Singapore Property 2017 Strategy - UOB Kay Hian 2017-01-04: Silver Lining In Supply


Singapore Property 2017 Strategy - Silver Lining In Supply

  • Maintain an OVERWEIGHT stance on the Property & REITs sector as concerns on rising interest rate expectations have been over-discounted. 
  • We anticipate supply-led recovery within the business park, hospitality and private residential space. 
  • We prefer property stocks with exposure to these segments, with AREIT, FLIT, ART, FHT and City Developments as our top picks.


  • 2017 Strategy: We maintain our OVERWEIGHT stance on the sector as we believe concerns over a rise in interest rates have been overblown. 
  • Expect budding supply-led recovery in selective sectors that include business park, hospitality and in the private residential space. 
  • We prefer property stocks with Ascendas REIT (AREIT), Frasers Logistics & Industrial Trust (FLIT), Ascott Residence Trust (ART), Frasers Hospitality Trust (ART) and City Developments as our top picks.

Prefer REITs with exposure to business park and hospitality space. 

  • We see opportunity to invest in S-REITs at attractive levels as Fed rate hike expectations dampen share prices. REITs offer the right balance of yield and growth as rate hike acceleration in 2017 remains uncertain, in light of the depressed global outlook. 
  • We anticipate supply-led recovery within the business park and hospitality space with Ascendas REIT (AREIT), Ascott Residence Trust (ART) and Frasers Hospitality Trust (FHT) as our preferred picks for these segments. 
  • We also like Frasers Logistic & Industrial Trust (FLIT) for its Australian exposure with relatively better growth prospects compared with its Singapore peers while offering a high 7% yield.

Invest in developers to position for the fundamental shift in 2018 on supply-side recovery, though cooling measures could be here to stay in the near term. 

  • Our analysis of unsold private residential inventory indicates that 2018 is likely the year where vacancy could reverse its upward trend after peaking this year, as supply tapers. 
  • We opine City Developments Limited (CDL) could be a beneficiary should this turnaround materialise as it derives about 30% of its value from the residential segment. We also like deeply valued CapitaLand for its diversification across geographies and asset classes.

No certainty on rate hike acceleration in 2017. 

  • After hiking interest rates in Dec 16, Fed officials have signalled the likelihood of three more rounds of increases in 2017.
  • However, we continue to opine that reasons for the Fed to reconsider pulling the trigger thrice in 2017 could include: 
    1. continued volatility in Europe with rising anti-globalisation sentiment post Brexit, 
    2. depressed growth prospects in mature Asian markets like Japan, where interest rates are only marginally positive, and 
    3. slowing growth in China, with overall exports for 11M16 declining 7.5% yoy. 
  • This could create a feedback loop into the US economy, especially as foreign contributions made up about 44% of S&P 500 companies’ sales figures in 2015, according to S&P Dow Jones Indices.

Developers: Silver lining in supply. 

  • We expect overall private housing vacancy to peak at 12.6% in 2017 before fundamentals begin improving in 2018 (12.5% vacancy) to 2020 (11.1% vacancy). This will be propelled by tapering private residential supply, as even we forecast muted residential demand of about 8,200 units p.a. from 2015 to 2020, by incorporating conservative population growth estimates at a CAGR of 1.2%. As of 3Q16, unsold inventory (including completed units) of 27,894 units was near trough levels (historic low of 27,820 units in 1Q16), based on URA data stretching back to 1999.
  • 4Q16 URA flash estimates indicate slower qoq decline, with the private residential price index down 0.4% qoq compared with 3Q16’s 1.5% qoq contraction. The flash estimates also indicate a slower decline in private home prices for 2016 (-3.0%) compared with 2015 (-3.7%).

Increased property stamp duties in Hong Kong to dim expectations of easing property cooling measures in Singapore. 

  • With Hong Kong doubling stamp duties on overseas property buyers from 15% to 30% in Nov 16, potential capital inflow will likely encourage the Singapore government to maintain cooling measures in the near term.
  • According to URA caveat data, Chinese buyers only accounted for 5-6% of overall transactions during Nov-Dec 16. We note that over the last three years, Chinese buyers constituted nearly 7% of overall caveat transactions. 
  • In 3Q16, private home prices fell 1.5% qoq, continuing its anaemic performance over 12 consecutive quarters. We expect the impact of multiple rounds of cooling measures, together with higher supply, to lead to a healthy 15-20% moderation in property prices from 2013’s peak, beyond which we expect prices to trend in line with GDP growth.

Industrial: Only business park segment stands out on supply side. 

  • We opine that business and hi-tech segment could benefit from spillover office demand. This is especially due to the lack of pre-committed business park / hi-tech supply from 2017 onwards, according to industry consultant CBRE. 
  • However, industrial REITs with exposure to domestic warehouse/factory space will likely continue to be susceptible to supply-side rental pressure. Thus, we will be unsurprised should some of these REITs report revaluation losses during the full-year reporting season later this month, which we witnessed last year for Sabana REIT and Cache Logistics Trust. Sabana saw same storestore asset value (ex 10 Changi) decline nearly 10% yoy while Cache’s same-store Singapore portfolio value fell nearly 5% in 2016 (ex Kim Heng and DHL). 
  • Ascendas REIT (AREIT) is our preferred pick in the industrial space.

Turnaround in hospitality space in sight

  • Turnaround in hospitality space in sight, which we opine could materialise in 2H17, as 2018 supply of hotel rooms is expected to slow to a trickle (around 199 rooms or about 0.3% yoy increase). As hotel room supply has historically exhibited a tendency of being deferred, 2H17 could be opportune for investors to pick up hospitality REITs should signs of back-end loaded hotel room supply fail to materialise. 
  • For the remainder of 2016, we continue remain sombre on the sector, as Oct 16’s latest numbers still exhibited poor operating data for Singapore hoteliers, likely in the wake of August’s domestic Zika outbreak (13.4% yoy RevPAR decline). 
  • We note however, that STR Global’s (hotel data analytics firm) preliminary Nov 16 data painted a less grim picture (5.9% drop in RevPAR). 
  • Ascott Residence Trust (ART) and Frasers Hospitality Trust (FHT) are our preferred picks in the hospitality space.

Office: Early signs of stabilisation, especially on the pre-leasing front. 

  • According to CBRE, Grade-A office rentals declined 2.1% qoq in 3Q16 to hit S$9.30 psf pm, which implies slowing decline on a qoq basis. In previous quarters during 3Q15-2Q16, Grade A rents witnessed qoq declines ranging from 3.5-4.8%. 
  • We were also somewhat heartened by healthy pre-leasing activity in big ticket projects like Marina One (reportedly ~50% occupied) and GuocoTower (~80% occupied). Office landlords like CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) have also stepped up forward renewals, with a respective 6% and 5% of office leases by NLA to renew in 2017.
  • According to industry consultant CBRE, the healthy take-up led to positive islandwide take-up of 0.82m sf in office space for 3Q16, reversing four consecutive quarters of negative space absorption (average 0.23m sft).
  • Beyond 2017, supply remains meagre at below 0.65m sf (Frasers Tower), which should underpin a pick-up in rental growth. We opine that Grade-A office rents could correct 20% from 1Q15’s peak before bottoming out (3Q16 Grade-A rents already declined 18.4% from 1Q15’s peak of S$11.40 psf pm).

Retail: Challenging environment. 

  • 3Q16 saw retail rentals in Orchard Road decline 0.5% qoq, representing seven consecutive quarters of decline, as the leasing environment remains competitive. The overall retail environment is still expected to remain challenging due to increased mall supply, rising costs and threat from alternative retail channels. 
  • Retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) have guided for more moderate rental reversions and we expect retail rental growth to trend in line with inflation. 
  • Acquisitions and asset enhancement initiatives (AEI) are expected to continue catalysing growth, i.e. CMT’s Funan DigitaLife Mall (commenced July 16), FCT’s Northpoint Shopping Centre (commenced Mar 16), and Suntec’s Park Mall.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-04
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