Not all gloomy in property stocks, says DBS Vickers

Property stocks have taken a hit amid tighter loan rules and cooling measures but some sectors still promise good returns, said DBS Vickers Securities yesterday.

While prices and rents are expected to trend lower across most major sub-sectors because of the modest economic outlook, DBS Vickers believes the retail sector will likely remain resilient.

It noted: "We expect retail to continue to deliver stable returns with a preference towards suburban landlords, where there is limited impact from e-commerce, and performance should be able to withstand economic shocks, if any."

Sectors, like offices and hotels, will likely feel the brunt of the slowdown in addition to an increase in supply in both sectors. DBS Vickers expects office landlords to feel the heat as key tenants in the financial industry scale back and some move to suburban business parks. It expects office rents to dip by up to 20 per cent this year and next.

Still, it believes that it is time to have another look at developers as valuations are "too cheap to ignore". DBS Vickers said developers are now trading at an attractive 0.7 times price-to-book, which is close to cyclical troughs.

Its top developer picks are CapitaLand, City Developments and Frasers Centrepoint for their improving return on equity, diversified earnings bases and conservative balance sheets.

DBS Vickers expects home prices to fall by 7 per cent to 10 per cent this year, but it sees "limited negative impact" for most developers, given that their exposure to the residential sector is manageable.

It added that the developers under its coverage have also trimmed their exposure to the residential market here and sought opportunities abroad, such as in Australia and London. The real estate sector will also get a lift if the Government eases cooling measures.

"A wild card will be the potential unwinding of government policies, a scenario which we believe is likely when prices drop by 13 per cent to 15 per cent from the peak, versus currently 8 per cent from the peak," DBS Vickers said.

It has its eye on real estate investment trusts (Reits), preferring "resilient sectors and selected offshore-focused S-Reits with continued ability to deliver consistent growth". It picks Ascendas Reit, Frasers Centrepoint Trust, Mapletree Greater China Trust and CapitaLand Retail China Trust.

Amid headwinds in the various segments, it projects that growth in distribution per unit for S-Reits will likely moderate to 2.2 per cent this year, from 2.7 per cent in 2015.

It added that rising United States interest rates will make borrowing costlier for Reits and hit their distributions in the medium term.

A higher-than-expected rise in interest rates will also cap the performance of S-Reits. DBS said the increased cost of capital is likely to limit acquisitions as well.

Last year, S-Reits fell 10.1 per cent, underperforming the Real Estate Developers Index, which declined 2.9 per cent.

This article was first published on January 9, 2016.
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