OSK upgrading property recommendation to neutral

Source : Business Times – 27 Aug 2009

OSK Research is upgrading its recommendation on property sector to neutral from underweight in view of the possibility of certain investors having already bought into 2010 valuations.

‘Despite the upgrade, we still believe that a moderate correction in property stock prices is inevitable in the short term,’ it said in its research note here yesterday.

As most of these stocks are already trading close to their 2010 fair value anyway, the current risk-reward ratio appears to be unfavourable and as such investors are generally advised to accumulate only after a meaningful price correction, it added.

‘The rally in property stocks from the March 2009 lows caught us by surprise as we had initially thought that such a rally would only take place in early 2010 when the market would be likely to aggressively accumulate property stocks 12 months ahead of the 2011 upcycle,’ OSK said.

This rally, the research firm said, can be explained by the existence of two major groups of investors in the market.

There are those who believe in a robust V shape recovery in the sector and may have priced in an early upcycle in 2010.

On the other hand, there are also investors with a huge risk appetite who may have bought into year 2010 valuations in anticipation of an upcycle in 2011.

‘The performance of property stock prices will very much depend on how these two main groups of investors play out their strategies in the next few months,’ OSK said.

‘We believe that a correction in property stock prices in the short term is inevitable, as the reality that will emerge soon would likely disappoint those who have been overly-optimistic of a robust sector recovery in 2010,’ it added.

However, as investors who are already looking at year 2010 valuations may take the opportunity to buy into dips, the expected correction in the near term is likely to be moderate, OSK said.

Therefore, the valuations of these stocks, despite the anticipated correction, may not retest their March 2009 lows, it added.