Here’s why investors should bet on developers and not REITs

Interest rate hikes will barely faze them.

A report by UOB expressed preference for deep-value and diversified property and REITs. Moreover, UOB noted that it preferred developers over REITs as the former are trading near undeserving crisis valuations and will relatively be hurt less by a rise in interest rates. Further, analysis of peak and trough price-to-book valuations indicate an alluring 6:1 reward-to-risk proposition.

Currently, developers under UOB are trading at a distressed $1.33 below mean RNAV. This troublingly drags counters in the territory of economic recession when they traded at $1.52 and $2.22 below average RNAV during the global financial crisis and Asian financial crisis, respectively. On the flipside, average reversion to their historical discount to 13.8% long-term RNAV indicates a whopping 47% upside.

Expectations are also set for a healthy 10-15% correction from the peak in property prices, beyond which prices should trend in line with the country’s GDP growth. Developers are expected to recover if they see reasonable indication that prices won’t correct beyond an average of 12-15%.

The report also notes that affordability is not an obstacle as sensitivity analysis showed that around every 1ppt hike in interest rates leads to a $582 monthly mortgage payment on a $1m property loan with a tenure of 25 years. This puts affordability ratio from about 32% to 35.8%, reflecting a worsening of around 3.8ppt.

“We reckon this is palatable to most households, especially against a backdrop of stretched levels of 60-70% during the 1996-97 period,” stated the report.

It was also pinpointed that the key catalyst for re-rating will be government easing policy on the demand side. The possible relaxation of measures will rely on factors such as the magnitude of price fall, impetus for the government to calibrate overall home prices, and cutbacks in foreign labour growth moderating rental outlook.

All factors considered, the report championed City Developments and Wing Tai Holdings.