Real Estate - RHB Invest 2018-07-23: Taking The Wind Out Of Sails


Real Estate - Taking The Wind Out Of Sails

  • Downgrade sector to NEUTRAL from Overweight. CapitaLand is our Top Pick. 
  • Our channel checks show the latest policy measures seem to have achieved the objective of curbing the exuberance in the property sector. Developers are seen adjusting their price expectations in launches. 
  • Post measures, we expect transaction volumes for 2018 to fall by 10% (from 10- 15% rise) and prices to stay flattish for 2H18-2019. Developers margins are expected to be squeezed to 0-15%, depending on land cost. 
  • Separately, the increasing threat from continued build-up in supply pipeline – posed by the “red hot” enbloc market – is expected to subside.

Project pricing the key factor to determine demand ahead.

  • With the implementation of cooling measures on 6 Jul (see our 6 Jul report titled: Killer Move To Curb “Euphoria”), property market sentiment has taken a hit with developers and buyers adjusting to the new norm. 
  • Our channel checks revealed that many developers are still proceeding with project launches as per initial plans, but are seen lowering their pricing expectations by 10-15%. We also note that some of these launches – especially high-end segment – have been deferred, which is not surprising, considering this segment will likely see the biggest impact. 
  • Existing launches are seen offering discounts of up to 10%, which has helped in maintaining some sales momentum with > 200 units sold, post measures. We believe sales momentum is unlikely to take a sharp dip as long as the developers are willing to price their launches more realistically.

Developers margins to take a hit.

  • The intense completion for development sites have been driving land prices higher over the last year. Bids were seen factoring in a 10-30% appreciation in prices to achieve typical development margins of 10-15%. While property prices have since risen by about 10% on an average since last year, the recent measures have put the brakes on price escalation. 
  • Developers margins are likely to be squeezed to 0-15%, depending on the cost and timing of land purchase. This is based on our base case assumption of flattish-to-modest price increase over the next two years.

Latest cooling measures to prevent build-up in supply pipeline.

  • As at 1Q18, a total of 44,293 units were in the supply pipeline, comprising 24,193 unsold units with planning approval and 20,100 units without planning approval. Based on 10-year average demand of about 10,603 units, the supply pipeline is sufficient to cater to demand for the next four years. A large part of this supply pipeline was a result of strong surge in en bloc sales since 2017 with ~SGD19bn worth of deals done. There was a growing threat of a further build-up in supply, with more than 100 sites available in the en bloc market. 
  • Post measures, we expect the en bloc to hit a pause, owing to the growing disconnect between sellers’ and developers’ price expectations.

Our revised assumptions for sales and prices.

  • We revise our primary transaction volumes to dip by 10% in 2018 (from 10-15% rise). Property prices are likely to stay flattish for 2H18 and we maintain our full-year price growth expectations of 5-10% (1H18: +7.4% y-o-y). 
  • For 2019, we expect property prices to see a modest growth of 0-2%. Key supporting factors are replacement demand and liquidity from en bloc and stable job market. Key threats to our assumptions include spike in interest rates and prolonged trade war tensions impacting Singapore economic growth.

Downgrade sector to Neutral.

  • We downgrade City Developments to NEUTRAL from Buy on large Singapore residential exposure. See report: City Developments (CDL) - High Exposure To SG Residential Market.
  • Our Top Pick is CapitaLand, which should see a minimal impact from policy measures. 
  • We also maintain BUY on APAC Realty, as we expect the lower volumes to be partially offset by higher developer commissions.

Demand supported by local buying with limited speculative activity.

  • Bulk of the demand in 1H18 was attributable to Singaporeans/permanent residents, who accounted for 93% of the total purchases. Foreign buying activity remained low at 7% compared to mid-teen levels seen in 2010-2011.
  • Sub-sale purchases, which typically is used as a measure of speculative buying, accounted for just 1.4% of total sales in 1H18. The above factors lend support to our view that local buying demand is unlikely to see a sharp drop, if the projects are priced realistically.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-07-23
SGX Stock Analyst Report BUY Maintain BUY 0.770 Same 0.770
BUY Maintain BUY 3.95 Same 3.95
NEUTRAL Maintain NEUTRAL 10.400 Same 10.400