Shareholders of UOL Group, Hongkong Land, Guocoland and Ho Bee Land H13 are well-positioned to benefit significantly from restructuring their portfolio amid a lower interest rate environment, according to a report released by DBS on Singapore developers.
In the report released on Oct 18, DBS analysts Derek Tan and Tabitha Foo noted that Singapore listed property developers are trading at an average of 0.3 times to 0.4 times P/B, representing one of the biggest discounts in the past 10 years.
While investors attribute this to residential exposure, the analysts see a mispricing of risk, particularly as residential projects have been delivering stable returns.
Despite operating under close policy monitoring, given their access to attractive leverage, the analysts estimate that developers can achieve project internal rate of return (IRR) of around 10% on average.
“With land bid prices moderating recently, we anticipate margin expansion for selected projects acquired through 2024, provided property prices remain buoyant,” the analysts add.
The analysts have observed that a strategy adopted to close the pricing gap observed between developer share prices and the “market value” of their properties has been to strategically divest, particularly non-core assets, in the past two years.
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UOL’s 50.4% owned subsidiary Singapore Land recently divested Stamford court for $132 million, while Ho Bee has sold its 49% stake in a new business park development for $205 million, the analysts state.
The analysts note that this strategy has led to improved optimisation of portfolio returns, boosting gains and supporting a share buyback strategy, for some developers.
While this is value-enhancing, the analysts believe that more can be done to further unlock value for shareholders, resulting in a more consistent re-rating.
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REITs are trading at higher P/B multiples of 0.9 times, much higher than property developers at 0.4 times.
As such, the analysts state that restructuring into a stapled security or spinning off a portion of their investment property portfolio could unlock significant value, leading to a potential share price increase of 100%, based on their estimates.
In a scenario where the market gives similar valuations to the REIT portion of the structure, the analysts estimate the average P/B of 0.4 times could increase to 0.8 times, or from a price over realisable net asset value (P/RNAV) perspective, an increase from 0.3 times to 0.7 times.
As at 4.13pm, units in UOL are trading 1 cent higher or 0.18% up at $5.52, units in Hongkong Land are trading 6 cents lower or 1.49% down at US$3.96 ($5.20), units in Guoco are trading at 1 cent higher or 0.63% up at $1.60 and units in Ho Bee are trading at $1.97 flat.
