Property prices are expected to keep running hot into the new year and share market investors looking at gaining exposure to this thematic can do so through a number of listed property stocks.
But there's one in particular that stand above the crowd, according to Morgan Stanley which picked the Stockland Corporation Ltd (ASX: SGP) share price as the one to own in 2020.
That's an interesting choice as Stockland is the laggard among its large cap peers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. The stock may have jumped 40% plus since January, but that's well behind the Mirvac Group (ASX: MGR) share price and Lendlease Group (ASX: LLC) share price. These are up 52% and 64%, respectively.
Retail letdown
The underperformance of Stockland may be due to concerns about its lower quality retail property portfolio. These second-tier malls make up 40% of group earnings and retail is going through a tough patch.
Morgan Stanley acknowledges this as much but thinks investors have missed the point.
"While we remain structurally bearish on Retail, we think the market has overlooked the steps that SGP has taken to address issues in its mall portfolio, and think further downside from here (in the form of earnings downgrades/de-valuations) is more subdued vs. peers," said the broker.
Big cuts lower risks
Stockland devalued 86% of its malls over the past year by around 7% (from peak book value) and is the most aggressive in cutting valuations on its retail properties.
In comparison, Vicinity Centres (ASX: VCX) and Scentre Group (ASX: SCG) have only devalued half of their properties with an average 2% cut to book value, noted Morgan Stanley.
"SGP has been realistic about the need to reset rents in its centres, flagging -7% re-leasing spreads for FY20 (deepest in the sector), and cutting overall rent assumptions by -7% since FY17," added the broker.
"This is supported by our analysis of SGP's occupancy costs, which suggests that specialty rents have been cut by an average of 5% in its centres – helping to create a more sustainable revenue base."
Re-rating opportunity for Stockland
What's more, sales growth in Stockland's malls have been improving and that means there is a re-rating opportunity for the stock in 2020, particularly if the residential property market continues to rebound.
Morgan Stanley calls Stockland it's top pick in Australian property and noted the stock is trading on a relatively generous dividend yield of nearly 6%.
The broker rates the Stockland as "overweight" (meaning a "buy") with a price target of $5.50 a share.
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