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Kamis, 28 Juli 2011

Property still going strong - CLSA

"We like investments where the risk is time, not price"
- Richard Chandler -

In an interview with Institutional Investors magazine in 2006, the reclusive legendary Chandler brothers, founders of Sovereign Global Investment reveal their strategies that built a US$5bn+ (back then) fortune (from US$10mn family fortune) in just two decades. Their key competitive advantage is their ability to take a very long term view of "risky" markets.

Indonesian property stocks have been a big laggard but that has not been the case for physical property (still considered risky by many) as land prices have moved up a lot in the last 12-24 months. We have flagged this latest trend numerous times in the past but here are a couple of latest anecdotes:

Bekasi, east of Jakarta, a personal experience. Land prices here have gone up by at least 40% YTD. One of our colleagues, after months of watching prices move up, finally closed the transaction – but 40% more expensive when first offered in the market. Our co-worker made the decision after learning that an independent appraiser confirmed the value of the house - BCA mortgage is the most conservative when appraising.
Cipete, south of Jakarta, an expat favorite. Green and lushes Cipete has long been a favorite amongst expatriates. Only three months ago, land prices here were around US$700-800 psm. That has now gone up to US$900-1000 psm.
Senayan, central Jakarta. My friend’s house in Senayan Residence cost Rp 3 billion two years ago. Market price of the house is now worth at least Rp 8 billion ($944,000).
It’s not often that fundamentals improve ahead of being priced in equities. Property stocks have started to re-rate only very recently. We believe that property is a secular story still has a long way to go. With a stronger currency, growing middle class, lower cost of funding, and very low mortgage to GDP (CIMB Niaga just took it one notch up as the bank is offering 10 years fixed rate, 10% down payment with 20 years tenor - by far the most aggressive mortgage product out there) - all stars are now aligned for continued strong operational performance.

So what are the plays? We like property developers with large landbanks acquired long time ago (assets not revalued per annum as there’s a capital gain tax). This is because as land prices continue to soar, the margins will continue to expand.

Bumi Serpong (BSDE IJ) is a nice example – It has the largest quality landbank in the western area of Jakarta – and seen its gross margins expanding to almost 50% (from 25% just a few years ago). This means that developers with large landbanks have a lot of leverage to NAV appreciation.

BUY developers with large landbanks: Bumi Serpong (BSDE IJ), Ciputra Surya (CTRS IJ), Bakrieland (ELTY IJ) and Lippo Cikarang (LPCK IJ).

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