SG Residential Property - OCBC Investment 2016-07-05: Home prices likely to grind lower

SG Residential Property - OCBC Investment 2016-07-05: Home prices likely to grind lower  CAPITALAND LIMITED C31.SI  UOL GROUP LIMITED U14.SI  CITY DEVELOPMENTS LIMITED C09.SI 

SG Residential Property: Home prices likely to grind lower

  • Home prices dip in 2Q16
  • Dev demand for prime landbank
  • Remain neutral on sector

Barring curb reversals, expect home prices to grind lower in 2H16

  • According to URA flash estimates, the private property index fell 0.4% over 2Q16 – versus a 0.7% dip in 1Q16 – which brought the cumulative price decline to 9.4% since peaking in 3Q13. 
  • Looking ahead to 2H16, barring curb reversals, we expect home prices to grind lower under a potent mix of an uninspiring economic outlook, continued physical over-supply and persistent pressure from still-falling rentals as buyer sentiments remain cautious in what is by now one of the longest property bear in recent history. 
  • On a relative value basis, we prefer the prime residential property segment (CCR), which in fact saw prices move against the grain by increasing 0.2% and 0.3% in 2Q16 and 1Q16, respectively. 
  • On the other hand, the mass- market segment, however, (OCR) presents the least attractive risk-reward in our view. OCR prices fell 0.7% in 2Q16 after registering a 1.3% decline in the previous quarter.

Firm developer demand for prime landbank

  • Under current market conditions, we see new home sales settling at a relatively stable equilibrium of between 7k and 9k per annum. 
  • Given that developers generally continue to enjoy firm balance sheets, there is firm competition for prime land-bank. 
  • To illustrate, the latest GLS tender at River Valley attracted a solid 13 bidders and a top bid from S$595.1m from Guocoland, which was the highest for a GLS site outside on Sentosa since 2009. This site at the junction of River Valley Close and Martin Place is expected to yield ~450 high-end homes with an estimated breakeven price of ~S$1.9k. Assuming a 10%-20% profit margin, the market expects Guocoland to launch at S$2.1k to S$2.4k psf.

Maintain NEUTRAL on sector

  • Maintain NEUTRAL on the domestic residential sector. 
  • We continue to prefer developers with diversified portfolio exposure and strong balance sheets. 
  • Our top developer picks are CapitaLand [BUY, FV: S$3.68], City Dev [BUY, FV: S$9.89] and UOL [BUY, FV: S$7.43].

Eli Lee OCBC Securities | http://www.ocbcresearch.com/ 2016-07-05
OCBC Securities Analyst Report BUY Maintain BUY 3.68 Same 3.68
BUY Maintain BUY 7.43 Same 7.43
BUY Maintain BUY 9.89 Same 9.89