Downgrade to Cautious Industry View: The 4-30% relative outperformance of the Singapore property stocks since March 2009, despite a backdrop of deteriorating macro conditions, has made it fundamentally difficult for us to justify being invested in this space, particularly given downside risk to our base case NAVs of as much as 37%. On the back of less compelling valuations, we are downgrading CapitaLand and Keppel Land to Underweight from Equal-weight but maintaining our Underweight rating on City Developments and Wing Tai. We are upgrading Allgreen, our new sector top pick, to an Overweight rating from Equal-weight as the stock offers 17% potential upside from current levels, while maintaining our Equal-weight rating on Wheelock Properties. CapitaLand offers the least downside risk to our base and bear cases among the large-cap stocks, followed by City Developments ahead of Keppel Land.

Maintaining Base Case NAVs Despite Downside Risks. Morgan Stanley’s recent 2009e Singapore GDP downgrade to -10% suggests that our base case officevaluations could trade toward our bear case. Despite that, we maintain our base case NAVs except for a slight adjustment to CapitaLand’s NAV to S$2.02 from S$1.98. At current levels, City Developments and CapitaLand are trading 12% and 4% above our bull case NAVs, respectively, pricing in upcycle office and residential market valuations, which we believe are unjustified at this stage of the property cycle.

Better Entry Prices at Bear Case NAVs: We believe the property stocks could trade downwards on realization of revaluation losses from investment properties and write-downs of residential land banks impacting net earnings, with the downward pressure particularly evident in 2H2009. For the rest of 2009, we would look to switch into higher yielding S-REITs, with CapitaCommercial Trust (CACT.SI, S$0.86, EW) as our sector top pick.