Rally in property stocks unlikely to continue

Source : Sunday Times - 12 Apr 2009

Defying the real estate gloom, property counters have outperformed the broader stock market in the rally over recent weeks.

While the Straits Times Index has gone up by about 25 per cent since its six-year low of 1,456.95 on March 9, the FTSE Real Estate Index has shot up 31 per cent in the same period. The gains were led mainly by large and mid-sized developers, especially CapitaLand, City Developments (CDL) and Keppel Land, which jumped between 39 per cent and 63 per cent each.

But if would-be investors have not got in on the property stock action yet, it may be too late to do so now, analysts say.

They explain that part of the reason for the strong rebound recently was that the developers were previously oversold, thus making them look attractive despite news early this month that private home prices had plunged in the first quarter by a record 13.8 per cent.

But given the recent run-up in share prices, there appears to be limited potential for further gains for counters such as CapitaLand, Keppel Land and CDL, said OCBC analyst Foo Sze Ming.

The fundamentals of the property market remain flimsy, he said.

Although falling prices spurred a spike in home sales recently, demand was also partly driven by pent-up interest after several months of slowing sales.

‘Sustainable demand will still have to depend on the economy, wages and unemployment, which are still looking fragile at the moment,’ said Mr Foo.

‘With no catalyst in sight for a sustainable recovery in the property market, we prefer to remain conservative.’

Mr Foo favours developers with greater exposure to the mass market, which is still performing better than higher-end private properties as the gap between entry-level condominiums and HDB resale flats narrows.

‘Everybody knows the mass market is the one that is supporting the property sector right now,’ agreed Mr Donald Chua, an analyst at CIMB-GK Securities.

He added that fundamental problems remain in the real estate market. Transactions of mid- and high-end properties are slow, and the market is still worried over the possibility of defaults as job losses mount and more properties are completed this year.

‘If nothing changes on a fundamental basis, I don’t think this rally will last,’ he said.

DBS analyst Adrian Chua is also taking a cautious stance on the property sector, saying that ‘negative newsflow will continue to dog the sector as positive catalysts remain absent’.

‘We believe balance sheet strength remains the best defence in the current downcycle,’ he said in a report last week, with ‘buy’ calls on CDL, Wheelock Properties and Wing Tai.

OCBC’s Mr Foo also likes financially strong developers such as CDL and UOL Group, he said in a report last Wednesday.

UOL has underperformed in the recent rally, with its share price rising only about 28 per cent since March 9, Mr Foo said.

But the outlook for the property group remains positive and its recent successful launch of Double Bay will likely contribute to earnings through 2013.

CDL’s strengths are its ‘conservative management, strong balance sheet, diversified operations and low-cost land bank with significant mass market exposure’.