As the property market makes its recovery, many investors will want to make use of this opportunity to increase their investment in the property and REIT sector. This is in-line with UOB Research’s 2018 strategy as they recommend investors to maintain overweight in this industry, especially so for “stocks with exposure to the residential, hotel and office segments” as these are expected to be the star performers.
This article will highlight three main trends that UOB Kay Hian (UOBKH) mentioned in their strategy report on Singapore’s property and REIT sectors, as well as top stock picks (including from other houses) in the sectors for 2018.
1. Improving economic conditions
Echoing the optimism of the Ministry of Trade and Industry which has increased their GDP forecast for 2017 and 2018 by 50 basis point (with a GDP growth forecast of 1.5 percent to 2.5 percent for 2018), UOB Global Economics and Markets have increased their 2018 growth forecast to 2.5 percent. Analysts at UOBKH are confident on the performance of the property and REIT sector given the general improvement in economic conditions.
As the economy recovers, interest rates are undoubtedly going to increase at some point. This may concern some investors since property developers will have to face a higher cost of debt as interest rate rises. However, it is noteworthy that interest rate hikes often hinge on robust economic activities, and when there are signs of rising inflation.
Furthermore, analysts are reassuring investors that interest expenditure is a minor cost incurred by developers as compared to the entirety of development costs that they face. Therefore, rising interest rates will not be as detrimental to property developers as one might expect it to be, and investors need not be overly concerned.
2. Rewarding Investments In Hospitality Properties
Occupancy rates are expected to increase with rising corporate travels and expanding number of visitors from China, all of which are contributing to increasing room rates. UOBKH analysts predicted that the recovery in the number of corporate travellers is likely to be very beneficial for Singapore’s hotels “given Singapore’s role as a regional meeting, incentive travel, conventions and exhibitions (MICE) hub”.
Despite the increase in demand, the growth in the supply of hotel rooms is slight as there has not been any additional hotel site under the government land sale programme since 2014. Furthermore, application approval for new supply of accommodation in locations that have not been designated for hotel use is increasingly restricted and hence the number of new hotel rooms to be introduced has not been rising over the years.
Combining these two factors, analysts are expecting that revenue per available room will increase by 3 to 5 percent per year over the next three years as occupancy rates rise to 90 percent. Overall, the hospitality sector is expected to perform well in the upcoming year with higher demand driving growth.
OCBC Investment has picked OUE Hospitality Trust (OUEHT) as their favourite pick as it is likely to benefit from the pick-up in the hospitality industry. However, income support from Crowne Plaza Changi (CPCA) will be drawn down completely by the 4Q17. Traffic is expected to rise at CPCA due to the opening of Terminal 4. Overall, OCBC has a Hold call on OUEHT and a neutral call for the hospitality industry because the current prices of the stocks are not attractive enough. Perhaps investors should be patient and wait for a bargain price to enter the recovering sector.
3. Residential sector seeing signs of turnaround
In the past 11 months of 2017, total sales in the residential sector totalled $6.4 billion. However, this is only 38 percent of the total sales in 2006 which signals that there is further room for growth in sales numbers. The rising demand from “enblocers” and foreigners are expected to contribute to higher sales.
Despite the tightening of policies to reduce foreign interest in the local property market, international authorities are adopting similar cooling measures. This explains the return of foreigners to Singapore’s market as property prices are increasingly comparable to overseas prices once again.
Consequently, analysts are predicting that residential property prices will increase by 5 to 10 percent in 2018, having reached its lowest point this year. In addition, private housing vacancy is also likely to tighten from 8.1 percent in 2017 to 5.9 percent by 2020 as supply diminishes.
Taking these points into account, UOBKH has chosen City Developments and Wing Tai Holdings as their top picks for the property development sector. In general, developers are still trading at significant discounts (20 percent to 40 percent) to their revised net asset value (RNAV). Correspondingly, the current valuations of developers trade at a 0.5 deviation below the historical mean discount of 15.6 percent.