Upgrade to OVERWEIGHT, BUY CDL, KepLand and CapLand. We are upgrading our sector call on the Property sector to OVERWEIGHT, on the back of (1) physical prices leveling off, (2) a comfortable mid-prime price disparity paving the way for return of interest in prime properties, (3) mass market volumes to transition to mid-prime properties and (4) expected return of foreign buyers. On the ground, confidence is sky high, which is best documented by a shift from fleeting enquiry interests (buyers’ market) three months ago, to the present genuine and immense buying interests (sellers’ market). While property stocks have already soared 98.9% QoQ and 32.7% MoM, we believe upside potential remains for the blue chip developers under our coverage. Pegging 0 – 30% premium (which transpired during initial phases of property recovery cycles) to their new RNAVs, we derive BUY recommendations for City Developments (S$9.59 TP: S$12.18), Keppel Land (S$2.54 TP: S$3.15) and CapitaLand (S$3.85 TP: S$4.27).

Improved physical market dynamics. We reckon physical prices have already bottomed in 1Q09, assisted by developers’ aggressive downward price adjustment (10 – 30%) to move inventories. We believe current price disparity between mid-prime projects stands within 1Q05 – 3Q05 levels, which should drive sales and buying interest into prime projects for the next six - nine months. More importantly, we reckon this implies more upside potential than downside, thus erecting a good entry point for investors. We expect end-2009 vacancy rate to hit 6.7 – 6.9%, which is still under 20-year average and past crises’ levels. Supply in the pipeline for the next three years have plunged 41.5% YoY, ending any initial concerns over a supply glut.

Onshore palate to salivate offshore appetite. We believe the pick-up in domestic buying activity and current mid-prime price gap would trigger a return in foreigners’ buying appetite. Signs of foreigners’ purchasing interest have begun to emerge, based on caveats lodged from Apr – May 09, recent prime project launches and anecdotal evidences. We foresee an increased quantity of foreigners to enter the market within the next six – nine months.

CDL as top pick. We prefer developers with a reasonable exposure to the domestic residential market. With 34% of its RNAV (vs. CapLand’s 16% and KepLand’s 22%) exposed to Singapore’s residential sector, CDL is our top pick. We believe this accords it a slight edge over the strengthened balance sheets of KepLand and CapLand post-rights, notwithstanding their higher proclivity for NAV growth through opportune land acquisitions. Key risks include a slower-than-expected economic recovery, negative newsflow emanating from the US and failure of IR to take off.