The Real Deals - Fundamentals deteriorate

■ Residential, office & retail fundamentals worsening.

■ Industrial REITs beat expectations in 2QCY15.

■ Still prefer Developers to REITs on scope for residential policy easing, whereas oversupply, weak demand, impending rate hike overhang the latter. Top picks Ho Bee and Wing Tai.

What’s New
Residential. Despite developers’ dire outlook for home prices, government officials maintain that price falls after the introduction of property -cooling measures have been small relative to prior jumps. They think it premature to lift the measures and have tempered expectations prior to elections. While we believe high -end homes offer much better value after their sharp price falls, well -priced mass -market projects continue to dominate headlines. Some 1,100 units or 78% of the mass -market High Park Residences was sold during its recent weekend launch. .

Office. 2Q results were in line, though property consultants continue to warn of weakening leasing. This poses risks to our estimates. We remain cautious, preferring KREIT to Suntec REIT and CCT.

Retail . Rents dropped YoY for the first quarter since 4Q13. Occupancies drifted down to 92.8%, in their sixth quarter of decline. The pain was especially acute in the DTC -City Hall area where rents have fallen the sharpest ( -1.6% QoQ, -2.6% YoY) and vacancies risen the most (13.4%). CMT has the highest exposure to that area and missed consensus earnings. We remain cautious as employment growth has slowed.

Industrial. Islandwide , rents have been sacrificed for occupancy. Rents fell 0.7% QoQ and 2.7% YoY, supporting an occupancy increase to 93.3% (1Q: 93%). Rent reversions for Areit and MIT were markedly slower. The resulting improved occupancy enabled both to beat expectations. Cache, in contrast, disappointed with unexpectedly large rent incentives. Uncertainties over C&P as its lessee may also explain its c.10% unit -price slide since news broke of C&P’s strategic review.

Corporate developments. Suntec will be redeveloping Park Mall. CMT is buying Bedok Mall and has put Funan on strategic review. Cache’s sponsor, CWT, may have a change of owners.

What’s Our View
Near-term sector catalysts are lacking with property -cooling measures remaining in place.

However, we continue to prefer Developers to REITs as the former has past the point of tightest policy :

1) housing policy will be eased after a more meaningful price correction, and

2) the government has more scope to tweak population measures after elections ; while for REITs oversupply/competition amid weak demand, and an impending rate hike are unfolding key overhangs on price performance.

We are currently undertaking a review of our REIT strategy. (Read Report)

Source : Maybank Kim Eng Research

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