Sentiment to get worse before it gets better; cut to Neutral. We downgrade the Singapore property sector from Overweight to Neutral as we believe the prospect of QE tapering in 2014 will be a drag on Singapore developers’ share prices. Physical prices look set to correct and we expect continued share price weakness unless the government removes some of the cooling measures. Inexpensive stock valuations notwithstanding, we will adopt a Neutral view on the sector for 2014.

Point of inflexion looms. Private residential property prices in Singapore have been rising since 2Q09, but there are indications that prices will turn in 2014. Higher borrowing costs, falling HDB resale flat prices, slower population growth and a record number of physical completions in the near term all suggest that residential demand will wane. We reiterate our belief that private property prices will decline by 10% in 2014, led by the mass market segment.

New options for retail developers. Even as most developers reduce exposure to the Singapore residential segment, we see new openings for those with the expertise to develop and manage retail malls. The Urban Redevelopment Authority’s Draft Master Plan 2013 heralds opportunities in mixed developments, namely, integrated transport hubs. Toa Payoh HDB Hub and Compass Point in Sengkang are two examples of transport nodes integrated with commercial elements.

Overseas forays gather steam. Most of the developers under our coverage are increasingly looking to diversify overseas, particularly in China. We concur with such a move as long as they do not overpay for land. We believe China’s market will continue to be underpinned by growing affluence and the urbanisation process and favour names with a proven track record in that market.

Valuations inexpensive but be selective; TPs trimmed. We cut our TPs for all the stocks that we cover in this universe, based on slightly steeper discounts to RNAV (lowered by 5ppts). This is to factor in the uncertainties associated with QE tapering. The exception is CapitaMalls Asia, which remains our top pick as it benefits from new malls opening in Singapore and China. Maintain BUY on CapitaLand and Keppel Land as well, given their diversified business models, reduced exposure in the Singapore residential sector and strong execution in China.  

Source: Maybank Kim Eng Research - 17 Dec 2013