Singapore Property - Maybank Kim Eng Research 2016-06-29: The Property Fix ~ Cooling measures could stay; D/G to Neutral

Singapore Property - Maybank Kim Eng Research 2016-06-29: The Property Fix ~ Cooling measures could stay; D/G to Neutral Singapore Property WING TAI HLDGS LTD W05.SI  HO BEE LAND LIMITED H13.SI  CAPITALAND LIMITED C31.SI  CITY DEVELOPMENTS LIMITED C09.SI 

Singapore Property: The Property Fix - Cooling measures could stay; D/G to Neutral

  • We turn less bullish on the sector as our recent macro-analysis suggests that property-cooling measures could – and likely should - be in place for longer than expected. As such, expectations of a strong rebound in home sales may not materialise in the near term. 
  • While asset monetisation and overseas diversification may provide some support, we see them as weaker catalysts for the sector. We cut home-sales and EPS forecasts accordingly. 
  • We see less appealing valuations for Ho Bee and CityDev against our revised RNAV and TPs. Downgrade both from BUY to HOLD. Wing Tai stays as a HOLD. CapitaLand is our sole BUY in the sector.

Surplus capital to property will keep home prices up, up & away

  • We recently reviewed the relationship between Singapore’s property market and its broader economy in The Singapore Fix, dated 29 June 2016. Although Singapore has one of the highest home-ownership rates in the world, Singaporeans are still not satisfied. Almost everyone still aspires to be a landlord. This has led to the increasing use of residential properties as investments.
  • Investors continue to snap up residential properties whenever prices dip ever so slightly, even though income returns from this asset class have not been great in recent history. Even the best net yields during the GFC were only 3.5% for prime homes. We think that investors’ willingness to accept such low returns stems from their entrenched belief in the long-term capital-appreciation potential of this asset class. Buying property is also facilitated by the following two government policies:

    Avenue for unlocking CPF savings. 

    • Purchasing a property is one of the few ways a working adult can access his or her Central Provident Fund (CPF) savings in Singapore. Working adults are required to contribute a portion of their monthly salaries to CPF, Singapore’s state-managed savings plan, as a form of forced retirement savings. 
    • By purchasing a property with CPF funds and leasing it out, one can gain cash income throughout one’s life. This encourages the use of CPF for property purchases. There are also fewer restrictions on the use of CPF monies for the purchase of properties, unlike other forms of investments such as gold and stocks.

    Liberal subletting rules for public housing. 

    • Liberalised subletting rules for public housing since 2007 have encouraged the use of residential properties as investments. After the change in regulations in 2007, Singapore HDB owners are now able to lease out their entire flats if they meet the minimum occupation period. 
    • More than 51,000 HDB homes today have been approved for leasing. Their owners can thus buy private properties while retaining their public housing for rental. But Singaporeans’ preoccupation with owning and investing in properties has at least three undesirable implications, as we found in our recent macro- study.
      1. Poor allocation of capital. Even after the recent downturn in home prices, Singapore households have tied up SGD840b of their capital in residential properties – a relatively illiquid asset class. At 209% of GDP, we wonder if this is a poor allocation of capital, which can be channelled to more economically productive uses.
      2. Weighs on disposable income. Rising property prices tend to raise occupancy costs and lower disposable income for the population. Our calculations suggest that occupancy costs account for 20% of household spending in 2012-2013, up from 16% in 2007-2008 and 13% in 2002-2003. This is consistent with our observations on consumption, with Singapore having lower per capita household consumption than other high-income OECD countries.
      3. Wage inflation. We believe there could be another trade-off from rising property prices that may not have been fully appreciated. Conventional thinking suggests that home prices track income growth over time as the population can afford to pay more for their homes. We believe the reverse is also true: higher home prices can lead to higher wages as well. There are at least three mechanisms for this. Firstly, higher home prices would fuel inflation, accentuating the pressure on nominal wages to keep up with real wages, at the very least. Secondly, income needs to rise to service higher mortgages or rents. This applies to both the resident and non-resident workforce as occupancy costs usually represent a chunk of their spending. Thirdly, as 91% of households are home owners, a buoyant property market has enabled many young and smart Singaporeans to live on passive income and retire early.

To remake economy, government may keep cooling measures for some time

  • We believe the government is aware of the country’s infatuation with residential properties as investments and has implemented various tactical measures to address this. The introduction of ABSD and various loan-to-value limits since 2010 for the purchase of second and subsequent homes was targeted at the excessive use of residential properties as investments. At the time of implementation, the measures were meant to be temporary. But in the years since, the government has been reluctant to roll them back, oft citing still-high home prices.
  • Increasingly, we see risks of these measures becoming permanent. Even before considering top-down concerns, strong take-up rates for new launches and stubbornly low interest rates could keep the government guarded about lifting cooling measures too early. Property developers under our coverage have themselves been cautious on Singapore’s residential market for a few years. They have limited their exposure by diversifying overseas. Those private / foreign developers that had bought land at elevated prices in their stead could take a bigger hit if home-sales volumes stay soft.

Sales rebound from lifting measures may not happen

  • In view of the above, we believe that investors should temper their expectations for a home-sales rebound from any review of cooling measures. It is better to leave that as an upside surprise. While asset monetisation and overseas diversification could provide some sector support, we see them as weaker catalysts.
  • We cut home-sales and profit forecasts accordingly. We cut the most for Wing Tai in view of its need to pay various QC and ABSD penalties. We build in SGD66m of ABSD for The Crest (40% stake) in Sep 2017 and SGD131m of QC penalties for Nouvel 18 (50% stake) based on assumed unsold inventories at their deadlines beginning Nov 2016. Our cuts also reflect its smaller recurring income base and persistent headwinds for its retail business.
  • CityDev’s earnings have been lowered for slower sales, but the impact is buffered by its larger recurring earnings base and overseas profits. We factor in a SGD108m payment of ABSD for Commonwealth Towers (30% stake) in Feb 2018 and QC penalties of SGD131m for Nouvel 18 (50% stake). We push out sales assumptions for South Beach Residences, Gramercy Park and New Futura.
  • Small revisions have been made to our forecasts for CapitaLand and Ho Bee due to their smaller exposure to Singapore’s residential market. Ho Bee’s residential projects on Sentosa are not subject to QC deadlines. Nonetheless, we mark down the latter’s earnings further for lower profits from its UK offices due to the weaker GBP.

Valuations less appealing now

  • We raise discount rates applied to all Singapore residential assets by 5ppt to 20% as we expect an extended period of weakness. We also refresh our valuations to update the latest market value of listed entities and for significant currency moves. In particular, we lower the valuation of M&C by 18% to 365pence to reflect the sharp fall in its share price recently.
  • We find valuations of CityDev and Ho Bee less appealing now against our revised RNAV and TPs and cut them to HOLD from BUY. 
  • We made significant cuts in RNAV and TP for Wing Tai but retain it as a HOLD, as negatives appear to be priced-in. 
  • CapitaLand is our sole BUY in the sector.
  • We turn less bullish on property developers and downgrade our view to NEUTRAL from POSITIVE.

Valuation of Property Developers

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-29
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.71 Down 1.93
HOLD Downgrade BUY 2.28 Down 2.47
BUY Maintain BUY 3.93 Down 3.95
HOLD Downgrade BUY 8.92 DOwn 9.82