Macquarie projects rents to only move within +/-5% range.
Here's from Macquarie:
We expect 2013 to be another subdued year for the property market. Apart from office rents which were down more than 10% in 2012, all other sectors saw less than 10% moves in rents, prices or RevPAR.
Going into 2013, we expect price/rents moves to be within +/-5%; which means very little RNAV uplift as we roll forward our valuations to end 2013. Almost every sector is facing supply concerns, and retail remains the best-positioned sector.
We therefore expect investors to demand a larger discount to RNAV to assess fair value of stocks. We believe this discount to be between 20-25%, reflecting the 2002-05 period when the outlook for the physical markets was also subdued. Currently, the property developers are trading on an 23% discount to our 2013 RNAVs. We raised RNAVs for the developers by 2%.
We tweaked our long-term risk free rates from 3.0% to 2.3%, reflecting the five-year average rates from the Singapore 10-year bonds. This is offset slightly by a lower terminal growth in our DCF models by 50 basis points, reflecting a lower growth environment. Overall, the SREITs’ DCF valuations were increased by 7%. The sector yield is 5.8% with 1.9% in DPU growth, hence a total return expectation of 16%.
We retain our preference of SREITs over developers in 2013. The central bank’s policy of a gradual appreciation of the S$ in its October half-yearly policy review bodes well for SREIT investors.
New home sales was strong in 2012, +45.1% YoY to 17,844 units in the first nine months of the year. We are concerned with a few emerging trends in the residential sector. Firstly, the listed developers under our coverage lost market share in new home sales, from 28% in 2009-10 to 15% currently.
Secondly, there are more players in this space, mainly from listed non-property groups and/or unlisted players and foreign participants. Further, most of these players adopt a fast asset turnover strategy, launching projects from sites secured within six to seven months, thereby
lowering price risk and policy risk. The listed developers’ success in bidding for GLS sites has been poor this year. Should they become more aggressive, the risk is overpaying, and hence lower pre-tax margins from these projects.
Office and retail preferred sectors
We believe office rents are bottoming out, as evidenced by the slower rate of rent decline QoQ in 2012. Further, demand in the first nine months of 2012 of 1.7 million sq ft was encouraging. Whilst demand from financial institutions is weak, this was offset by more broad-based demand from other sectors - resources/commodities, shipping, media and legal. Grade A landlords is preferred given flight to quality as well as only 52% of supply is in core CBD locations. Most of the new office supply are in fringe CBD and decentralised locations.
The retail sector faces little new supply concerns, with new supply accounting for less than 3% per year of total retail stock between 2013 and 2015. The concern in retail is the slower retail sales growth (excluding motor vehicles), but we believe the listed retail REITs’ rental reversions will beat overall retail sales growth figures.
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