Real Estate - RHB Invest 2018-01-12: Brighter Outlook But Watch Out For Pitfalls

Real Estate - RHB Invest 2018-01-12: Brighter Outlook But Watch Out For Pitfalls Singapore Property Stocks Real Estate Sector Outlook APAC REALTY LIMITED CLN.SI CAPITALAND LIMITED C31.SI

Real Estate - Brighter Outlook But Watch Out For Pitfalls

  • We expect property prices to rebound by 3-7% in 2018, driven by: 
    1. Improving job market aided by economic growth; 
    2. Strong surge in the en-bloc market; 
    3. Falling inventory levels.
  • However, a soft rental market, rising interest rates, intense competition in land sales, and risk of additional policy measures could derail a smooth recovery in the residential market. 
  • We upgrade the sector to OVERWEIGHT (from Neutral) with CapitaLand and APAC Realty as our Top Picks.

Residential prices to rebound by 3-7% in 2018. 

  • Key factors aiding a price rebound include the strong buying momentum/optimism driven by local buyers, and better job market conditions (unemployment rate of 2.1%) supported by improving GDP growth and a surge in en-bloc sales – this should boost liquidity and result in replacement demand. 
  • Signs of bottoming in the price market has already emerged, with the Urban Redevelopment Authority’s (URA) residential price index turning +1% YoY in 2017 (based on flash estimates), after a 3.1% decline in 2016. Property prices are currently 11% below the 3Q13 peak, but remain 44% higher than the global financial crisis (GFC) trough (2Q09).

Surge in en-bloc market boosts optimism on the ground... 

  • In 2017, about 26 residential en bloc deals were completed, with a total value of SGD8.5bn. This is more than double the SGD3.3bn en-bloc deals completed over the previous five years, making it the second highest total transaction value achieved after the 2007 peak (SGD11.4bn from 164 deals). 
  • The strong surge in en-bloc deals was fuelled by factors such as falling inventory levels, strong developer balance sheets, competition from overseas developers, and low interest rates. The surge in en-bloc deals has boosted property liquidity and evoked optimism for strong price recovery. 
  • On the flip side, the en-bloc sites could add 10,000-14,000 units to the supply pipeline over the next three years, which may cap price increases.

...but intense competition in land sales could limit margins. 

  • The intense competition for en-bloc deals has driven land prices higher. Bids are factoring in a 10-40% appreciation in property prices assuming developers achieve their typical profit margin of 10-15%. Notably, developers have to build, sell and complete a project within five years or else they would face stiffer additional buyer's stamp duty (ABSD) penalties (15% of land cost plus interest expense). 
  • While we do expect prices to rise, we believe the bids are overly optimistic and could limit profit margins of developers despite the expected price increase.

Policy risk looms amid signs of over-exuberance. 

  • In Nov 2017, the Monetary Authority of Singapore (MAS) sounded a note of caution on the property market, saying that recent market developments such as the en-bloc rage and rising land prices could affect market stability. This follows National Development minister Lawrence Wong’s comments on the need for developers and buyers to be prudent. 
  • We believe the Government is closely monitoring the situation and could possibly implement additional supply-side measures – these may include an additional layer of stringent approvals for the en-bloc process, limiting bonus GFA allowances, and increasing government land supply for 2H18.

Prefer laggards and volume-driven plays. 

  • With residential stocks rallying by 30-60% last year, the RNAV discounts for most of the big-cap developers have narrowed to 10-30%. However, CapitaLand has been a laggard over concerns about its China property portfolio and limited Singapore residential portfolio. The latest reconstitution of its China retail assets and a softer policy stance have removed some overhang, and we expect the counter to outperform in 2018.
  • While developers are actively looking to replenish landbank, the steep increase in land cost means that margin expansion can only materialise if there is a surge (20-30%) in residential prices. In this context, we believe a volume-driven stock would offer a more direct play on improving property market conditions. Our Top mid-cap Pick with volume-driven exposure is APAC Realty.

Favourable near-term demand and supply. 

  • Private home supply hit its peak in 2016 and 2017, with nearly 20,516 and 16,898 homes completed respectively, compared to the 10-year average of 11,472 units. Looking ahead, 2018F and 2019F’s are expected to see units completed halve to 7,893 and 8,696 units respectively.
  • This compares favourably with the 10-year average demand of 9,978 units. Vacancy rates remained high at 8.4% in 3Q17 (peak vacancy was 9.0%), and are expected to remain elevated as the market digests the completed supply that came onstream over the last one year.
  • Overall, we expect rents to stay flat and vacancy rates to remain elevated at around 8-9% for 2018. The weak rental market and increase in interest rates are potential bugbears to a smooth recovery in the residential market in our view.


  • Risks to our assumptions include: 
    1. Rising vacancy rates leading to a weak rental market;
    2. Intense competition for land resulting in reduced profitability for the sector; 
    3. Faster-than-expected rate hikes;
    4. Unexpected and stringent policy measures.
  • In the meantime, we also think that an unexpected relaxation of cooling measures and a delay in interest rate hikes could potentially provide upsides for the sector.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-12
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.200 Same 1.200
BUY Maintain BUY 4.200 Same 4.200