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CapitaLand, KepLand likely to benefit from Beijing's rate cut
The Singapore developers stand to gain from their exposure to the Chinese residential market
By: Lynette Khoo
TWO Singapore developers CapitaLand and Keppel Land are touted by analysts as potential beneficiaries of Beijing's latest lending rate cut, given their exposure to the Chinese residential market.
A targeted relaxation of mortgage rates and home purchase restrictions in China this year, coupled with the lowering of interest rates, could make housing more affordable and boost buyer sentiment ahead, analysts reckon.
DBS analyst Derek Tan noted that Beijing's interest rate cut "could be a potential inflection point to help sustain the recovery in (residential) sales seen in the latest October statistics".
Property sales in China marked a 1.6 per cent drop in terms of floor space in October, which was seen as a moderation from September's 10.3 per cent fall. This followed announcements by the Chinese government in September to prop up the sluggish property market by lowering mortgage rates and down payments for some second home buyers.
Over the weekend, the People's Bank of China (PBC) surprised the market with a lowering of one-year benchmark lending rates by 40 basis points to 5.6 per cent and paring down the one-year benchmark deposit rates by 25 basis points to 2.75 per cent - prompting economists to believe that more rate cuts are on the cards.
Deutsche Bank head of Asia property research Tony Tsang estimates that the lending rate cut will reduce monthly mortgage payment by 3.2 per cent on average.
"As we expect further rate cuts by PBC and bigger discounts on mortgage rates starting 2015, housing affordability should continue to improve," Deutsche Bank analysts Joy Wang and Man Chien-Fie said in a note.
"With this marking the policy-easing cycle in China, both CapitaLand and Keppel Land should benefit from a more relaxed policy/liquidity environment," they said, adding that China now accounts for 53 per cent of both CapitaLand and Keppel Land's gross asset value.
Shares of CapitaLand and Keppel Land have risen 1.8 per cent to S$3.33 and 1.2 per cent to S$3.37 respectively over the past two trading days.
CapitaLand said recently that it will launch another 3,900 residential units in China in the next three months. It has a total of 61,348 units in its pipeline in China that are not launched yet as at end-September and 3,009 launched but unsold units.
Keppel Land has 37,222 units left for sale from its residential land bank in China, according to its investor presentation materials.
Reiterating his "buy" call on CapitaLand, DBS's Mr Tan cited better prospects for the Chinese residential market and potentially better execution capability from a more streamlined organisational structure following the privatisation of CapitaMalls Asia.
He also kept a "buy" rating on Frasers Centrepoint Limited (FCL), which despite having limited exposure to the Chinese market, has a robust earnings outlook underpinned by its acquisition of Australand.
Nomura maintained a "buy" call on CapitaLand and Keppel Land, noting that further policy easing in China could help stabilise the housing market next year and provide a re-rating catalyst for the stocks.
The several divestments announced by Keppel Land this year will also enable it to unlock capital and de-leverage significantly once the deals are completed, said Nomura analyst Sai Min Chow.
While analysts noted that the third quarter earnings season continued to reflect headwinds in the Singapore residential market, developers still have some margin buffer to lower their prices.
But the majority of developers are still adopting a wait-and-see approach, Mr Sai said. Nomura has cut its fiscal 2015 and 2016 earnings per share forecasts for residential developers under its coverage by an average of 5.3 per cent and 0.7 per cent respectively.
Mr Sai noted that the current valuations of these developers are already implying an over 30 per cent downside in prices of unsold residential units and should "more than compensate for the potential additional costs" if the projects that are affected by the additional buyer's stamp duty and qualifying certificate rules are not fully sold.
Meanwhile, Deutsche Bank analysts are urging a switch from office stocks to residential developers with their top picks being CapitaLand, City Developments and Wing Tai, as "weakness at the margins" are showing up in the office sector where rental growth is starting to slow.
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