Time to snap up bargain developer stocks after market rout: analysts

Stocks will start rallying from 2H16 onwards.

After years of being pummelled by a spate of stringent property cooling measures, Singapore’s largest developers are now trading at record-low valuations. After the long-drawn rout, analysts now believe that residential developer stocks will soon be headed for a rebound as the government eases cooling measures.

“Home prices have corrected for nine consecutive quarters; we believe further price falls this year could set the stage for a bottom. There is, moreover, upside potential if the government loosens policy measures sooner than later,” Maybank Kim Eng analyst Derrick Heng said in a report.

Meanwhile, DBS analysts Derek Tan and Mervin Song noted that property developers are now trading at an unjustifiably low valuation of 0.7 times price-to-book value, which is close to cyclical troughs and a far cry from normalised valuations of 0.9 time price-to-book value.

“While residential prices remain on a downward trend, we see limited negative impact for most developers given that exposure to the residential sector is around a manageable 8% of revalued net asset valuations,” Tan and Song wrote in a report. 

They said that those developers who have stayed nimble in trimming their exposure in the Singapore residential market and were selective in diversifying to overseas markets will see higher returns in equity from 2016 onwards.

Heng added that developer stocks may start rallying starting the second half of the year.

“While home price corrections have slowed down, we believe deteriorating economic conditions could push prices down by another 4- 6% in 2016. This could set the stage for a progressive loosening of policy measures in early 2017; developer stocks may start rallying in 2H16. We recommend stock positioning ahead of this sector catalyst,” Heng said.