Lucio Tan “triggers” property bull!

The recent move by Lucio Tan to go “loud” on his property ventures prompted me to change my “neutral” stand on the sector. I do believe that its time to go overweight on property counters.

Lucio Tan joins Greenbelt Race

Mr. Tan is not a known player in the local property sector. However, he is big both in Hong Kong and China property markets. In other words, he is with the big boys – Cheung Kong’s Li Ka Shing, Shui On’s Vincent Lo etc. Mr. Tan must have seen something that prompted him to go full blast in the local property market. We can never argue with Mr. Tan’s timing .... or his billions. He is known to have a keen eye on spotting turnaround opportunities. Note that Mr. Tan bought into Philippine Airlines and Philippine National Bank (PNB – P55.0) when things are looking nasty.

What this tells me is that the property sector will certainly enter the expansion phase.

For the longest time, I have been neutral on the sector since I do not see any “triggers” for property companies to generate meaningful “economic profits”. Most property companies are reliant on purchases by overseas Filipinos. However, this alone is not enough to pull the sector out of its slump.

Moving forward, purchases by local investors will be the "trigger" for the sector.

Here’s why:

Mismatch between growth and deflation. The country’s per capita income has risen to US$1,500.0. In Dollar terms, it has risen by 50% over the past 10 years. But in Peso terms, per capita income has expanded by 100%. On the other hand, property prices are down 70% from its peak in 1997. This means that in Dollar terms, property prices are mere 15% of its peak. Thus, the deflation of property values in the past 10 years has to be corrected. There is a big mismatch between income growth and property values. So most likely property values will start going up in the coming years.

91-day T-bills at 2.885%. The current 91-day t-bill rates will force the banks to move money to the consumers. For the past 10 years, banks have curtailed its lending simply because they can sit back, relax and make 10% return by lending to the government. The paradigm has changed. Banks will have to start lending to the consumers. Currently, banks are still offering mortgage rate at 10%. Moving forward, mortgage rate can go down to as low as 6%. This will definitely boost property purchases.

So with systemic risks and growth scenario emerging, there is every reason to overweight property stocks. However, instead of focusing on mainline property companies with clear earnings picture, I would bet on property stocks that have recapitalization and restructuring angle. They will likely outperform other property stocks.

My top 3 property stocks are Fil-Estate Land (LND – P1.02), C&P Homes (CMP – P2.85) and SM Dev’t Corp. (SMDC – P4.25).

LND has emerged as my top pick since the stock is still trading at “crisis” values. At current prices, LND is trading at mere 30% of its book value. At these prices, we are just coming in at the same footing as how much “vulture” funds would have paid for anyway. So downside is limited. My bet is for LND to trade at 50% of its book value or P1.70 per share in the near term. Long term, assuming the company comes up with a “go forward” plan, LND can trade at par with its book value.

Please read “Casino Royale”: some chips that are worth betting on; buyers beware


CMP is one restructuring story that the market has ignored. CMP is looking like another Benpres (BPC – P4.20) in the making. Major shareholders have already bought back P3.6bn in outstanding loans from banks. The existing Floating Rate Notes (FRN’s) amounting to US$140m can easily be tendered at 20-30% to a dollar based on comparable transactions. So moving forward, CMP has a strong chance of emerging as a debt-free entity. Its current market capitalization of P11.0bn dwarfs the value of its landbank. CMP is known to have the biggest landbank in the country today.

As for SMDC, it is clear that the company will emerge as the property vehicle of the SM Group. My speculation is that there will be more deals in the coming months to consolidate all the property projects/landholdings of SM Group under SMDC. Just like Mr. Tan, Henry Sy is making big bets in the property sector.