We believe the recent increase in the VAT rates on new residential properties which obtained construction permits after January 2013 is more than reflected on Emlak’s share price. The stock underperformed the ISE100 benchmark by 1% y-t-d, despite the fall in the financing rates, expected to support the demand. Our revised 12m target price for Emlak implies a 17% upside potential thus we reiterate our OUTPERFORM recommendation for the stock. We have valued Emlak REIC via sum of the parts (SOTP) method, in which we have valued ongoing projects through DCF, and added lands at project value incorporating time value of money as well as new VAT rates over lands appraisal value.;
Decreasing mortgage rates to boost housing demand. CBRT’s easing bias since June 2012 caused a decline in the mortgage rates to 0.80% levels recently from 1.20% levels back in January 2012, based on weighted average of granted loans. Monetary conditions are expected to remain accommodative through 2013 which may lead to future decline in mortgage rates. One-half of Emlak’s sales are financed by housing loans, benchmarking to the previous years’ experience we expect decreasing rates to lead to a pickup in Emlak’s sales. In addition, the recent change in VAT scheme is likely to accelerate the sales of existing residential stock.;