Property – JPM

Policy overhang to widen discount to RNAV

• S-REIT tax concessions/remissions extended for another five years: Singapore’s 2010 Budget extended S-REIT tax concessions/remissions (including those relating to foreign institution distribution withholding taxes and stamp duties on acquisition) to 31 March 2015. 

• RNAV estimates still with a mild upward bias: Singapore property developers’ RNAV estimates are, in our view, still upwardly biased, with the launch prices of recent projects generally above our estimates. 

• But physical market uptrend may lead to further policy action: Few, if any, sectoral indicators will in the next 1-2 quarters give policy-makers an opportunity to claim victory over rising property prices, in our view. Fresh policy action, including further tightening of housing loans or real property gains taxes, could be imposed if the price uptrend continues.

• De-rating of property developer stocks while the policy overhang persists: The discount at which property developers trade to our RNAV estimates may widen while the policy overhang persists. Stocks are trading at about 10% higher than 1 standard deviation above the historical mean discount to our RNAV estimates, and we hesitate to suggest that all adverse case implications now are priced into stocks. 

• S-REITs favored over developers: In our view, the Singapore developers are likely to struggle to perform, given continued fears of ever more aggressive policy action to stem residential property price increases. We therefore prefer the Singapore REIT sector for exposure to Singapore property, and our top pick in the sector is CapitaMall Trust. The key risk to this positioning may come if there is a return in the appetite for risky assets (Singapore developers are high-beta stocks) or if the policy overhang is alleviated.