All is not lost for developer stocks even as home prices crash: analysts

Share prices could rally soon.

A gloomy home price outlook is always a bad sign of things to come for developer stocks, but analysts say they have a reason to be optimistic.

Although home prices are often used as the key indicator for developer stocks, Maybank Kim Eng analysts argue that an improvement in sales volume could cause shares to rally even while property prices are falling.

“We believe developer stocks can still rally despite the dire home price outlook over the next few years. In fact, this occurred in 15 out of the 31 quarters of home price contraction since 4Q97,” said the report.

For instance, Maybank Kim Eng said that City Developments Limited (CDL) managed to buck a past downturn by increasing its sales. In the fourth quarter of 2001, CDL's share price jumped by 44.7%, even as home prices fell by a significant 4.3%.

CDL’s share price rally was driven by a 43% surge in home sales volume and a series of off-budget measures introduced by the government to reverse cooling measures implemented over the years, Maybank Kim Eng said.

They added that home sales volume is headed for a rebound soon due to a potential lifting of cooling measures next year. This could provide a whiff of fresh air for developers.

“While regulatory overhang continues to weigh on near term sentiment, we reiterate that Singapore’s property market is past the worst of policy intervention and believe the government could start to roll back cooling measures in 2016. Better affordability and normalisation of interest rates are the key triggers,” the report said.

“While change in measures will not arrest home price declines, it should bring a rebound in sales volume and remove a key overhang developer stocks,” Maybank Kim Eng added.