The latest report from DMG & Partners Research describes property developers in Singapore and Hong Kong as overvalued.
“Developer ROEs (return on equity) should fall significantly from 2010 to 2112, and share prices should follow,” said Craig Irvine, Chief Regional Strategist at DMG & Partners Research.
“Forward ROE is a much better stock valuation tool for property developers than the tradition NAV (net asset value) estimates, especially in bearish markets.”
According to DMG’s regression analysis, ROEs correlate with year-end stock prices.
Irvine explained that when regression is applied to predict end-2012 share prices, the predicted downside is “material”.
He noted that Singapore’s Keppel Land and CapitaLand, as well as Hong Kong’s Sung Hung Kai Properties were “particularly vulnerable”.
Meanwhile, Macquarie Research published bearish reports last week on the outlook for Singapore’s property sector.
“Our outlook for the various property sub sectors is subdued. Given this environment, we believe property stocks should trade at a wider discount to RNAV (revalued net asset value), similar to levels seen from 2002 to 2005,” said the research house.
However, it maintained a relatively positive outlook for the residential and office segments in Singapore.
“We believe ample liquidity…and a persistent low interest rate environment, which results in negative real rates and a positive rental yield spread, more than offset concerns over the impact of cooling measures. We expect (home) prices to increase 2.5 percent per annum over the next two years,” it said.
The firm added that it does not see office rents correcting significantly.
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