outlook over the next few years. In fact, this occurred in 15 out of the 31 quarters of home price contraction since 4Q97. Nine of these 15 quarters of stock rallies were accompanied by higher home sales volume.
For example, in 4Q01, CDL’s share price increased by 44.7% even as home prices contracted by a significant 4.3%. We believe this is driven by the 43.0% jump in home sales volume and a series of off-budget measures introduced by the government to reverse cooling measures implemented over the years. We could see a similar situation in 2016.
Maintain OW; Sector past worst of policy intervention
While regulatory overhang continues to weigh on near term sentiment, we reiterate that Singapore’s property market is past the worst of policy intervention and believe the government could start to roll back cooling measures in 2016. Better affordability and normalisation of interest rates are the key triggers.
While change in measures will not arrest home price declines, it should bring a rebound in sales volume and remove a key overhang developer stocks. With our universe trading at a 48% discount to RNAV and 0.59x P/BV, we continue to see good value and skewed risk-reward ratio. Maintain OVERWEIGHT.
 Derrick Heng, CFAWhat to do with developer stocks? While regulatory overhang continues to weigh on near term sentiment, we reiterate that Singapore’s property market is past the worst of policy intervention and believe the government could start to roll back cooling measures in 2016. Better affordability and normalisation of interest rates are the key triggers. While change in measures will not arrest home price declines, it should bring a rebound in sales volume and remove a key overhang developer stocks. We believe the 4Q00 rally in developer stocks is a good guide. With our universe trading at a 48% discount to RNAV and 0.59x P/BV, we continue to see good value and skewed risk-reward ratio. Maintain OVERWEIGHT. |
Full report here.
