Just like the S-REIT sector, funding for property companies will be a key concern as we believe banks would continue to reduce their exposure to the property sector and thus compounding the credit crunch on developers that are in need of funding.
However, many developers are now financially stronger - net debt/equity ratios have come down and cash positions have strengthened since the 02/03 trough period. No doubt that fear of asset value write-down is rising, but we estimate that on average, developers need to write down 31.2% of their equity value before their net gearing deteriorate to the trough period level.
Developers are currently trading at an average price-to-book (P/B) of 0.59x – this translates to a downside potential of 26.6% if valuation is to fall towards 02/03 trough level. However, we believe it is prudent to remain selective, and our preference is for financially stronger developers which have already seen their valuations fall below the 02/03 trough level and have low net gearing.
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