Eyeing mispricing opportunityLower mortgage rates could reignite demand appetite There has been government pressure to lower lending rates on the ground recently. Our checks suggest mortgage rates have only declined around 100bps from January to average 14% pa by end-February 2009. We believe only rates near 10% pa will lift demand close to sales levels in 2007-08.
Landed residential segment sales to relatively outperform. The property segment that benefits the most from lower mortgage rates is landedresidential especially for mid-to-lower income earners. High-rise residentials earn lower margins than landed and are hence less attractive for developers although demand in the mid-low segment can persist reasonably, in our view. We are negative on investment properties this year. We believe a meaningful increase in rental rates is unlikely.
50% discount to our calculated RNAV is attractive. We believe that over 50% discount to our property sector universe RNAV has been an attractive entry level. However, the length and intensity of RNAV recovery may vary. Our property stock universe is currently trading at average 4% discount.
Top pick is SMRA on a relative basis. We maintain our Buy ratings for Bakrieland, Ciputra Development, and Summarecon given discount to target RNAV at 38%, 37% and 58%, respectively.
We maintain our Sell rating on Lippo Karawaci and Jababeka. Rolling over our RNAV target to year 2010 and adjusting for 2008 figures, we raise our price targets by 14-26%. Our RNAV-derived price targets assume 16.1-16.9% WACC for development properties and 13.1-13.9% single cap-rate for investment properties.
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