Property-related stocks are likely to face more downward pressure in the short term, as the stocks have surged too fast in too short a time, making a price correction necessary, a Citigroup analyst said in a client note yesterday.
“Despite our bullish view concerning the outlook for the property market, in the short term ... the downside risk is much more than the upside, as we see housing affordability restraining the pricing upside and the pre-sale system limit developers’ leverage on future prices,” wrote Andre Chang (張致竑), an analyst at Citi Investment Research.
The building material and construction stock index, a gauge of the nation’s property sector development, has surged nearly 78 percent since the beginning of this year, compared with a 6.68-percent increase in the benchmark TAIEX index during the same period, the Taiwan Stock Exchange’s tallies showed.
Cathay Real Estate Development Co (國泰建設), one of the sector’s major players, for example, has seen its share prices rise 90 percent this year. The stock closed at NT$28.7 yesterday, while shares of Chang Hong Construction Co (長虹建設) jumped 95.74 percent to NT$105.5 and Huaku Construction Co (華固建設) shares surged more than 120 percent to NT$136.
As many developers had traded their shares at a much larger premium to their net asset value (NAV) as of yesterday, the Citigoup analyst said investors should offload their positions in property-related stocks in view of a short-term correction.
But if investors are still interested in the property sector and don’t want to miss a potential upswing, Chang suggested they should switch to asset-rich stocks such as Asia Cement Corp (亞洲水泥), Tatung Co (大同) and Taiwan Fertilizer Co (台肥), as well as developers who have more exposure to commercial properties instead of residential projects.
“We believe the upside of commercial properties, as opposed to residential, is not fully factored into the prices yet,” Chang wrote, adding that commercial properties had not moved as much over the past few years as residential ones.
This means the capital value and rental in the nation’s commercial properties lag behind other Asian markets compared with residential properties, he said.
In addition, the increase in demand from Chinese investors and other foreign institutional investors for commercial properties since the presidential election will continue to bolster the sector, he said.
“This external demand is not subject to the weak economy and income growth in Taiwan, suggesting room to pay for more premium,” Chang wrote.
Chang’s comments come ahead of a planned visit by a group of Chinese real estate developers next week who are seeking first-hand information about a construction site near Taiwan Taoyuan International Airport, a commercial-leisure complex in Taichung and several resort areas in southern Taiwan.
Citigroup yesterday downgraded Cathay Real Estate to “sell” from “buy” with a new target price of NT$24, as the stock is trading at a 20-percent premium to NAV — much higher than many of its peers — while its earnings momentum is weaker, Chang said.
He is also bearish about Chang Hong Construction and cut the stock to “sell” from “buy,” with a new target price of NT$107.
Citigoup, meanwhile, upgraded its rating on Taiwan Fertilizer to “buy,” with a target price of NT$170, saying that most investors had underestimated the value of its commercial land-blocks.
The Taipei-based company has seen share prices rise 83.42 percent this year to close at NT$146 yesterday.
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