SINGAPORE (Jan 18): Deutsche Bank expects a challenging 2017 for the local property market despite forecasting a recovery.

The brokerage noted that the supply of residential and industrial property hit its peak in 2016. This year, it will probably be the office and hotel property sector's turn to peak.

Demand, on the other hand, has started to stabilise on pro-growth economic policies.

As such, the property sector looks set to see the cyclical bottom in 2017.

Even so, Deutsche Bank analysts Joy Wang and Man Chien Fie continue to have reservations about the sector.

“While we may finally see a bottoming of the physical market as we move towards the tail-end of the supply cycle, a steepening yield curve could put this rate-sensitive sector back under pressure on a macro level, not to mention volatile exchange rates,” said Wang and Man.

The pair also pointed out that the higher expectations for positive growth could very well be a setup for disappointment in cyclical sectors and downgraded its view on the office sector. The pair prefers the residential and retail segments over the office, industrial and hotel segments.

There is also the issue of rising yield curves which impacts borrowing costs, and the growing volatility in foreign exchange rates. Wang and Man estimates that the sector could see a 1.9% earnings decrease with every 0.5 percentage point increase in borrowing costs, given that 70% of the sector’s debt is fixed and just 7% of debt is due within the coming year.

Among the Singapore REITs, CapitaLand Mall Trust, Ascendas REIT and CapitaLand have the strongest debt profiles. Meanwhile, CapitaLand and Global Logistic Properties are the most exposed to currency fluctuations, particularly in the renminbi and the US dollar.

Furthermore, the pair anticipates more mergers and acquisitions and restructuring activities within the sector, given the “significant valuation disparity between the public and private markets”.

Among the developers, they believe CapitaLand is poised to benefit the most from potential restructuring.

To that end, the analysts have downgraded CapitaCommercial Trust, Keppel DC REIT, and GLP from a “buy” to a “hold”.

Instead, they prefer companies with stable growth which could gain from the consolidation and restructuring of its operations, like CapitaLand, City Developments, and Mapletree Commercial Trust.

Shares in CapitaLand, CDL and MCT are trading at S$3.13 (RM9.81), S$8.86 and S$1.465 respectively on Wednesday. — theedgemarkets.com.sg