Singapore Property - Maybank Kim Eng 2016-10-04: Tightrope for Developers

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Singapore Property - Tightrope for Developers

We continue to see a difficult operating environment for property developers. Aggressive land bids could lead to narrow margins if prices are not raised. Even though construction and financing costs have fallen, their declines may not be enough to offset costlier land. While developers could try to raise ASPs, we do not rule out more hawkish policies from the government to stamp out any revival of home prices.

And while developers under our coverage have not overpaid in recent land bids, it remains onerous for them to replenish land banks. Remain NEUTRAL on them with CAPL (BUY, TP SGD3.93) as our preferred exposure. We think diversified players with strong recurring income could outperform.

Fierce competition has led to escalating land prices this year, arising from limited land-banking options as the government scales back its Government Land Sales (GLS) launches this year.
The top bid submitted by a joint venture between Sing Holdings (Not Rated) and Wee Hur (Not Rated) for a mass-market condominium site at Sengkang in Sep 2016 was 17% higher than the average price paid by a Chip Eng Seng (Not Rated) JV for two adjacent land plots at High Park Residences in Aug 2014.
Prior to that, GuocoLand (Not Rated) paid a record SGD1,239 psf for a prime residential site at Martin Place in July. A similar pick-up in prices can be observed in the Executive Condominium (EC) market. EC sites sold this year cost 16-25% more than sites sold last year.
We expect continued keen interest in the remaining three residential land parcels for launch in the next few months.

While construction costs, the second-largest, have fallen in recent months, their decline is probably not enough to offset higher land costs unless selling prices are raised. We note that the 5% decline in construction costs from their peak is much smaller than the 9.4% decline in home prices.
While funding costs for developers have also probably declined in recent months as the 3M SOR has given up nearly 100bps this year, we believe this is unlikely to move the needle much as funding accounts for just 2-3% of project costs.

Despite economic weakness, rising unemployment and elevated home vacancies, buying sentiment remains buoyant in the mass market. One only has to look at the turnout at mass-market projects. About 270 units or 43% of the 626-unit The Alps, a mass-market condominium in Tampines, were sold during its launch on 2 Oct. MCC Land, its developer, said that 88% of the units sold were 1- and 2- bedders priced at SGD491-806k each. Their 41-65 sq m size kept them easy on the pocket. MCC Land, in fact, has sold more units here than at its nearby project, The Santorini, launched at the start of 2014. We believe lower price tags from an average 13% reduction in unit size played a crucial role.
Elsewhere, turnout at a preview of Forest Woods, a mass-market project in Serangoon by CityDev (BUY, TP SGD9.43) was equally remarkable. CityDev apparently also kept its units small and affordable to move them. We believe cheap mortgages from persistently low interest rates also helped to stoke buying interest. The large cash pile on Singapore’s household balance sheets suggests pent-up investment demand which could be deployed to buy homes.
Furthermore, still-high stable HDB resale prices could have spurred upgraders’ demand. All these seem to provide scope for developers to raise their mass market prices, to capitalise on the prevailing market sentiment.

On the other hand, developers are probably aware that any notable rebound in home prices could trigger more-hawkish policies from the government. As recent as July this year, government officials articulated that the 9.4% decline in home prices from their 3Q13 peak remained small relative to their 62% increase from their bottom in 2009.
The government has no intentions of lifting cooling measures anytime soon. As we believe investors cannot rule out a potential tightening of cooling measures if home prices rebound, we see developers walking a tightrope between price hikes and risks of provoking a policy backlash.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-04

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.71 Same 1.71

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