Singapore Property - Maybank Kim Eng 2017-03-15: Evaluating Upside Risks to Home Prices

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Singapore Property Sector Market Outlook UOL GROUP LIMITED U14.SI CAPITALAND LIMITED C31.SI WING TAI HLDGS LTD W05.SI HO BEE LAND LIMITED H13.SI CITY DEVELOPMENTS LIMITED C09.SI

Singapore Property - Evaluating Upside Risks to Home Prices

Raise TPs to reflect better sentiment; prefer laggard UOL 

• The government recently surprised the market by revising its cooling measures. While the overall impact could be small as its key measures holding down demand such as ABSD, LTV and TDSR are intact, we believe improving sentiment may lift volumes marginally. 
• Calibrated loosening should also provide some market stability and price support. We now see scope for narrowing RNAV discounts and apply zero discounts (from 20% discounts) to our residential GAV. Accordingly, we lift TPs by 1-9%, the largest for CDL and Wing Tai. 
• Still, remain NEUTRAL on the sector as we believe the occupier market could stay weak while elevated land prices may continue to weigh on profitability. 
• We believe the market should curb their enthusiasm on outperformers and switch to laggard, UOL, after the recent sector rally.

Small Impact Expected… 

• The government recently revised its property-cooling measures, taking the market by surprise. While the overall impact on the physical market should be small as ABSD, LTV and TDSR are intact, its calibrated loosening should lead to better market stability and price support. Improving sentiment - even before the measures were announced - could also induce a marginal uptick in buying volumes. As such, we see scope for RNAV discounts to narrow and now apply zero discounts (from 20% discounts) to our residential GAV. 
• We lift TPs by 1-9%, with the largest revisions made for CDL and Wing Tai. 
• Still, we remain NEUTRAL on the sector as we believe the occupier market could stay weak while elevated land prices may continue to weigh on profitability. We believe the market should curb their enthusiasm on outperformers and switch to laggard, UOL, after the recent sector rally.
• We cross-checked our new RNAV discounts with the historical RNAV discounts of sector bellwether, CDL. We believe our revised discount of 18% for CDL (from 24%) is reasonable, broadly in line with its average trading discounts in the past decade. 
• Unless the sector’s outlook improves materially, we see limited scope for further narrowing.

… Amid Improving Sentiment 

Pick-up in sales volumes… 

• Sentiment in Singapore’s residential market has improved in recent months.
• Take-up for two mass-market launches was commendable, with UOL selling 39% of The Clement Canopy and Chip Eng Seng (CHIP SP, Not Rated) selling 58% of Grandeur Park Residences during launch. The high-end market also showed signs of life, albeit off depressed levels. CapitaLand’s recent sale of the remaining 45 units of The Nassim suggests the readiness of astute investors to deploy capital in the market.

…and declining stock of unsold homes 

• Improving sales and tapering land supply have combined to lower the stock of unsold homes, to 21,100 units or roughly half of the 40,400 during their last peak in 2011. Even at current low sales run rates of about 8,000 new homes a year, this inventory should translate to just three years of sales. 
• Furthermore, with only 4,500 units added a year from the government’s confirmed land sale list, saleable resources are likely to trend lower. Mortgage rates for homes remain low, as proxied by the 3-month SIBOR. Also, an ongoing price war among banks (here and here) implies that funding could stay cheap. High cash levels among Singapore households also suggest ample liquidity in the system. All these point to potential short-lived upside for home prices. 
• Longer term, the occupier market could stay weak as housing-stock increases continue to outpace population growth. Resultant vacancies may limit a full sector recovery.

Price Sensitivity 

• While we continue to assume that home prices will fall another 1-3% in 2017 before a gradual recovery, strong investment appetites and ample liquidity in the market may present upside to our assumptions. 
• For stocks under coverage, CDL and Wing Tai have the biggest exposure of 29% and 24% of their GAV to the Singapore residential market, in our estimation. 
• Outside our coverage, Bukit Sembawang offers the purest exposure with almost all its assets in this market.

Earnings and RNAV sensitivity to a 20% ASP hike 

• In our price-sensitivity analysis, we raise ASPs by 20% for unsold stocks while keeping sales volumes unchanged. 
• Coming from its depressed earnings base, Wing Tai offers the largest RNAV/EPS upside of 7%/87% if prices move by 20%. This stems from two projects: Le Nouvel Ardmore and The Crest. 
• CDL’s upside to a 20% ASP increase is 5%/20%. Its smaller EPS impact than Wing Tai is due to its larger income base from other businesses. 
• Following years of cutting its Singapore residential exposure, CAPL is least sensitive.

Not Out of the Woods but Trading Opportunities 

• The recent improvement in sentiment may provide a window of opportunity for developers to lift sales and potentially, prices. Any price and/or volume improvements may fuel developer stocks in the near term. However, we do not see a full sector recovery as the occupier market could stay weak for an extended period of time with housing-stock increases outpacing population growth. 
• Inventory turnover is unlikely to improve materially with key cooling measures remaining in place. 
• Furthermore, unless we see a big rebound in home prices, elevated land prices remain the biggest dampener of developers’ profitability.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-03-15

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