BT : Credit Suisse analysts favour stocks of 'older office' landlords

Business Times - 22 Jul 2010

Credit Suisse analysts favour stocks of 'older office' landlords

By KAREN NG

THE recovery in the prime office sector of Singapore is faster than expected, say Credit Suisse analysts. In a July 20 research report on the Singapore property sector, they said that stocks that are 'prime office plays' have year- to-date outperformed the Straits Times Index (STI) by 13 per cent and stocks of residential developers by 23 per cent.

Citing this as a reason, the analysts say that stocks of residential developers and older office/commercial landlords now look attractive.

Taking a contrarian view, the Credit Suisse analysts recommend a switch to the laggard stock of City Developments (CDL) from Keppel Land as the latter, a prime office proxy, has already outperformed the indices by 14-18 per cent year-to-date.

Reasons that the analysts cited in favour of CDL are: potential rerating of its large yet older office/commercial portfolio and its South Beach project; its largest low-cost residential land bank; and its 54 per cent stake in its global hotel arm, M&C, which they see as a prime beneficiary of the strong growth in the Asian hospitality markets.

Other factors cited in support of residential developers are receding policy risks, 'given the moderate price increases'. The analysts expect investment sentiment to stay firm, given strong economic growth, low interest rates, continued population growth and residential developers' stocks lagging the physical market.

The research report, which sees CDL as a bellwether all-round play, downgraded Keppel Land to 'neutral' from 'outperform' with a target price of $4.13, and upgraded CDL to 'outperform' from 'neutral' with a target price of $13.18.

Other property stocks on which the analysts have an 'outperform' call are CapitaLand, Allgreen and Wing Tai. They maintain their 'outperform' call on CapitaLand for its attractive valuations and believe that the concerns over its China exposure have been overdone. Allgreen and Wing Tai are favoured for their attractive land bank and big discounts to revised net asset values (RNAVs).

The analysts said that the uptake and rents of new prime office have recovered earlier than expected, driven by expansion of financial institutions (FIs) and professional services on the back of economic recovery, FIs' flight to quality and their willingness to pay a premium, competitive rents (49 per cent discount to Hong Kong Central) and old office space conversions to residential use. As half of the new space is already pre-committed well ahead of completions, the analysts believe that average prime Grade-A rents had bottomed at $7.50-8/sq ft in 1Q10.

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