From mass market to high end

Source : Business Times – 28 Nov 2009

Analysts upgrade property counters with exposure to the top end of the sector

SALES of high-end homes have picked up. And as a result, analysts are more upbeat about property counters with exposure to the top end of the market.

DBS Group Research has upgraded its calls on SC Global, Ho Bee Investment and Wheelock Properties to ‘buy’. The three developers have significant exposure to the high end of the market.

‘We see value emerging for these companies, following price consolidation in recent months, and this is backed by our expectation of a pick-up in activity in the high-end segment come 2010,’ DBS analyst Adrian Chua said in a Nov 17 report.

DMG & Partners Securities analyst Brandon Lee said in a Nov 16 note: ‘The confluence of the integrated resorts’ opening, strong real estate fundamentals and more positive economic newsflow should lead to an upswing in high-end prices from current levels over the next six months.’

Mr Lee issued fresh ‘buy’ calls on City Developments, Wing Tai Holdings and SC Global.

The property recovery started in the mass market, where sales began to improve as early as February this year. Activity at the top end of the market only started to pick up in Q3.

‘The number of units transacted at more than $2,000 psf – our definition of high-end – is just below the number of units we saw back in Q1 2007, prior to the run-up in the high-end market,’ said DBS’s Mr Chua.

And while the property market cooled in October, the high end held up. Developers sold 811 new private homes in October, down from the 1,143 in September.

But the number of high-end homes sold climbed month on month. Goldman Sachs said that 285 homes with a median price of more than $1,500 psf were sold in October 2009, compared with 115 in September. Prime district sales are now the driver, the bank said on Nov 16.

Analysts cited a number of reasons for betting on high-end homes. Policy risk is smaller for this segment as government policies tend to focus on the mass market.

The government announced cooling measures in September and warned recently that further pre-emptive measures will be taken, if necessary, to ensure a stable market.

But the government has traditionally been less concerned with the top end of the market, as this is seen to be the playing field of high net-worth individuals.

Any new cooling measures, if prudent, will also only have a near-term negative impact on share prices, as improving property fundamentals and still attractive valuations matter more, according to Goldman Sachs analysts Paul Lian and Rishab Bengani. They have ‘buy’ calls on two property stocks – CapitaLand and City Developments.

Another boon for the high end is the opening of the integrated resorts (IRs) in early 2010, which could boost demand from foreigners in particular.

DBS’s Mr Chua said that high-end homes in Singapore now look relatively cheap compared to those in Hong Kong – similar to the valuation gap before the 2007 high-end run here. He said that the high-end segment here could also be a beneficiary of Chinese demand, which did not factor in a big way in 2007 but could be a force in 2010.

Looking ahead, top-end prices are expected to trend upwards. Prices here have stayed between $1,750 and $1,825 psf over the past quarter, up 38-44 per cent from the bottom in April 09, DMG’s Mr Lee said. ‘Nonetheless, this represents 15-20 per cent off Q4 2007 peaks, which should head upwards over the subsequent six months in the wake of the IRs’ opening and improved economy.’

Property analysts are also encouraged by developers’ Q3 results. They came in mostly ahead of expectations, with year-on-year bottom-line growth.

‘Perhaps the most important takeaway is the substantial improvement in developers’ balance sheets,’ CIMB Research said in its Q3 2009 earnings round-up. ‘Robust property sales and stabilising asset values helped push down average net gearing from 0.5 times in Q2 2009 to 0.3 times for developers under our coverage.’