Home prices seen to drop by up to 5% in 2013

If that's so, what could be in store for property stocks?

For 2013, DBS Group Research said it remains neutral on developers on the basis of valuations, after the sharp run up in stock prices. It believes the market would continue to focus on incoming supply. "As we move a step closer to the peak of incoming supply, we expect private residential prices to decline by 0-5% while volume demand should remain relatively robust at about 20,000 units."

Here's more from DBS:

The government is expected to release policy review papers on population, infrastructure and land use (Concept Plan and Master Plan) this year.

This may provide some indicators to population targets for the medium to longer term. While we expect this to provide some catalyst for the sector, we see this as medium-term in nature, as we believe any acceleration in migration is likely to happen when the current infrastructure and housing bottlenecks are alleviated.

In the near term, the market is likely to continue to focus on the prospect of rising inventory and the impact on occupancy and rental yield levels.

That said, we think that RNAVs for property companies are likely to remain relatively flat, given the expected modest decline in home prices and stable office capital values. As such we expect investors to focus on other catalysts such as asset value unlocking as a driver for share prices.

Hence, we believe the two key themes for 2013 to be: i) Monetisation of assets to close the gap between stock prices and underlying asset values ii) Undervalued stocks in view of RNAV resilience.  For our first theme, we prefer companies that have effective currency platforms through their REIT vehicles to monetise assets. To this end, we like CMA and Capitaland.

We see CMA’s business model as being even more effective as its listed REIT platforms are trading above book value and could potentially be currency vehicle for the group to monetise assets in the medium term. This should boost the former’s ROE. 

Furthermore, with the gradual completion of development assets, more than 70% of its China malls are in operation, with >60% of these moving into their second to eighth year of operations. The group should be moving into a more accelerated earnings phase over the next few years. We raise out TP to S$2.29 (from S$2.15) based on a smaller 15% discount to RNAV.

We also like Capitaland which should enjoy a positive knock-on impact from the improved performance at CMA. With improved sentiment in the China residential sector and healthy reinvestment activities in recent years, we believe the group’s activities and earnings are on an upward trajectory. We have raised our TP to $4.09, based on a 25% discount to RNAV vs a 35% discount previously, as asset monetisation actions should close the gap to underlying asset values.

We also like companies that offer attractive valuations, as RNAVs should remain relatively resilient. We see more scope for this in the mid-cap space and our pick in this segment is Wing Tai, which offers a 25% upside to our TP of S$2.33, pegged at a 30% discount to asset backing.

Potential catalyst could come from its upcoming new launch at Tampines Road.

With a low legacy land cost, we expect this development to rake in decent margins when launched and sold.