SG Residential Property - OCBC Investment 2016-12-09: Severe Dip In Home Prices Unlikely

SG Residential Property - OCBC Investment 2016-12-09: Severe Dip In Home Prices Unlikely CAPITALAND LIMITED C31.SI  GLOBAL LOGISTIC PROP LIMITED MC0.SI  CITY DEVELOPMENTS LIMITED C09.SI 

SG Residential Property - Severe Dip In Home Prices Unlikely

  • Home prices to dip 3%-7% in 2017.
  • Economic outlook relatively benign.
  • Prefer diversified large-caps developers.

Forecast for private home price to dip 3% - 7% next year 

  • In 2017, we forecast for private residential prices to dip 3% - 7% and private residential rents to fall 5%-10%. 
  • A severe dip in home prices 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. 
  • We also expect primary residential sales to remain muted at between 6k and 9k units in 2017. Despite prices continuing their downtrend in 2015 and 2016, the rate of sales appears to have stabilized near that in 2014 (~1.8k– 2.0k units sold per quarter), with about 5.7k units sold over 9M16 to date.

See significant scope for curb reversals going forward 

  • We see significant scope for curb reversals going forward, particularly if housing prices accelerate to the downside or if the economic outlook deteriorates rapidly from here. 
  • The Singapore authorities have a strong track record of actively reviewing its property legislation with respect to its goals of ensuring stable housing prices and stability in the financial system, and had in fact tweaked existing TSDR measures in Sep 2016 to extend the exemption of TSDR rules for those looking to refinance loans for owner-occupied residential properties, and also for investment properties given certain restrictions. 
  • The economic backdrop also appears fairly benign for domestic home prices, in our view; we forecast Singapore GDP growth at 1.3% and 1.5% in 2016 and 2017, respectively, and note that the unemployment rate remains at a low 2.1% as at end 3Q16.

Physical oversupply situation to persist in 2017 

  • That said, a physical oversupply situation is likely to persist in 2017, which will impact rental levels and vacancy rates. This will continue to pressure domestic home prices while interest rates are expected to rise ahead. 
  • We forecast that domestic benchmark rates (short-term SIBOR/SOR) for mortgages will broadly rise 80 to 200 basis points from now to end 2020. 
  • Together with the impact of falling rentals, this will pressure the rental carry for investment home owners and will result in incremental selling in the secondary market 

Prefer diversified large-cap developers with healthy balance sheets 

  • We maintain a NEUTRAL rating on the sector, and prefer large-cap developers with diversified business models across geographies and sub-asset classes, healthy balance sheets, and share prices that trade at a significant discount to their long-term fundamental valuations.
  • Our top picks are CapitaLand [BUY, FV: S$3.68], City Developments [BUY, FV: S$9.89] and GLP [BUY, FV: S$2.37].

Eli Lee OCBC Investment | http://www.ocbcresearch.com/ 2016-12-09
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.68 Same 3.680
BUY Maintain BUY 2.37 Same 2.37
BUY Maintain BUY 9.89 Same 9.89