More signs of life in property
Share prices of property developers likely to keep rising as sentiment picks up
The share prices of property developers are likely to keep rising as market sentiment continues to pick up, according to analysts.
The sector has been extremely buoyant since the start of the year, with the Real Estate Developers Index up about 25 per cent.
"While stocks were generally off their peaks in June, we believe any near-term corrections in prices would be good re-entry levels to reconsider adding to property developers, given our positive stance on the residential sector," DBS Group Research said in a recent report.
DBS pointed to two key reasons for its bullish stance on developers.
It noted that their shares are rising as investors look for exposure to the improving market.
It also noted that factors such as land-banking and real estate launches could drive prices higher.
"We continue to see catalysts that could drive prices higher, closer to an average of one times price to net asset value, in line with their five-year historical mean," it said.
"At that level, developers would be trading at an average price to revalued net asset value of 0.9 times."
A price-to-net asset value ratio is generally used as an indication of a real estate company's value. A ratio of less than one could mean the company is undervalued, while a ratio of more than one might mean it is overvalued.
We are of the view that successful land-banking activities that could mean potential reflation of net asset values will further boost share prices. DBS Group Research
"In addition, we are of the view that successful land-banking activities that could mean potential reflation of net asset values will further boost share prices.""Catalysts will come in the form of higher transaction volumes, resulting in the clearing of unsold inventory or even higher prices," added DBS.
DBS singled out City Developments, UOL and CapitaLand as its top picks, "given their relatively higher exposure in the residential space compared with peers".
In a separate report released last week, Maybank Kim Eng analyst Derrick Heng noted that investors have become increasingly concerned that escalating land prices could lead to a margin squeeze for developers.
But he also said the resurgent collective sale market offers alternative land-banking chances for developers and could ease upward pressure on land prices.
More than $3 billion in collective sales deals have been concluded so far this year, with another 30 properties at various stages of the process.
Six of these potential deals, if completed, could lift sales value by another $2.3 billion and add 4,600 units to the pipeline, he noted.
Moreover, the resurgent collective sale market comes with a "positive feedback loop".
"Every household displaced from the (collective sale) market would be on the lookout for a new property, which would effectively front-load demand and push out supply," Mr Heng said.
The 11 deals closed this year would lead to the demolition of 1,600 units from the existing housing stock in the year ahead, while the other six deals could result in a further 1,300 units being knocked down.