Singapore Residential Property - OCBC Investment 2018-06-26: Cheap Just Got Cheaper



  •  Buying opportunities amid pullback.
  • Addressing investor concerns.
  • Top picks: UOL, CIT and CAPL. 

Opportunities amid divergence between share prices and fundamentals

  • Singapore developers, using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark, registered negative total returns of 4.8% YTD, underperforming the STI (-2.5%) but outperforming the S-REITs sector (-6.7%). 
  • Given our continued positive view on the outlook of Singapore developers, we believe the divergence between their share price performances and fundamentals presents buying opportunities. 

  • In this report, we seek to address some of the market’s concerns which may have contributed to the share price weakness, although broader macro issues such as escalating trade tensions would also have impacted investor sentiment.

Potential government cooling measures?

  • From the start of the year till end-May, CapitaLand’s share price had outperformed its peers which have much higher Singapore land bank exposure. We believe this reflects the market’s concerns that there may be higher risks of tightening measures by the Singapore government given the vibrant ‘animal spirits’ seen on the ground. 
  • Since the start of Jun, CapitaLand’s share price underperformed and this has coincided with rising trade tensions between the U.S. and China. 41.8% of CapitaLand’s total FY17 EBIT was derived from China. 
  • While it is difficult to predict whether government measures would kick in, we note that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q17. Hence, further data points may be needed before the next course of action is taken, in our view. 
  • In addition, the HDB resale price index is still on a downtrend. With more than 80% of Singapore’s resident population living in HDB flats, any potential tightening measures would have to be very carefully calibrated by the government, in our view.

Supply concerns valid, but likely manageable at this juncture

  • Another issue stems from potential oversupply concerns. According to data from URA, there are 44,261 units in the supply pipeline (including ECs), as at 31 Mar 2018. There is also a potential pipeline supply of 20,100 units (including ECs) from Government Land Sales (GLS) sites and awarded en-bloc sale sites pending planning approval.
  • Notwithstanding this expected increase in supply, we note that a significant proportion of this potential pipeline will only come on-stream from 2021. Furthermore, although the total number of unsold inventory increased to 25.3k in 1Q18 from 20.8k in 4Q17, 74% of these units have yet to obtain the pre-requisites for sale; the level of unsold inventory is also below the long-term average of 32.4k. 
  • With the number of resident households in Singapore growing by at least 2.0% per annum since 2013 to 2017 and the median household income from work increasing at a CAGR of 3.5% from S$7.87k in 2013 to S$9.02k in 2017, we believe this will put the market in a better position to absorb the upcoming supply.

Primary unit sales expected to gain traction ahead

  • 5M18 primary units (excluding ECs) sales came in at 3,480 units, or a decline of 39% y-o-y. However, May sales of 1,121 units alone represented healthy growth of 7.9% and 53.1% y-o-y and m-o-m, respectively. 
  • While we ease our private sales transaction volume projection to 10k-12k (previously 12k-15k) based on the current run-rate, this still implies a backend loaded year. 
  • We also raise our Singapore residential price growth forecast to 8%-12% from 3%-8% after taking into account the firm demand on the ground.

Demand still robust: developers hungry for land

  • Demand factors remain largely robust, from both the perspective of land purchases by developers and demand for property by consumers.
  • Judging from the bullish land bid prices for GLS sites and the collective sales market, we believe this reflects developers’ confidence in the market, especially bearing in mind the potential ABSD and QC extension charges if the units are not sold within a certain stipulated timeframe. YTD, we estimate that ~S$9.1b worth of en-bloc transactions have been announced, surpassing last year’s ~S$8.6b aggregate.
  • Most developers have also sought to diversify the risks from rising land costs by submitting joint bids for projects, especially for the larger sites. Foreign developers have also jumped on the Singapore residential market bandwagon. To illustrate, 
    • Hong Kong based Shun Tak Holdings recently clinched the bids for two prime freehold redevelopment sites at 21 Orchard Boulevard and 14 & 14A Nassim Road. In its press release, Shun Tak highlighted that this was an important milestone for the Group to expand into healthy real estate markets. For the bid at 21 Orchard Boulevard, this represents the collective sale of Park House, with the purchase consideration of S$375.5m translating into a record S$2,910 psf ppr (based on maximum allowable GFA of ~129,035 sq ft and excluding the 10% bonus for balconies). Shun Tak intends to redevelop this site into a luxury residential development. 
    • Another example comes from the joint bids by New World Development, Far East Consortium International and SC Global Developments, the former two which are Hong Kong-listed, for the winning bid of S$2,377 psf ppr for a Cuscaden Road GLS. This was the highest bid ever submitted for a GLS tender.

Demand still robust: healthy sales take-up for launches

  • Sales launches this year have largely seen healthy take-up rates, in our view. Examples of projects which saw brisk sales on their first weekend of launches include Oxley Holding’s The Verandah Residences (76% of units launched were sold at an average S$1,815 psf), Rivercove Residences EC (80% of units launched were sold at an average S$965 psf), CSC Land’s Twin VEW (85% of units launched were sold at an average S$1,399 psf) and UOL Group’s Amber45 (80% of units launched were sold at an average S$2,200 psf). 
  • On the other hand, there was also lukewarm reception to some projects such as Oxley’s Affinity (sold 112 out of 300 units launched at an average S$1,575 psf) and Keppel Land and Wing Tai’s joint project, The Garden Residences (sold more than 60 units at an average ASP of S$1,660 psf). Perhaps this was attributed to the two projects’ close proximity and simultaneous launch timings, coupled with the quieter Jun period.

Reiterate OVERWEIGHT on Singapore residential sector

  • The FSTREH is currently trading at a blended forward P/B ratio of 0.62x. We view valuations as compelling as it comes in at 1.2 standard deviations below the 10-year average (0.79x). 
  • Maintain OVERWEIGHT on the Singapore residential sector. 
  • We move UOL Group Limited [Rating: BUY, Fair Value: S$10.63] to the front of our top picks list, followed by City Developments Limited [Rating: BUY, Fair Value: S$15.78], and CapitaLand Limited [Rating: BUY, Fair Value: S$4.26]
  • UOL Group, City Developments Limited and CapitaLand Limited are trading at attractive discounts of 44.0%, 33.8% and 36.5% to our RNAV forecasts, respectively.

Wong Teck Ching Andy CFA OCBC Investment | https://www.iocbc.com/ 2018-06-26
SGX Stock Analyst Report BUY Maintain BUY 10.630 Same 10.630
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BUY Maintain BUY 4.260 Same 4.260