Property sector may face stronger headwinds in 2014, say analysts

Singapore’s property sector, which has benefited from rising home prices and loose monetary policy in recent years, could face stronger headwinds in 2014, say analysts.

2013 has turned out to be a challenging year for property stocks.

Apart from concerns about household leverage and effects of the pullback in US stimulus measures, the property market has been hit by further cooling measures, tightening of home financing rules and rising supply of new units.

The FTSE ST Real Estate Holding and Development Index has declined by about 11 percent year-to-date in 2013, closing at 704.77 points on Monday. It recorded a high of 840.84 points on 1 February.

Liu Jinshu, lead analyst at Voyage Research, said: “The decline was mainly led by the larger property developers such as CapitaLand which fell by 10-odd per cent, as well as City Developments which fell by over 20 per cent.

“On the whole, if you look at the whole list of property developers listed on the SGX, about 13 of them had negative returns for this year, while about 23 of them had positive returns.

“On the whole, the decline in the real estate index could be due to some counters having a larger weightage instead.”

Looking into 2014, analysts say developers will have to cope with potentially slower sales. Margins are likely to come off as well with limited upside to pricing coupled with increasing construction costs.

Analysts believe home prices could correct by five to 10 per cent next year.

Mr Liu said: “I am not expecting margins to increase substantially because to some extent, construction costs have climbed. I would say we can’t expect 30 to 40 per cent margins for projects anymore. I think 20 per cent would be quite good…”

Despite the headwinds, some analysts said there may be some upside for property stocks in the second half of next year.

“If you look at the stocks, many of them, I think, have not appreciated as much… underperformed the market over the last one, one-and-a-half years. And that is because many investors were worried that there could be more measures coming through,” said Terence Wong, head of research at DMG & Partners Research.

“But I believe the last of the draconian measures is there. There could be minor tweaks to the system. We are looking towards the second half of the year to actually accumulate some of these property developers.”

Meanwhile, DBS Vickers Securities said in a report that it remains neutral on developers for the next 12 months, given the share price correction. It expects companies with more diversified business model, strong recurrent cash flow and attraction valuations to be more resilient.

Source : Channel NewsAsia – 23 Dec 2013

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