Property stocks in Singapore nose-dived dramatically on Friday, following the announcement of new property cooling measures in Singapore. The Singapore government made a surprise announcement to increase the buyer stamp duty by 5% for everyone, except for Singaporean and permanent resident first-time home owners. In addition, it also tightened the loan-to-value limits by five percentage points.
This would have an impact on investors looking to buy a second investment property in Singapore and also increases the down payment needed to purchase a home. This will most certainly put investors off, and also make it more difficult for home-buyers to purchase a private property due to the higher initial down payment.
The lower demand for private homes will, in turn, affect property developers who have projects due for sale in the next few years. Unsurprisingly, on Friday, the market reacted by driving the prices of Straits Times Index (SGX:^STI) component property stocks, CapitaLand Limited (SGX:C31), UOL Group Limited (SGX:U14 ) and City Developments Limited (SGX:C09) down by 6%, 13.5% and 15.6% respectively.
Considering the fall in share prices, are the firms cheap now?
Benjamin Graham, the author of the “The Intelligent Investor” and mentor to legendary investor Warren Buffett, was a keen believer of investing in securities with a low price-to-book ratio. The price-to-book ratio, or PB ratio, is a comparison between how much you are paying for the security and its net asset value.
In theory, buying stocks that trade at a discount to its book value is like buying a $1 coin for less than a dollar. Investors would be able to reap a return when the market realises the discrepancies and raises its share price to its fair value. This method of valuation is especially useful for real estate investment trusts (REITs) or property companies that mostly have tangible assets on its books.
At the time of writing, Capitaland Limited, UOL Group Limited and City Developments Limited had a price-to-book ratio of 0.66, 0.59 and 0.85, respectively.
All three companies are trading below their book values, and as such, can be considered cheap using this metric.
The Foolish bottom line
The price-to-book ratio is a good metric to use for property companies that own mostly tangible assets, such as properties. However, it is worth noting that this is only one aspect of a company. There may be other factors that can drive the share price up or down.
For one, the changes in the property cooling laws can impact the profitability of its development projects and likewise, also depreciate the book value of these developments. Besides imminent changes to its book value, investors also need to contend with the changes in the company’s profitability. A poor return on equity may be another reason why companies might trade below their book value.
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