Don't be fooled by rosy rise in rents, warns analyst

A 4% dip in rents actually lurks beneath the 0.3% climb that URA statistics showed.

According to Nomura, the latest Urban Redevelopment Authority (URA) statistics showed a 0.3% climb in rents and a 0.1ppt improvement in vacancy for private housing during 2Q12. "We believe the headline numbers mask a rental market that is in fact weak."

Here's more from Nomura:

An apples-to-apples comparison focusing on projects with a consistently high number of leasing transactions suggests rents in these projects actually declined 4% in 2Q12 and could be a leading indicator for the overall market. It also appears we have underestimated the pace of completions, with the actual completions in 2011 33% more than our previous forecast. We now expect another 46,689 units to be completed in 2012-14F, of which 75% are located in the rest of central and outside central locations.

All eyes on leasing demand at the Alexis 2Q12 saw the completion of the 293-unit Alexis, arguably the biggest
“shoe-box” project so far. The project will be looking for tenants over the next two quarters, and we expect the leasing transactions to provide further data points for the rental market, especially the “shoe-box” segment, where more projects are expected to be completed from 2013F onwards.

Following a 37% rise in share prices year to date, the average discount to NAV for residential developers under our coverage has narrowed from 42% at the start of this year to the current 23%, which is already in line with the mid-cycle valuation since 2000. Mindful of the weakening rental market and taking into account current valuations, we see relatively more value in the mid- and small-cap residential developers such as KPLD and WINGT.