Broker's take: DBS says Singapore property plays 'too cheap to ignore' amid attractive valuations

DBS Group Research on Thursday called Singapore's property developers "too cheap to ignore", citing attractive valuations.

The research team said in an industry note that the developers are well-equipped and capitalised to overcome near-term operational headwinds.

DBS's stock picks are CapitaLand and City Developments Limited (CDL). Both have "buy" ratings and target prices of S$3.70 and S$10.50 respectively.

As at 10.37am on Thursday, shares of CapitaLand were trading down 0.4 per cent or S$0.01 to S$2.75, while shares of CDL were 1.3 per cent or S$0.11 lower at S$8.19.

DBS believes most negatives are priced in at an average price to net asset value ratio of 0.6 times, close to levels back during the global financial crisis.

"We like risk-reward ratios at current levels and believe that implied valuations have priced in a 10 per cent to 15 per cent portfolio deterioration in asset prices, a scenario which is unlikely given low interest rates and the low-yield environment," said analysts Derek Tan and Rachel Tan.

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The developers' well-capitalised balance sheets also position them as buyers rather than sellers, providing the war chest for merger and acquisition opportunities, they added.

Although DBS remains cautious on the residential sector given heightened job insecurity stress, it noted most developers it covers have turned their inventory faster than peers, limiting exposures when sales slow.

Most commercial portfolios, especially Grade A offices and business parks, should continue to see resilient demand in the post-Covid-19 world, with improvement expected from the second half of 2020, the analysts said.

Moreover, a majority of retail exposure in Singapore will "rebound quickly", supported by deep population catchments, despite retail headwinds remaining. CapitaLand's China exposure is mainly in integrated developments.

However, uncertainty remains in the lodging segment as the resumption of leisure travel will likely be dependent on the discovery of a vaccine for the Covid-19 virus.

With DBS's revisions in earnings, the analysts estimate that developers' return on equity is expected to fall to under 3 per cent in 2020, supported by a stronger H2 2020, before rebounding towards the 6 per cent to 8 per cent range from 2021.