Property Development & Inventory - CIMB Research 2016-07-15: A softer Jun

CITY DEVELOPMENTS LIMITED C09.SI CAPITALAND LIMITED C31.SI UOL GROUP LIMITED U14.SI

Property Devt & Invt - A softer Jun

Jun sales of 536 units, ex-EC, trending below monthly average, but YTD volume on track to reach our 2016 target of 8,000-9,000 units.
Large supply and looming developer penalties to drag on price outlook.
Selective stock picking stance, prefer UOL, City Dev and Capitaland.

Jun primary home sales totaled 536 sans ECs (768 with ECs) which is 43% higher yoy but 49% lower mom. This level of sales is below the YTD monthly average and the wide swing in the monthly transactions reflects the lack of new launches. Only 234 new units were launched, translating into a take up rate of 2.3x.
Unlike May when sales mix was concentrated in the city fringe areas, Jun sales saw high end units making up 9% of sales, city fringe units 31% and suburban homes 60%.

YTD Jun sales totaled 3,810 units (5,692 units including ECs) and looks on track to reach our 2016 annual sales target of 8,000-9,000 units. This is in tandem with the 7,500-7,700 units transacted a year in 2014-15 and indicates some volume stability returning to the market.
But with incoming completed units of 20,516, 12,760 and 10,019 units for 9M16-2018, higher than annual average absorption, continued pressure on residential prices, particularly in the suburban areas, exists.

Private home prices drifted down 0.4% qoq in 2Q16, led by outside of the central region, which fell 0.7% qoq while HDB resale prices inched up 0.1% qoq. However, the rental market continues to be under pressure with the inflow of newly completed units. Hence, we maintain our projections for a 5-8% price correction this year.

The looming deadline for unsold inventory facing Qualifying Certificate and Additional buyers’ Stamp Duty penalties should intensify from 2017 and we anticipate developers lowering prices to clear stock. This will provide another drag to private home prices, on top of the supply indigestion.

Developer stocks have rallied in recent weeks on the back of a lower-for-longer interest rate environment and at 40% discount to sector RNAV, we think much of the above negative newsflow is in the price. We think any policy relaxation expectation would be more of a medium term catalyst while in the near term, investors would look for a bottoming out in prices to spur property stocks.
Hence, we expect the sector to trade range bound in the near term. The risk to our call is if prices in any of the residential micro-market bottoms out earlier than expected.

We like CAPL for its ROE-boosting capital recycling activities. The stock is trading at 40% discount to RNAV.

We think Brexit concerns are largely factored into share price. The UK makes up only a small 11-12% of revenue and asset base. It has a healthy balance sheet with gearing of 0.26x. Potential catalyst could come from overseas execution.

UOL has high recurring income underpinned by rental income, hotels and investment holdings, providing the group with a recurring income base. The stock is trading at a 44% discount to RNAV.

LOCK Mun Yee CIMB Securities | Yeo Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-15

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