Buy the condo or the stock?

Source : The Edge – 1 Jul 2009

The property rush continues to grab the headlines with queues at new launches and crowds at show flats. Perhaps a sobering reminder would be the still declining prices based on the Urban Development Authority’s (URA) flash estimates released earlier this Wednesday. The price index for private residential property is still falling, albeit at a slower rate. Overall residential prices fell by 5.9% in 2Q09 (q-o-q) compared to 14.1% decline in the previous quarter.

Prices declined by 2.6% outside the central region (representing the mass market), by 6.6% in the core central region (Orchard Road and its environs), and 6.3% in the rest of the central region. These declines were markedly slower than the 7.3% (outside central region), 16.2% (core) and 17% (outside central region) declines in 1Q09.

And some analysts remain skeptical about signs of a recovery in the physical property market. “I am cautious about the renewed interest in the Singapore property market” says Singapore-based Thomas Kraegi, head of macro-economic research for Asia-Pacific at UBS. “I’m surprised by the activity,” he admits. He puts it down to price cuts.

“Transactions are being driven by domestic buyers. Foreigner are absent,” he adds. This is a marked difference to the gains in 2006 and 2007, where foreigners figured largely in driving up prices in the luxury segment. What’s more, Kraegi is expecting unemployment to get worse with 30,000 to 40,000 people losing their job as a base case scenario over the whole (recessionary) cycle so its not likely that more people will keep jumping on the property buying bandwagon.

Nomura Research in a report released on Wednesday, concurs, saying that a faltering economy puts “further downside risks to rents, tempering current optimism (in part driven by the buy/rent trade-off) and subsequently investor/end user demand and asset price expectations.” Besides rising inventory, weak residential leasing demand and lower rents fundamentally are likely to continue weighing on underlying asset prices, the report states.

“Our sensitivity analysis suggests that stocks have simply run too far, too fast even assuming an aggressive up-tick in residential property prices from 2H09 through to 2011” the report adds. “Consequently, we reaffirm our bearish stance on the developers, and retain our reduce calls on CapitaLand, City Developments and Keppel Land.”

Over at Kim Eng Research, Wilson Liew sounds more upbeat. He singles out Wing Tai Holdings as an interesting play.

“After speaking to property agents, we believe that the launch of Ascentia Sky (on Alexandra Road) is imminent. We have raised our average selling price assumption to $1,100 psf, and based on an estimated breakeven of $984 psf, we no longer believe that a provision is necessary for this site – Wing Tai may in fact make a small profit,” he observes.

Interestingly, hordes of owners who had bought units under the deferred payment scheme were reported to be at the adjacent The Metropolitan (which recently received its temporary occupation permit) over the weekend trying to ‘flip’ their units. They were reported to be asking for $1,100 psf to $1,200 psf from interested buyers.

Liew has a buy recommendation on Wing Tai. “Buying the stock is cheaper than physical property,” he reckons. “As the sales outlook improves, we have upgraded our FY09-10 forecasts by 4.9% and 13.2% respectively.” He has a target price of $1.79, and the counter closed at $1.42 on Wednesday. Missed the queue? Consider property stocks.