Singapore Property - UOB Kay Hian 2017-03-13: Positive Policy Surprise To Further Catalyse Sector Re-Rating

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Property Sector Singapore Property Cooling Measures CAPITALAND LIMITED C31.SI GLOBAL LOGISTIC PROP LIMITED MC0.SI CITY DEVELOPMENTS LIMITED C09.SI WING TAI HLDGS LTD W05.SI HO BEE LAND LIMITED H13.SI

Singapore Property – Positive Policy Surprise To Further Catalyse Sector Re-Rating

• The move to ease the Seller's Stamp Duty marks the first significant easing of demand side policy measures. There is room to tweak the nine rounds of property cooling measures introduced since 2009. 
• Expectations of a bottoming out of residential property prices will result in further re-rating of property developers. 
• We raise target prices by 5-8% and upgrade City Developments to BUY. 
• Maintain OVERWEIGHT.

WHAT’S NEW

• The government announced calibrated adjustments to the Seller’s Stamp Duty (SSD) and Total Debt Servicing Ratio (TDSR) framework with effect from 11 Mar 17. 
• Key highlights are as follows: 

Easing of Seller’s Stamp Duties (SSD). 

• The government lowered the SSD rate by 4ppt for each tier with the new SSD rates ranging from 4% (for properties sold in the third year) to 12% (for those sold within the first year). Currently, the SSD rates range from 4% (for properties sold in the fourth year) to 16% (for those sold within the first year). 
• The move comes as the number of property sales within the 4-year window has fallen significantly over the years since this measure was introduced. 
• Note that there is no change to Additional Buyer’s Stamp Duties (ABSD) and Loan to Value (LTV) Limits.

Stamp duties on transfer of equity interest in entities whose primary tangible assets are residential properties in Singapore 

• ... to treat transactions in residential properties on the same basis irrespective of whether the properties are transacted directly or through a transfer of equity interest in an entity holding residential properties.
•  The intent is for significant owners of residential property-holding entities (PHE) to be subjected to the similar stamp duties as buying or selling the properties directly.

Total Debt Servicing Ratio (TDSR) to exclude mortgage equity withdrawal loans with LTV ratios ≤50%. 

• The TDSR framework will no longer be applied to mortgage equity withdrawal loans with LTV ratios of 50% and below. 
• This comes on back of feedback of some borrowers that the framework has limited their flexibility to monetise their properties in their retirement years, ie to borrow against the value of their properties to obtain additional cash.

ACTION 

• Maintain OVERWEIGHT on property; top picks are CapitaLand, Wing Tai. The move to ease the SSD marks the first significant easing of the demand side policy measures.
• The expectations of a bottoming out of residential property prices will result in a further rerating of the property developers. We raise target prices by 5-8% and upgrade City Developments to BUY.

ESSENTIALS 

Positive surprise to further catalyse sector re-rating. 

• The move to ease the SSD marks the first significant easing of the demand side policy measures, thus confirming that peak of policy tightening is behind us and will raise the likelihood of further easing of property measures ahead. There is room to tweak the nine rounds of property cooling measures introduced since 2009. This builds expectations of a bottom in residential property prices (about 15-20% below the peak in 3Q13 in our view). 
• This will result in a re-rating of the property developers that have been pricing in steep 40-50% decline in physical property prices.

Target prices raised by 5-8%; upgrade City Developments to BUY. 

• We raise target prices by 5-8% as we reduce the discount to RNAV by 5-8 ppt, in line with long-term mean. 
• RNAV will remain the same but there will be a narrowing of discount to RNAV as investors hope for a possible bottoming out of the property market. 
• We expect developers’ trading discount to RNAV to gradually narrow from the current 31% discount (-1.2SD) towards the historical 15% discount.

Minimal impact on property demand; severe SSD unnecessary to curb speculation.

• We see limited impact on physical property demand from this move as there is no change in the ABSD or a big change to the debt service ratio. The move is easing the severe SSD as the speculative demand as measured by subsales share of total transactions dropped to 1.2% in 1Q17 (2.3% in 2016) from a high of 14% in 2008 and 8% in 2011 when the SSD was introduced. 
• The share of mid/high-end segment subsales dropped from 60-80% in 2007-11 to below 20% last year, which may imply a slight positive impact on the mid/high end segment.

Silver lining in supply. 

• 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 expect overall private housing vacancy to peak at 11.5% in 2017 before fundamentals begin improving in 2018 (11.5% vacancy) to 2020 (10.1% 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%. 
• We opine 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.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-13

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