First development properties profits since 2013. We expect development profits to taper off in 2017 as most of Australian residential development is sold. Ho Bee Land’s (HBL’s) two residential development projects Rhapsody in Gold Coast and Pearl in Melbourne drove top line growth from development property income. This is HBL’s first development profits since 2013. We expect this revenue boost to taper off in the coming year as bulk of the revenue from these two projects has already been recognised. HBL’s other residential projects in China are booked under Associates and JVs.
Activity in Singapore high-end property starting to pick up. Negativity towards Ho Bee Land’s high-end property and huge discount to book less warranted. We opine that HBL’s current discount of 45% to book value unfairly penalises the Group because of the negativity towards the 3 Sentosa properties which make up 16% of our FY17 GAV. Sentosa condominium units have made the news over the last few years for the losses made by their owners and the falling Average selling prices (ASP).
We observed a notable pickup in transactions for properties >S$2,000psf which ties in with the healthier sales figures of higher-end property units reported by locally listed developers in the latest quarterly results. 2016 saw 1,244 of such transactions, the first time we witnessed a significant y-o-y increase since 2010. We expect the momentum to continue into 2017 as a result of the widening gap between Singapore’s correcting high-end home prices and rising regional high-end home prices, especially in China, Hong Kong and Jakarta, where most of our foreign buyers come from. An additional catalyst to sales volumes and prices can come in the form of the lifting of property cooling measures in time to come, although we do not see this happening in 2017.
Figure 1: No of Property Transactions >S$2,000psf
Rose Court sale demonstrates astute foresight of management.
HBL’s sale of Rose Court for £94.5mn in February 2017 is a further demonstration of the astuteness of management. Acquired just four years ago at £67.2mn, the sale price represents a 41% gain (in GBP terms) over the holding period (or 9% annualised). This is on top of a c.6.5% rental yield per year. Though GBP depreciated c.12% over the holding period (mostly post-Brexit), we think this transaction further demonstrates the astuteness of management.
At 0.55 P/NAV, HBL trades at a bigger discount to the peer average (market capitalisation >SGD 1bn) of 0.69. We opine that interest in high-end properties is returning as the divergence in prices between Singapore’s and regional high-end property widens. The returning interest should narrow the P/NAV gap in HBL’s share price. As such, we narrow our discount to RNAV from 40% to 30%. We maintain our ACCUMULATE call on Ho Bee Land with an increased RNAV-derived target price of S$2.64 (from S$2.20).