Navigating Singapore ~ Property - Overweight , good value
Overweight on valuations
- Property stocks are trading at c.42% discount to RNAV, below the -1 s.d. mean discount. Developer stocks have been trading range bound for most of 2016 driven by cheap valuations and lack of immediate re-rating catalysts or RNAV reflation activities.
- Going into 2017, we believe that developers would continue to remain range bound as rising global uncertainties and prospect of higher interest rates would likely have a negative impact on employment and affordability. That said, we see little downside risk to RNAV from the former as Singapore developers have little unsold Singapore landbank and have diversified their portfolios outside of Singapore and into Australia, UK and China.
- With the sector trading at 0.77x P/BV and large cap developers having a strong balance sheet, we think M&As could be a possibility.
1H17: Supply concerns to remain on the radar
- Although 2017 is expected to see a lower quantum of completions compared to the expected peak supply in 2016, the expected 13,284 units coming onstream still exceed the long-term average. Hence, we think this will drag on stock price performance.
- Higher SIBOR rates are also likely to translate into increased mortgage costs and erode housing affordability.
2H17: ABSD concerns to tick up
- We expect concerns over developers’ Additional Buyers Stamp Duty (ABSD) penalties to accelerate in 2H17 as projects with remaining unsold units hit their deadlines.
- Projects such as IOI Properties’ The Trilinq, Elitist Developments’ Stratum, MCL Land’s Lakeville at Jurong, as well as City Dev’s The Venue and Wing Tai’s The Crest are some of the projects that could be affected. This could erode development margins and profitability of developers and may result in some write-downs for the projects.
- Private home prices have declined by 2.6% for 9M16 and down 11% from the peak in mid-2013. Leading the way are prices in the Rest of Central Region (RCR), which dipped by c.11% while those in the Outside Central region (OCR) and Core Central Region (CCR) have declined by a slightly lesser 9-10%. HDB resale prices have also fallen by a similar 10% over the same period. Meanwhile private home primary transactions have stabilised at 7,135 units for 9M16, up 9% yoy.
- The near term outlook for the Singapore residential market remains challenging due to the high incoming supply. 2016 will see a peak in new completions. After completing 15,874 ECs and private homes for 9M16, there are 7,077 units remaining to be developed in 4Q16, bringing the total for the year to 22,951. In 2017, there are a further 16,167 units scheduled to come onstream, following which new completions will contract significantly from 2018 onwards. Meanwhile, vacancy rate has risen to 8.7%.
- In terms of outlook, we think private home prices are likely to continue to retrace, on the back of weaker economic outlook with rising unemployment and hiking interest rates. Given the uncertain outlook, we think the scope for lifting the cooling measures currently in place, are likely to be slim.
- Furthermore, we are likely to see an acceleration of the ABSD and QC penalties to be paid by developers from 2017, which could translate into more price erosion as developers clear inventory.
- Our Overweight call is largely premised on the cheap valuations of property developer stocks where we think further asset price deflation have been priced in.
- Upside risk could come from more capital deployment into new investments which should boost RNAVs and a deceleration in the interest rate hike momentum as global growth remains sluggish.