Citi Analysis- Property Analysis 2015

Navigating 2015 — 2015 is shaping up to be challenging for Singapore real estate,
given our expectation of weaker growth in the various sub-segments compared to
2014. We remain relatively cautious on the sector, but now favour developers over
S-REITs. Our preferred developer is CapitaLand. Our preferred S-REIT is AREIT.

Developers over REITs — Valuations aside, our switch from S-REITs is premised
on operational pressures, the much-anticipated rate hike which Citi expects in
4Q15, increased volatility from potential policy changes (particularly if certain
incentives are not renewed in entirety by 31 Mar) and the cross-currents from a
stronger USD. In particular, we feel the currency impact has been downplayed at
the expense of the rate hike scenario (which itself has not been fully factored into
valuations). Our analysis (page 10) shows that S-REITs tend to underperform
developers when USD/SGD is more volatile. Also, while weaker JPY/SGD and
AUD/SGD could theoretically lead to capital flows out of J-REITs and A-REITs into
S-REITs, history shows outperformance tends to favour the weaker currency in the
pairs (page 11). While we do not see a structural re-rating for developers in 2015 as
pipeline supply would continue to be an overhang, expectations here are lower.

Residential: Don't put your eggs in the policy basket — We hesitate to regard
policy easing (tied to elections or otherwise) as a structural catalyst for 2015.
Policies have been relaxed in the past only when prices fell 11-25% off the peak,
and importantly, had almost no effect in arresting ASP decline. Also, neither ABSD
nor TDSR, the two most impactful policies, addressed the main housing issue in the
2011 elections – that of affordability. As such, ‘election brownie points’ that could be
earned from their removal are likely over-stated. We believe a structural re-rating is
possible only when over-supply is addressed – the only short-term fix is a reversal
in immigration policy, but the political stakes look too high for that currently.

Office: Priced in — We expect Grade A rents to increase 5-10% in 2015, after
rising c.15% in 2014. We believe most of the forward growth has been priced in.
Office REITs’ implied cap rates correlate well with spot rent growth, and we note a
moderating trend here since 2H14 (page 19). We look to take profit in office proxies.

Retail: Watch the negative wealth effect — We note a strong correlation between
qoq home price movements and yoy retail sales (both were negative in 2014),
evidence of a negative wealth effect which could likely persist in 2015 (page 21).

Other sectors — While 2014 was the peak in industrial supply, demand remains
weak; spot rents should thus maintain a negative bias in 2015. That said, this sector
is under-owned and any good news that could portend a turnaround could lead to
outperformance. Hospitality remains caught in the cross-hairs of increased supply,
slower inbound traffic growth and strong SGD, though valuations are undemanding.

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

Citi Analysis- Property Analysis 2015

Comments

Leave your comment