Brace yourselves for a 14.8% discount on CapitaLand's home projects

Markdown is fair enough.

According to Nomura, its estimates suggest that, based on the current market value of CAPL’s 65.5% stake in CMA, the market is pricing in a 14.8% discount to our estimated value of CAPL’s residential projects in Singapore.

Here's more from Nomura:

The discount appears fair, in our view. As highlighted in our note “2013F supply, inventory risks underestimated”, published on 20 November 2012, our estimates suggest c.37,400 units of private condos and apartments could be launched for sale in 2013, which works out to nearly 19 months of supply based on the average monthly pre-sales (ex-ECs) of c.2,000 units in 2012.

Coupled with tougher restrictions on home purchases imposed by the government, we expect developers to offer more discounts and incentives in 2013 to move inventory.

CAPL has since added a second residential project in Bishan (99-year, GFA c.592,195 sq ft; c.700 units), next to Sky Habitat (99-year, 509 units), at a cost of SGD505.1mn (or SGD853psfppr).

Including the new project, we estimate CAPL’s SG residential inventory at c.3,000 units, taking into account projects that were less than 80% sold or yet to be launched as of end-October 2012. Most of this inventory belongs to the mid-to-upmarket segment on account of the price points and location.

On the other hand, sales appear to have been slow in 2012, with c.350 units sold during the first 10 months of 2012. As such, the discount of 14.8% to the value of CAPL’s SG residential projects that the market appears to be pricing in reflects the potential inventory risk and discounts/incentives that may be offered in order to move the inventory, and is therefore fair, in our view.

Considering there appears to be limited upside to the valuation of CAPL’s residential development business at the current level, it may therefore make more sense for investors to invest directly into CMA in order to maximise returns from the latter’s core earnings recovery, in our view.

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