UBS bullish on PH property sector

Swiss investment banking group UBS is upbeat on the Philippine property sector, saying it will likely post slower but “more resilient” compounded annual growth rate (CAGR) in earnings of 15 percent from 2013 through 2016.

In a report dated Dec. 18 titled “Allayng Fears,” UBS analyst Caroline Kabigting said that after performing below market expectations for most of 2013, the property sector was now trading at “more attractive” valuations as macroeconomic concerns, potential housing/office oversupply and slowing earnings momentum continued to weigh on sentiment.

“Although some of these concerns are valid, we believe there are factors that could cushion their potential impact on the sector’s fundamentals. These include a generally modest rise in property prices, high domestic liquidity, the banking sector’s accommodative stance, healthy pre-selling activity, a positive outlook in the business process outsourcing (BPO) segment, steady overseas Filipino remittances, organic growth in housing demand, and the country’s stronger economic footing,” the report said.

On concerns about property bubble forming, UBS argued that despite the hectic development in recent years, property prices in general had posted modest increases.

In 2009-2012 or following the US-epicentered global financial crisis, UBS noted that housing pre-sales in the Philippine property sector recorded a CAGR of 43 percent. Amid aggressive capacity expansions in retail and office spaces and increased borrowings to fund large capital spending, aggregate earnings recorded a CAGR of 25 percent. UBS said this was fueled by a successive drop in interest rates, a stronger peso and improving economic performance.

UBS said the continued drop in interest rates, coupled with the banks’ accommodative stance, had led to the 18 percent CAGR in home mortgages in 2009 to 2012 and provided a significant boost in property sales.

“Despite this, overall credit growth has not been faster than those of other countries in Asia—hence, we believe the Philippines does not stand out as a risk,” it said.

The country’s mortgage penetration rate, computed by UBS using the banks’ housing loan portfolio plus developer financing, was estimated at less than 4 percent of the country’s gross domestic product (GDP), indicating that the level remained “very low.”

After heavy capital spending over the past three years, UBS’ forecast of a more resilient 15 percent earnings compounded earnings growth for the sector through 2016 was seen driven in part by the residential segment.

UBS estimated that the residential segment accounted for 64-65 percent of property sector’s revenue which, in turn, is seen getting a boost from hefty unbooked revenues even if pre-selling activities were to slow down from 2014 to 2016. Unbooked revenues refer to sales take-up, which are yet to be recognized in developers’ books because these projects have yet to reach a certain stage of development.

In the meantime, Kabigting said the continued expansion in retail and office capacity should underpin 14 percent annual growth from 2013 through 2016 in higher-margin rental portfolios, estimated to account for 35-36 of revenue. “This would offer the sector a good source of recurring income and provide support on any downside,” she said.

UBS’ “most preferred” stocks for the Philippine property sector are Megaworld Corp., Robinsons Land Corp. and Vista Land and Lifescapes, which it expects to post the strongest earnings CAGR of 19-20 percent from 2013 to 2016.

UBS revised its price target for Megaworld to P4.50 (from P4.90), Robinsons Land to P25.80 (from P29.50) and Vista Land to P6.90 (from P6).