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Why the Recent Sell-Off for Property Stocks May Have Been Overdone

(Source: www.fool.sg)

On Friday last week, property stock giants – City Developments Limited (SGX: C09), CapitaLand Limited (SGX: C31) and UOL Group Limited (SGX: U14) – plunged 15.4%, 6.0% and 13.5% respectively. This was a knee-jerk reaction to the surprise news that the Singapore Government is implementing additional property cooling measures . Investors are anticipating lower demand for Singapore residential property and lower returns on investments for future residential projects in Singapore. This is due to the fact that demand will be dampened and that developers will also have to incur an additional 5% stamp duty when they purchase land banks. That…

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On Friday last week, property stock giants – City Developments Limited (SGX: C09), CapitaLand Limited (SGX: C31) and UOL Group Limited (SGX: U14) – plunged 15.4%, 6.0% and 13.5% respectively. This was a knee-jerk reaction to the surprise news that the Singapore Government is implementing additional property cooling measures.

Investors are anticipating lower demand for Singapore residential property and lower returns on investments for future residential projects in Singapore. This is due to the fact that demand will be dampened and that developers will also have to incur an additional 5% stamp duty when they purchase land banks.

That said, the reaction from the market seemed too drastic in my view. Here are a few reasons why.

Other revenue streams

All three property companies have multiple revenue streams besides their property development arm. In fact, of the three property stocks, City Development, which depends the most on property development, only had around 53% of its revenue from that segment in the 2018 first-quarter. Revenue contribution from property development for UOL and CapitaLand during the same quarter was 48% and 13% respectively.

The other sources of revenue came from rental income from their investment properties, management fees and hotel operations.

Geographical diversity

Furthermore, the three property companies also have geographically diverse properties. Besides their Singapore assets, they also have projects in China, Vietnam, Indonesia and other countries. These projects will not be affected by the Singapore property cooling measures.

Discount to book value

Lastly, after the sell-off, all three companies trade at substantial discounts to their book value. Considering that most of the assets on their books are tangible assets, it would be appealing to value investors who believe that the stocks are undervalued at current prices.

At the time of writing, shares of CDL, UOL and CapitaLand had price-to-book ratios of 0.87, 0.59 and 0.67 respectively.

The Foolish Conclusion

The recent property cooling measures will undoubtedly impact the profitability of property developers, especially those that have a significant pipeline of Singapore residential properties. That said, the recent stock market sell-off may be overdone because these property companies also have other income streams and are geographically diverse.

This means the cooling measures will only have an impact on certain portions of their businesses. Also, at current prices, shares of the three property stocks trade at large discounts to their book value, which might make them interesting value propositions.

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