What are the risks and catalysts for real estate stocks?

 The real estate market would return to its excitement after a dull and sluggish period.

Real estate stocks have witnessed an impressive rally since early 4Q21 with the property sector index rising 15.3% since early 4Q21, higher than to VN-Index of 10.6%. Before that, most of them were in accumulation and sideways, together with low-interest rates environment, accelerating infrastructure development and a board-based recovery of macro fundamentals in 2022F. VNDirect believed the uptrend in real estate stocks would continue until 2022F, especially stocks of businesses with good asset quality as well as large projects to be handed over immediately at end-4Q21 and 2022F.

Upside risks for real estate stocks include new regulatory measures such as Decree 148/2020, Amended Construction Law 2020 issued in 2020, and the upcoming amended Land Law that are expected to tackle the bottlenecks in the approval of residential projects and shorten the time in granting construction. The market will return to its excitement after a dull and sluggish period.

However, VNDirect said real estate stocks could face some downside risks. First, the prolonged pandemic could restrict marketing and sales activities. 

Second, housing prices have increased rapidly, especially in decentralized and sub-urban areas, which are raising concern and pricing out of the market for home buyers. 

Third, it sees rising construction cost on material prices hike in FY21F, especially steels prices have increased more than c.40-45% YoY. Steel accounts for 12-15% of total construction cost (based on industry estimates), this could drive up housing prices if those remain at their current high level in the next two years.

Fourth, the individuals earning income from property leases with a price of more than VND8.33m per month are subject to tax even if they do not have full 12 months for lease in a calendar year under the Circular 40/2021/TT-BTC issued on 1 Jun 21, which will take effect from 1 Aug 21. This could impact the rental housing market when this market is suffering due to COVID-19.

“With the current strong cash inflow, VNDirect sees the real estate stock price has been pushed up too quickly, especially companies are high exposure to land bank in Hanoi/HCMC’s neighboring provinces such as NLG, HDC, DIG. The property sector is currently traded at 21.85x of trailing P/E and 3.17x of current P/B, which is higher than to VN-Index of 17.46x of trailing P/E and 2.79x of current P/B. So it is likely that in the short term there will be adjustments to balance back, before entering a stable uptrend in long term”, VNDirect said.

VNDirect said investors should focus on quality names that possess the following traits: 1) huge land bank, especially located in Hanoi/HCMC’s neighboring provinces and suburban areas, which is already completed legal procedures as well as infrastructure to be launched in 4Q21 and 2022F 2) high exposure to the midrange and affordable condo segments as these segments are driven by real end-user demand and 3) sustainable earnings growth and scalable business models.