Maybank Kim Eng has shuffled its top pick within the property sector, replacing City Developments Ltd (CDL) and CapitaLand. The brokerage remains positive on the sector.
“While we continue to like CDL as a proxy to asset-monetization theme, we now see smaller upside for the stock following substantial outperformance over the past month,” writes analyst Derrick Heng in his April 19 note. “We advocate a switch into sector laggard CapitaLand, which is now our top sector pick.”
According to Heng, he sees developers gaining from the reversal of an earlier trend of rising interest rates. For example, the 10-year Singapore government bond yields just 1.92%, which is a significant 96 basis points (bps) off the peak in September 2015.
Similarly, the 3-month SIBOR has corrected by 25bps to 1.00% as rate hike expectations had dampened.
“The recalibration of benchmark rates implies that cap rates for physical property assets could stay low despite the difficult physical market outlook,” writes Heng. REITs will enjoy a support as well in this environment.
In addition, mortgage rates are seen going lower. “This implies that home buying demand will be supported and prices could stay resilient despite the market oversupply,” states Heng.
He does caution that property cooling measures will remain longer as a result, as the government would not want to stoke a rebound in home prices by lifting the measures too early.
Last but not least, property developers will now find it cheaper to borrow. This will make it easier for them to borrow to fund asset monetisation deals. For one, asking yields for CapitaLand and CDL’s bonds due in 2020 have corrected by some 50 basis points from their respective peaks last September, he adds.
The combination of these factors has led Heng to raise his RNAVs on the four developers under his coverage and to lift their target prices ranging 3 to 9%.
For CapitaLand, Heng’s new target price is $3.95, up from $3.83 earlier, led mainly by higher valuation of its two key REITs: CapitaLand Commercial Trust and CapitaLand Mall Trust.
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“While we continue to like CDL as a proxy to asset-monetization theme, we now see smaller upside for the stock following substantial outperformance over the past month,” writes analyst Derrick Heng in his April 19 note. “We advocate a switch into sector laggard CapitaLand, which is now our top sector pick.”
According to Heng, he sees developers gaining from the reversal of an earlier trend of rising interest rates. For example, the 10-year Singapore government bond yields just 1.92%, which is a significant 96 basis points (bps) off the peak in September 2015.
Similarly, the 3-month SIBOR has corrected by 25bps to 1.00% as rate hike expectations had dampened.
“The recalibration of benchmark rates implies that cap rates for physical property assets could stay low despite the difficult physical market outlook,” writes Heng. REITs will enjoy a support as well in this environment.
In addition, mortgage rates are seen going lower. “This implies that home buying demand will be supported and prices could stay resilient despite the market oversupply,” states Heng.
He does caution that property cooling measures will remain longer as a result, as the government would not want to stoke a rebound in home prices by lifting the measures too early.
Last but not least, property developers will now find it cheaper to borrow. This will make it easier for them to borrow to fund asset monetisation deals. For one, asking yields for CapitaLand and CDL’s bonds due in 2020 have corrected by some 50 basis points from their respective peaks last September, he adds.
The combination of these factors has led Heng to raise his RNAVs on the four developers under his coverage and to lift their target prices ranging 3 to 9%.
For CapitaLand, Heng’s new target price is $3.95, up from $3.83 earlier, led mainly by higher valuation of its two key REITs: CapitaLand Commercial Trust and CapitaLand Mall Trust.
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