Singapore Property - DBS Research 2017-09-12: Remedy For En-bloc Fever?

Singapore Property - DBS Vickers 2017-09-12: Remedy For En-bloc Fever? Singapore Property Stocks Review CITY DEVELOPMENTS LIMITED C09.SI FRASERS CENTREPOINT LIMITED TQ5.SI UOL GROUP LIMITED U14.SI CAPITALAND LIMITED C31.SI

Singapore Property - Remedy For En-bloc Fever?

  • Sharp 13.8% hike in DC rates for non-landed residential developments could further reduce profitability by 1-4% for recent en-bloc transactions.
  • Larger en-bloc sites such as Serangoon Ville, Eunosville and Rio Casa could launch early to mitigate potential risks of ABSD and QC charges in the future.
  • Moderates en bloc momentum.
  • Picks UOL and City Dev.

Sharp rise in development charge (DC) rates. 

  • In the recent half-yearly review on development charge (DC), the government raised the rates for non-landed residential by a sharp 13.8% on average given the recent en-bloc euphoria as developers race to replenish their land banks. All except two sectors (i.e. 116 out of 118 sectors) have increased rates by 6-29%, with the largest increase from sector 100 (Tampines Road/Hougang/Punggol/Sengkang area).
  • The revised rates will apply to cases which have been granted Provisional Permission (PP) with effect from 1 September 2017.
  • We believe the higher rates would especially impact the later enbloc transactions which have not been granted PP before 1 September 2017, especially those transacted in 2017, thus raising the cost of land acquisition for developers.

Estimated 1-4% rise in all-in cost, a dampener in an environment of razor-thin margins. 

  • Based on our estimates, the impact to the breakeven prices of the recent en-bloc transactions ranges between 1% and 4%. While the number may seem marginal, the impact cannot be disregarded in an environment of thinning margins amidst the nascent recovery in the property market.
  • As it is, the majority of en-bloc transactions made in 2017, in our estimates, are already pricing in a potential 6-18% increase in property prices to breakeven, based on the previous DC rates.
  • With the new DC rates, these could add another 1-3ppt to the assumed increase in property prices to breakeven, further eating into these developers' profitability.

Developers could look to launch early to “catch the current wave” of improved market transactions. 

  • We believe that developers for larger en-bloc sites, especially those with more than 1,000 planned new residential units per site, such as Serangoon Ville, Eunosville and Rio Casa, might look to launch projects as early as possible especially given the large quantum of units to be cleared. At this moment, there are uncertainties to take up where our estimated breakeven prices are at a c. 15% premium to the prevailing property prices in the respective areas.
  • In addition, medium-term risk will arise from the potential payment of ABSD (if the development remains unsold after five years) and further QC extension charges for any unsold stock which might erode margins going forward.

No impact to UOL. 

  • We understand that UOL/UIC are once again benefitting from being early in land banking. We understand the new rates will not be applicable for the Raintree Gardens' en-bloc site. The PP was obtained prior to the revised DC rates.
  • The status of the other en-bloc transactions is not confirmed.

Moderation in the pace of future en-bloc transactions. 

  • While the higher DC rates may not be a deal breaker, we believe that this will dampen developers’ interest in further en-bloc sites, unless sellers remain realistic about their asking prices. 
  • While we recognise that developers remain hungry to land bank to restock dwindling inventories on their balance sheets, we believe the build-up in supply (estimated c.9,000 of potential new homes arising from recently completed en-bloc deals) and now with higher costs would be key considerations for developers when deciding to pay-up for new sites.

A steady recovery in volumes and prices. 

  • We remain positive on the Singapore property market and believe a steady recovery bodes well for the sector. Following the recent increase in en-bloc transactions, we estimate that an additional 9,000 new units could be added to the supply, largely by end-2018/2019. 
  • In addition, there are another eight sites that have been launched for collective sales with estimated total potential units of 5,300 units and potentially more in the pipeline. 
  • While we believe the market may still have the capacity to absorb the supply in the near term (assuming demand is sustainable), a key data point to watch is when higher-priced government land sites, such as Woodleigh Land, Upper Serangoon Road and Toh Tuck Road, and larger plots of en-bloc sites transacted this year at higher land prices, such as Eunosville, Rio Casa, Serangoon Ville and Tampines Court, come into the market. 

City Dev and UOL remain key proxies. 

  • We believe a steady recovery bodes well for the sector. UOL and City Development are key proxies. 
  • While the status of the en-bloc transactions are not confirmed, we understand UOL/UIC are benefitting from being early and the new rates will not be applicable for Raintree Gardens.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-09-12
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