Most property analysts, who had rated the sector as underweight, are busy upgrading their earnings forecasts and target prices for various companies. It must be noted, though, that the buys are in companies catering the middle and lower segment of the market, rather than the high-end specialists that were in favour earlier.



"We initiated coverage of the Thai residential property sector with an overall positive view, believing that demand will pick up in 2007 while supply will be contained," Terry Meensook of Citigroup said in a recent report to clients.

Nearly all analysts covering the sector agree, saying that a re-rating, thanks to the better political and macroeconomic picture would help the industry.

They believe that although housing demand has been sluggish this year due to weak consumer confidence linked to economic and political factors, the recent changes in the political climate, coupled with the likelihood of a pause or decline in interest rates, should help the industry.

A recovery is now believed to have begun and is expected to gain momentum during the second quarter of next year.

"This momentum should result in average sales revenue growth for the sector of 21.2% year-on-year for 2007," said Rasmiman Sermprasert of Tisco Securities. "Moreover, for the remainder of this year and into 2007 we expect the focus of demand to shift to more affordable categories of housing, especially budget condominiums and mid- to low-priced townhouses. For these reasons we raised our sector weighting from Neutral to Overweight."

Jiraporn Bumrungchatudom of Phatra Securities estimates that residential property companies will deliver double-digit earnings growth, at 15% or more in 2007, for the first time in three years.

"This will be mainly driven by strong volume growth rather than margin expansion given the high housing inventories in the market," she says.

Although the sector's index is up nearly 13% this year, against just 3.5% for the SET index, analysts say there's a potential for the sector to show tremendous growth in the near future.

The strongest demand, they say, will be in the condo and townhouse segment, with a gradual pickup in single detached houses later in 2007.

Helping prevent a supply glut is what analysts say is a very disciplined system that prevents overheating. They say lower supply is going to continue, as applications for land development permits, a leading indicator of housing supply, point to a contraction in some segments.

Based on data from Plus Property Partners, new detached houses and townhouses launched during the first six months of 2006 totalled 6,386 units from 55 projects. This was a 3% decline year-on-year, while detached house sales in the first half of 2006 also dropped by 10%.

In terms of selling prices, in H1 2006 about 47% of the detached houses were priced at 1-5 million baht per unit while 72% of the townhouses were priced at between 600,000 and three million baht.

"Demand will be strongest in mid- to low range ... into 2007. We note that these two segments are the most reliant on mortgage loans. A drop in mortgage rates and a pickup in consumer confidence would drive even stronger demand next year," says Citigroup's Mr Terry, who has a "sell" rating on Land & Houses, but a "buy" rating on LPN Development and Preuksa Real Estate and a "hold" rating on Asian Property Development.

Ms Jiraporn rates AP and LPN as her top picks, while for Ms Rasmiman companies such as Supalai, Noble Development and Lalin Property are the cheapest property stocks under Tisco's coverage, with 2007 forecast price-earnings ratio (PER) valuations of 6.3-6.8 times. Property Perfect, SC Asset, Noble and Sansiri offer the lowest 2007 price/book value (P/BV) levels (at 0.5-0.8 times) while PS, Noble and Lalin have the lowest 2007 EV/EBTIDA (at 5.6-7.7 times).

Ms Jiraporn says SPALI "is the most attractive of our top picks" with a projected gross yield for 2007 of 6.9%, followed by LH (6.7%), LALIN (6.0%) and LPN (5.6%). "Hence, we have 'buy' ratings on SPALI, PS and, for larger funds, LH."

Also, the average 2007 forecast PER for the trio (at 9.3 times) is substantially cheaper than for their peers in Hong Kong, currently trading at 15.3 times, she added.