Singapore Property - Maybank Kim Eng 2017-01-11: Trend of narrowing margins could continue

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Singapore Property - Trend of narrowing margins could continue

Land tender reinforces cautious view on developers 

• Strong bids for a city fringe land parcel has reinforced our cautious view on property developers, as intense competition could lead to narrowing margins. 
• While falling inventory levels may arrest further declines in home prices, slow home sales could continue with cooling measures remaining in place. The low velocity of sales raises development risks and lowers return on capital for developers. In this environment, we recommend positioning defensively and prefer exposure to stability over growth. 
• UOL (BUY, TP SGD7.39), our top developer pick, could outperform as it offers decent returns from its large recurring income base and good development earnings visibility from a conservative residential portfolio. There is also strong valuation support as the stock is trading at a large discount of c.40% to the market value of its underlying properties. 
• The potential sale of United Engineers (Not Rated) and Global Logistic Properties (Not Rated) could drive fund flow into the other three large-cap developers, CAPL, CIT and UOL, as investors redeploy capital within the sector.

Keen interest in city fringe site 

• URA announced the tender results for a land parcel at Perumal Road. The city-fringe site that is located next to Farrer Park MRT Station will be developed into a non-landed residential project with ancillary retail space. The site has a maximum permissible GFA of 16,161sqm, of which up to 500sqm may be used for commercial space. The land parcel attracted 11 bidders with Low Keng Huat (Not Rated) submitting the highest bid of SGD174m or SGD1,001 psf per plot ratio (ppr).

Pricing above comps and consultant expectations 

• The top bid for this site represents SGD214psf or a 27% premium over that for Sturdee Residences, which was sold for SGD181.2m or SGD787 psf ppr in March 2015. As of Nov 2016, 64% of the 305-unit project has been sold at an average price of SGD1,580 psf. 
• While stronger locational attributes and the inclusion of a higher value commercial component should justify a higher price tag, the 27% price premium appears fairly rich. 
• Furthermore, six of the 11 bids submitted were above the top end of prices expected by property consultants of SGD790 to SGD890 psf.

Margins could continue to be squeezed 

• Even after factoring in a higher residential ASP of SGD1,600 psf for this project and assuming a generous SGD5,300 psf for its retail component, we estimate a tight PBT margin of just 11% for the developer. This is in line with our observations of narrowing margins for residential sites sold over the past year and reinforced our cautious view on developers.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-11

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