China-focused Singapore developers are in, SREITs are out

Make the investment switch, urges Maybank.

Maybank Kim Eng advised investors to switch out of REITs to property developers with sizeable presence in China due mainly to the possibility of higher interest rates, which will impact the domestic property market.

China-focused developers like CapitaLand, CMA and Keppel Land who have diversified beyond the local shores will have high growth potential and will be able to withstand any interest rate shocks, said the research firm.

Here's more from Maybank:

Look beyond our shores. Amid the current market flux, we advocate a switch out of REITs to property developers with sizeable presence in China. The long-term investment theses of rapid urbanization and growing affluence remain intact and these will be catalysts for growth, mitigating any negative impact of potentially higher interest rates in Singapore. Reiterate BUY on CapitaMalls Asia, CapitaLand and Keppel Land.

Diversification resilience. Singapore’s interest rate environment cannot stay so low forever. While higher interest rates will impact real estate as an asset class, we like developers who have been intentionally reducing their direct exposures to the domestic market and have increasingly looked to China for diversification, namely CapitaLand, CMA and KepLand. They are so well-diversified that based on our analysis of a 10% residential property price decline and a 50 bps increase in Singapore commercial property cap rates, the RNAVs of CapitaLand, CMA and KepLand are only negatively impacted by 2.3%, 2.8% and 2.2% respectively.

China – big enough a sandbox for everyone. China is the most favoured locale for diversification, and in our view, rightly so for the immense potential of its domestic market. More pertinently in today’s context, interest rate movements in China are not as correlated to the U.S. as are Singapore’s. The three abovementioned big-cap developers are well-diversified within China, which account for 40-45% of their individual asset base.

Punching above their weight. We believe these three Singapore developers have been relatively successful at breaking into the Chinese market and we note that they have their individual competitive advantages to hold their own there. Improvement in operational metrics reported in FY12 and 1Q13 suggest that they are heading in the right direction. We also expect more acquisition related news flows from China as these companies continue to deepen their presence.

Reiterating our big-cap picks. We reiterate our preference for the bigcap diversified players with particular exposure to China, with BUY calls on CapitaLand (CAPL SP; TP SGD4.20), CapitaMalls Asia (CMA SP; TP SGD2.57) and Keppel Land (KPLD SP, TP SGD4.82). The current market correction offers an attractive opportunity not to be missed.