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

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 

Forecasting private home price to dip 5% - 15% over 2016-17 

  • 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. 

Physical oversupply situation to persist ahead 

  • 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. 

Prefer high-end and diversified blue-chip developers 

  • 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
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