SG Residential Sector - OCBC Investment 2015-12-18: Physical oversupply situation to persist

CAPITALAND LIMITED C31.SI UOL GROUP LIMITED U14.SI WING TAI HLDGS LTD W05.SI WHEELOCK PROPERTIES (S) LTD M35.SI

SG Residential Sector: Physical oversupply situation to persist

 Prices to dip 5%-15% over 2016-17

 Physical oversupply poses headwinds

 Prefer high-end and diversified bluechip developers

We forecast that private residential prices would dip 5% - 15% over 2016-17 and that 2016 primary residential sales would remain muted at between 6-9k units.

We also expect residential rentals levels to fall 8%-15% over 2016-17 and vacancy levels to increase from 7.8% currently to about 10% by end 2017.
That said, a price crash in excess of 20% is improbable, in our view, given the high price elasticity of demand in the housing market; that is, we will likely see significant buyer demand coming into the market at lower price points.

Looking ahead to 2016-17, we see three key drivers of domestic residential prices.
First, a significant physical oversupply situation is likely to persist, which will impact rental levels and vacancy rates.
Second, floating mortgage rates (typically pegged to short-end SIBOR or SOR) will rise alongside higher interest rates in the US, and this will add pressure on rental carry and housing affordability.
Finally, on the flip side, we see potential curbs reversals after price declines reach double-digits in 2H16 and after.
However, we believe these will only soften the magnitude of price declines and are unlikely to reverse the general bear market trend.

We see relative value in the high-end segment, and highlight that the premium of high-end median psf prices over mass-market is currently at 59% (near a 10-year low and >1 sd below the 10Y average of 90%).
From our analysis, we believe that the seller stamp duties and additional buyer stamp duties imposed over 2010-11 likely have had a heavier impact on the high-end segment. The ABSD – in essence a percentage upfront tax on home purchases – is a key driver of demand and will likely be a prime candidate for adjustment, in our view, if and when the authorities decide to support prices.
In this scenario, the high-end segment could benefit significantly.
We favor high-end developers which are trading at attractive discounts to their fundamental valuations; Wing Tai [BUY, FV: S$2.58] and Wheelock Properties (SG) [BUY, FV: S$2.27] – two developers with significant high-end exposure - are currently trading at an average discount of 56% and 52% to their RNAVs and book values, respectively.
We also like CapitaLand [BUY, FV: S$4.07] and UOL [BUY, FV: S$7.43] for their diversified business model and asset portfolios, healthy balance sheet and attractive valuations.

Eli Lee OCBC Securities | http://www.ocbcresearch.com/ 2015-12-18

OCBC Securities Analyst Report BUY Maintain BUY 4.07 Same 4.07

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BUY Maintain BUY 2.27 Same 2.27