Some positive surprises from 2Q CY09 results. Not withstanding one-off fair value losses, three of the property developers under our coverage - CapitaLand, Keppel Land and UOL Group, reported 2Q CY09 results that were within our expectations while two, City Developments and Soilbuild Group, came in above our expectations. Key sources of the upside surprise came from the revenue from new projects launched in 1H09 and fasterthan- expected construction schedule of existing projects. Developers share the consensus view that the worst is over for the Singapore property market.

Strong recovery in the residential property sector had even caught some of the developers by surprise but most of them had been well-prepared in their planning of new project launches to capture the upturn. Office market, which had the worst outlook among the different property sectors, had also seen a slower rate of decline in rents in 2Q09.

What can we expect in 2H09? Based on the latest URA data, developers sold a record 2,649 non-landed property units in July. In particular, sales in the Outside Central Region, which had seen four consecutive months of decline since February, jumped sharply by 70.7% MoM to 2,750 units, surpassing that achieved in February. This strong demand for mass market properties had exceeded our expectations and is likely to continue for the rest of the year, as we see the recent increase in cash-over-valuation in the HDB resale market as a catalyst for HDB home owners to upgrade to private properties. We now see prices of mass market properties stabilizing at S$700psf-S$800psf, which appears to be the comfortable price that HDB upgraders are willing to pay in recent mass market launches and this is above the S$600psf-S$650psf range seen earlier this year. Further upside will depend on any recovery in the economy that leads to increase in wages.

Advocating a cautious strategy for developers. Despite the recovery in the property market, we prefer to stick to a more cautious strategy when selecting our top picks for property developers. We prefer developers thathad already locked in profits for their land during recent upturn in the property market, which can provide earnings visibility for the next 2-3 years. We also favor developers that are trading at relatively larger discounts to their NAV/RNAV as this can protect against further downside from revaluation losses of investment properties going forward. Our preferred pick among the large-cap developers is UOL Group (BUY, FV: S$4.07). We also have a BUY rating on Soilbuild Group (FV: S$1.36).