Property Development & Inventory - CGS-CIMB Research 2018-07-05: All Eyes On Take-up Rates

Singapore Property Market Property Stocks Analysis CAPITALAND LIMITED SGX:C31 UOL GROUP LIMITED SGX:U14 CITY DEVELOPMENTS LIMITED SGX:C09

Property Development & Inventory - All Eyes On Take-up Rates

Private home prices surged in 1H18; sales/launch volume off to a slower start so far this year.
Good sell-through rates and fast asset turn are sector catalysts.
Office and hospitality sectors continue to look good.
Developers are trading at attractive valuations. Our top picks are UOL, CIT, CCT and CDREIT. Maintain Overweight.

Singapore developers

Property stocks ended 2017 on a high note with most indicators looking up. But at half-time 2018, both sales and launch volume have delivered a slow start, respectively accounting for only 30% and 28% of our full-year forecasts. However, private home prices surged 7.4% over end-2017 prices, i.e. in the past six months, and likely to exceed our expectation of an 8% y-o-y increase this year.
Meanwhile, even as the government has kept land supply constant in 2H vs 1H, potential launch pipeline from enbloc sales jumped 60% from end 2017, in our estimate, due to the additional S$10.3bn of collective sales announced YTD, assuming all deals are completed.
Going into 2H 2018, we think the price growth trajectory should slow down, but remain positive. Transaction volumes should pick up, aided by additional replacement demand from enbloc sellers as more older existing developments are demolished and new projects launched. With mortgage rates on the rise, in tandem with higher interest rates, demand resilience will be tested amid higher selling prices. io. We think take-up rates would be a key indicator.
For developers, we believe faster asset turn would be important to preserving development margins against this backdrop of expected slower rising ASPs and higher cost- to-completion.

Private home prices continue to surge, raising our 2018 price growth forecast

The Urban Redevelopment Authority (URA) private property index flash estimate for 2Q18 showed a 3.4% q-o-q rise in private home prices, on top of the 3.9% q-o-q hike in 1Q while the Housing and Development Board (HDB) resale price index notched a 0.1% q-o-q improvement in 2Q, its first uptick since 3Q16. This translates to a 7.4% increment since the end of 2017 and up 9.1% from the trough in 2Q17, led by Outside Central Region (OCR) and Rest of Central Region (RCR) regions.
The appreciation came on the back of 4.6% y-o-y growth in total private and secondary market transactions in 1Q18. So far, primary volume quantum was 40% lower y-o-y in the first five months of this year, at 3,480 units, due to slow pace of launches and sale approvals for new projects. Unsold inventory stood at 23,514 units at end-1Q18.
The sharp price improvement looks set to exceed our expectation for an 8% y-o-y rise in 2018F. Accordingly, we raise our 2018 price growth forecast to 10% while keeping our projection for new sales volume at 11,000-12,000 units for this year.

Net pipeline supply surged 60% in 1H18

The land markets remained very buoyant in 1H18, with a record S$10.3bn of enbloc deals and another S$4.1bn of residential/mixed-use government land sites changing hands. These land parcels can supply an estimated 9,583 and 3,880 additional residential homes from the enbloc and public markets respectively, on top of inventory still outstanding from the previous year.
Essentially, the net potential launch pipeline from enbloc sites has expanded 60% over the end-2017 estimate, in our calculation, while potential launch pipeline from government land sale (GLS) sites has grown 84% over the end- 2017 estimate.
In all, approximately a total of 24,200 and 9,758 private homes can come into the market from the two respective pipelines over the next 2-3 years, in our view or equivalent to 11,300-17,000 units a year. Of these, only a fraction has been launched in 1H18.
With this well-flagged incoming supply, we believe developers will likely adopt a faster inventory turn and a realistic pricing strategy going forward, to capture buyers’ wallet share.

Government land sale kept relatively constant, lowering HBD supply

On the flipside, we are heartened to see the 2H18 government residential land supply being kept relatively constant vs. 1H18, at 8,040 units (2,775 confirmed, 5,335 reserve). This paced introduction of new land inventory should signal a stable recovery in the private residential market, in our view. io. In addition, HBD has also indicated that it would reduce the build-to-order (BTO) supply of public housing for 2018 to 16,000 units from 17,000.
In the 2H18 land sale programme, the government raised available supply of commercial space to 124,200 sq m. The bulk of this new supply comes from a mixed retail/residential with community space and a bus interchange land parcel in the Eastern part of Singapore.
It also re-introduced hotel land supply into the programme after a four-year hiatus. Should the hotel land parcels be snapped up when tendered, the budgeted pipeline of 930 hotel rooms, largely in the CBD, or equivalent to c.1.5% of existing stock, could come on-stream from 2023F at the earliest, in our view. In the meantime, the dwindling hotel inventory under development currently and increasing tourist arrivals should continue to underpin the nascent hotel revenue per available room (RevPAR) recovery in Singapore.
Going into the 2H, we expect the pace of new launches to pick up significantly. Three large projects – Affinity @ Serangoon, The Gardens Residences and Margaret Ville – were launched in early Jun and a further 6-7 new projects with a total of up to 5,404 units are slated to be rolled out in 3Q. io. So far, Riverfront Residences is asking for S$1,200psf while Park Colonial and Stirling Residences are going for c.S$1,700psf. Marina One Residences P2 is being marketed at S$2,300-2,400psf. Meanwhile, The Tre Ver has started engaging potential buyers as well. With increasingly more buying options, we think buyers could take more time to evaluate choices and developers would have to price their projects realistically to capture more buyers’ share.
Low near term completions should be supportive of near term residential price growth, in our view. The bumper supply of residential units is projected to be completed and come on-stream from 2022F onwards. According to URA, there are 9,897 private homes scheduled to be completed between 2Q-4Q18, with another 8,060 units coming on-stream in 2019. This is on top of an estimated 4,130 new executive condo and up to 19,000 new HDB inventory for the remaining nine months of this year. This is still lower than the peak supply seen in 2016.

Demand outlook

Demand for private homes over the next two years should remain robust, aided by the strong liquidity from enbloc sellers and replacement demand from these owners. We estimate a total of 6,800 homes could be displaced when all the collective sales announced to-date, are redeveloped. In addition, these potential buyers would likely have strong cash holdings from the enbloc proceeds.
To be sure, affordability has been slightly eroded by the rising property prices. With the increase in SIBOR rates, we understand that most banks would have raised their mortgage rates c.30-50bp over the past six months, in line with spot rates. io. At this point, although mortgage repayments have risen, private homes generally remain largely affordable at this stage.
Based on URA statistics, average unit transaction value for private homes in the RCR and OCR rose an average 15.5% and 4.3%, respectively, in 1H18 from the average in 2017. This is accompanied by a 3.9% increase in unit sizes for RCR units and a shrinkage of 4.2% in average size of an OCR home. Effectively, this meant that property prices have risen c.8% on a psf basis.
Using these anecdotal evidences, we estimate that affordability ratio (ratio of monthly mortgage over average 2017 household income - the higher the ratio, the lower the affordability) would have declined 1-5% pts, to 34-38% using total debt servicing ratio (TDSR) rate of 3.5% (or 30-34% assuming current mortgage rates). As such, private homes still remain largely affordable to those in the 80th household income decile and upwards.

Will there be policy headwinds?

In his 2017/18 annual report speech, Monetary Authority of Singapore (MAS) Managing Director, Mr Ravi Menon, commented on the rapid rise of property prices and transaction volumes and highlighted that the MAS, Ministry of National Development (MND) and Ministry of Finance are closely monitoring the rapid rise in private home prices and remain committed to ensuring a sustainable market.
We view the risk of new policy as being a lower probability event at present. Robust household sector balance sheet and rising household incomes would be counterbalanced by in-place tightening measures such as Total Debt Service Ratio (TDSR) framework, rising interest rates (erosion in affordability) as well as the need for developers’ to manage working capital and potential ABSD penalty deadlines for both GLS and private land projects ahead of the large incoming completed supply.

Stock strategy

Property stocks has fallen 7.3% YTD, underperforming the broader market. Valuations are inexpensive, at 46% discount to RNAV, back to the -1SD level and trading at 0.7x 2018F P/BV.
At this juncture, we see value in developers. However, in view of the volatile global macro newsflow and rising medium term supply outlook, we think developers could trade range bound in the near term.
We think metrics for outperformance in this part of the property cycle are ability to adopt a quick asset turn i.e. developers with strong take-up rates, operating margin expansion, and a diversified model and strong recurrent income should outperform peers.

Take-up rates a key indicator

As we had articulated in our Dec 2017 report, property stocks’ performance shows a high degree of correlation to take-up or sales rates of new projects. 5M18 take-up rate of private homes was c.124% vs. 168% last year, still showing that demand outpaced supply.
With more new launches coming up, we think take-up rates should likely be closely watched as an indicator to provide impetus to drive share price performance.

Development margins under scrutiny

Given the large incoming supply pipeline and a rising interest rate environment, we believe developers with a quick asset turn strategy and ability to sustain development margins should outperform their peers. With the exception of developers which had land banked early in the enbloc cycle, we expect other developers to generate high single-digit returns.
Further price increase should bolster this spread but we believe this would have to be weighed against a quick asset turn strategy, in view of the increased competition from a large number of new launches.

Financial position of developers

We take a look at the balance sheet of developers to ascertain their balance sheet health in this rising rate environment. With S$10.3bn of enbloc deals and S$4.3bn of government land sales announced so far this year, we assess their land capex commitments and the resulting impact on the gearing positions of listed developers once they are paid.
Listed developers under our coverage generally had a very robust balance sheet and net debt to equity ratio of below 0.5x (with the exception of Frasers Property and Guocoland) at end-1QCY18. Assuming only the remaining Singapore land capex commitments were paid as at 1QCY18, we note that developers' balance sheet will continue to remain healthy.
In our view, Bukit Sembawang could move into a net debt position after paying the balance of Makeway Mansion and Katong Park Towers acquisitions, announced in Mar 2018. We project Ho Bee Land’s net debt to equity ratio, at 0.41x as at end-1Q18, to increase to 0.78x after the recent acquisition of the Ropemaker Place in London for S$1.16bn while Guocoland’s gearing ratio could exceed 1x after paying for the remainder of its 60% share of Pacific Mansion enbloc site.
Near-term refinancing needs for developers are not high, with debt due in the short term making up c.17% of total debt of developers under our coverage. We estimate the proportion of debt due within 1-3 years at about 44% of their existing bank loans. Thus, we believe that the developers' liquidity position and balance sheet metrics should remain very healthy in the near term.

RNAV breakdown

Much has been asked about developers’ RNAV exposure to the various asset classes. In the table below, we break down the RNAVs by segmental exposure to Singapore and overseas markets. Our RNAV assumes that all the residential enbloc transactions that have been announced will be completed. We have separated ownership of listed S-REITs into "the others" segment.
Wing Tai, Guocoland, City Dev and UOL offer the greatest leverage to the Singapore residential sector, at between 12% and 35% of RNAV. Amongst these, Wing Tai has the greatest exposure to the high-end residential sector (21% of total RNAV), followed by City Developments (9% of total RNAV). Wing Tai’s exposure is via the Nouvel Ardmore development. While HoBee also has a sizeable high-end residential exposure, its developments are located in Sentosa which has not experienced much price nor demand recovery at this point in time. The bulk of Frasers Property's overseas residential market is in Australia while Guocoland’s would be in China and Malaysia.
For exposure to the rising Singapore office sector, Guocoland has a sizeable exposure due to its Tanjong Pagar Centre property while HoBee's exposure is via the Metropolis. City Developments also has a decent 32% of RNAV to this sector. As for UOL, our estimate of 30% exposure to this sector is conservative as we have based our assessment on its current 50% ownership of UIC. Should UIC be fully consolidated, then UOL’s exposure to the Singapore office sector would rise to 40% of RNAV.
United Engineers’ high proportion of RNAV in others is due to its non-core assets in the manufacturing, distribution and engineering businesses, which we anticipate will be divested in the longer run.

Stock Picks

UOL (Rating: ADD, Target Price: S$9.62)

UOL is our top pick amongst developer stocks. Its residential and commercial property portfolio is predominantly focused in Singapore.
UOL has become a major office landlord post consolidation of UIC’s earnings. Together, they own a total of c.5.7m sq ft of office and retail space in Singapore, located in both the CBD and city fringe areas. This puts UOL in a good position to benefit from the office sector recovery.
On the residential front, plans to market The Tre Ver, where land cost is competitively priced, is likely to enable the group to preserve development margins. Recent win of the Silat Avenue has also replenished the group’s development land bank.
Our Target Price of S$9.62 is premised on a 20% discount to RNAV.

City Developments (Rating: ADD, Target Price: S$13.40)

City Developments is the bellwether property stock in Singapore. It has extended its residential development earnings with a current land bank with c.3,100 attributable units. With The Tapestry project receiving good sales response, the group is set to roll out The Opus later this year. In addition, it has a good pipeline of high-end projects slated for launch in 2018, including South Beach Residences and the Hotel boulevard site.
City Developments’s balance sheet remains strong even after accounting for its current outstanding land capex commitment. Valuations are attractive as the stock is trading at -1SD discount to revalued asset backing.
Our Target Price of S$13.40 is based on a 20% discount to RNAV.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-05

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