Listed property firms to see strong earnings rebound

A sharp earnings rebound awaits Philippine property firms in the next 12 to 24 months, driven by the recovery of mall rental revenues as well as the resumption of residential construction and selling activities, said First Metro Securities Brokerage Corp.

First Metro Sec’s top picks in this favored sector are: SM Prime Holdings (SMPH), Ayala Land Inc. (ALI), Robinsons Land (RLC) and Megaworld Corp.

“Our selection process is based on the level of benefit for each counter from having re-accelerated residential launches, large mall exposure, potential re-rating from REIT (real estate investment trust) listing, and whether it is an index glamor name,” First Metro said in a research note dated Nov. 30 written by head of equity research Mark Angeles, and analysts Estella Dhel Villamiel and Alyssa Alamar.

First Metro’s 12-month price targets for its top picks are as follows: P48 for SMPH; P52 for ALI; P30 for RLC and P5.10 for Megaworld.

The property industry is seen to benefit from a significant improvement in the operating environment, with the decline in COVID-19 positivity rates allowing the government to ease mobility restrictions in the fourth quarter, while rising vaccination rates are expected to make the economic reopening more sustainable.

Bullish segments

Among the property subsegments, the stock brokerage is most bullish on the residential and shopping mall segments.

On the residential segment, First Metro said the purchasing power of households remained intact, underpinned by healthy household balance sheets, the recovery of the labor market and resilient remittances.

“Moreover, the availability of credit contributes significantly to consumers’ ability to afford big-ticket purchases, such as housing,” the research said.

With banks remaining awash with cash while funding costs remain at record-low levels, First Metro said this systemic liquidity would continue to drive real estate loans in the next 12-24 months.

That said, it noted that some property developers like ALI, Megaworld and SMPH had begun to accelerate project launches, while RLC was expected to follow suit.

“This is especially so as mobility restrictions ease and available labor recovers, allowing for more construction to commence. Furthermore, construction starts have ramped up in recent quarters and should allow for resilient housing demand to flow through to financials sooner rather than later (via revenue recognition),” the research said.

For the shopping mall segment—which has been badly hit by lockdown measures during this prolonged pandemic—First Metro sees a “very clear” path to recovery.

“Amid a sustained easing of restrictions, recovery of tenant sales and reversion to pre-COVID rental rates, the segment can easily foster speedier earnings rebound in the next 12 months. This is especially so as we expect rental reprieve to eventually end and allow for full recovery of the segment,” the research said.

Discounted rentals rates

At present, the research noted that rental charges remained at 30 to 50 percent of normal levels—still behind the recovery of tenant sales.

“We believe rental concessions could come off faster than the consensus expects, observing that landlords were now reevaluating rental concessions rather frequently—on a month to month basis and only at month-end—effectively allowing them to price in the recovering operating environment.

On the office property segment, First Metro has a “neutral” view, noting that the changing dynamics of the workplace continued to cloud longer-term leasing outlook for most traditional office lessees.

“On one hand, work-from-home (WFH) arrangements have resulted in improved levels of productivity and cost efficiency. On the other, greater WFH adoption post-COVID is challenged by employers’ lingering worries on employees’ productivity, and the required investments to sustain hybrid-working arrangements, given increasing demand from employees to adopt flexible lifestyles,” the research said.

Meanwhile, First Metro sees brighter prospects for the outsourcing sector, translating to higher rents and lower vacancy rates.

For this industry, it expects that WFH penetration will be limited amid regulatory pressures and high data privacy risks; that the Philippines will remain a net beneficiary of global outsourcing firms’ efforts to rationalize costs, resulting in higher demand for office space in countries that offer talent at competitive rates; and that there will be a limited Philippine Economic Zone Authority-accredited office pipeline in the next two to three years as a result of delays in construction and the ongoing moratorium on tax incentives.