Real Estate - RHB Invest 2018-07-02: Near-term Outlook Remains Promising

Real Estate - RHB Invest 2018-07-02: Near-term Outlook Remains Promising Singapore Property Stocks Real Estate Sector APAC REALTY LIMITED SGX:CLN CAPITALAND LIMITED SGX:C31 CITY DEVELOPMENTS LIMITED SGX:C09

Real Estate - Near-term Outlook Remains Promising

  • Maintain OVERWEIGHT with APAC Realty and CapitaLand as Top Picks.
  • The Government’s plan to maintain steady land supply under the GLS programme indicates a balanced approach in meeting demand, and supports ongoing recovery in the residential market. With a good selection of sites, we reiterate our view that the en bloc market has peaked, and expect a slower 2H18 in terms of en bloc sales.
  • Overall, property prices should rebound by 10-20% over 2018-2019, as the market remains well supported by en bloc liquidity, a stable job market and pent-up demand.

Well calibrated land supply for 2H18.

  • The Government is maintaining a steady supply of residential land under the 2H18 Government Land Sale (GLS) Programme. There will be five sites on the confirmed list (including Executive Condominium (EC) and white sites), and seven on the reserve list, which together can yield 8,040 units.
  • The supply is similar to land released under the previous two programmes, indicating that the Government is mindful of supply building up and is careful to not over flood the market. We see this as a neutral stance and do not expect any further cooling measures in the near term.

Expecting strong demand for GLS sites.

  • All residential sites in the confirmed list are well located within close proximity to the MRT, and should attract strong interest from developers.
  • We expect strong interest from developers (overseas and local) for the Kampong Java and Sims drive sites with each expected to garner more than 10 bids. The Pasir Ris Central white site is also expected to see strong interest considering the lack of new launches in the area. We also expect developers to trigger the Anchorvale crescent (EC) site from the reserve list considering limited supply of ECs in the market.

En bloc cycle has peaked.

  • With the availability of plum sites in the GLS programme, sufficient restocking of landbank, and a build-up in the supply pipeline, we reiterate our view that the en bloc cycle has peaked, and is expected to slowdown in 2H18 (refer also to our previous report:  Real Estate - Are We Nearing The Peak Of The En Bloc Cycle).
  • YTD, 34 en bloc sites have been sold, with a total value of SGD10.1bn, surpassing the SGD8.2bn from 28 sites sold last year. While this year could potentially set a new record for en bloc sales in terms of total transaction value (previous high of SGD11.4bn in 2007), our channel checks with developers indicate that they have become very selective, with preference towards small to medium-sized sites primarily in the high-end market.

Near term outlook is positive, long term sustainability uncertain.

  • Flash estimates from the URA shows that residential prices rose 3.4% in 2Q18, following a 3.9% increase the previous quarter. Prices have risen 9% since bottoming out in 2Q17 but remain 4% below its 3Q13 peak, offering room for growth. 
  • Overall, we expect residential prices to rebound by 5-10% in 2018 and 2019, as the market remains well supported with ample liquidity from en bloc sales, a lower unemployment rate, and stable GDP growth. However, we remain cautious on the longer term outlook and sustainability of such steep price increases, as key long term factors such as population growth (tighter immigration policies), rental market, and divergence in HDB resale prices. 
  • Additionally, the possibility of faster rate hikes and a volatile macro- environment also pose threats to a smooth recovery in the industry.

OVERWEIGHT with Top Picks APAC Realty and CapitaLand.

  • We expect transaction volumes to remain robust (up 10-15% vs 2018) on a slew of upcoming new launches. APAC Realty is the preferred pick in this regard.
  • In the big-cap space, our top pick is CapitaLand as we like the recent rationalising of its China portfolio, its efforts to boost ROE through an asset-light approach, and its active capital recycling strategy.
  • City Developments is also expected to benefit from its strategic landbanking, and a better outlook for its hospitality portfolio.

Recent underperformance mainly due to timing of new launches.

  • YTD, Singapore’s real estate index has fallen by 7.8%, higher than STI’s 4% decline. We believe the underperformance of property developers’ stocks was mainly due to the following reasons:
    1. Lower number of new launches in 1H18, due to timing differences (9-12 months) between the completion of en bloc sales and actual launches. This has resulted in lower primary sales so far this year compared to last year. With a slew of more than 20 new launches in 2H18, we expect a much stronger 2H18;
    2. Market concerns on potential government cooling measures to moderate property prices. Our view is that it is premature at this stage to implement additional cooling measures;
    3. Profit taking after the strong sector outperformance in 2017, and potential concerns over the escalation of US-China trade tensions on Singapore’s GDP growth.
  • We believe a second leg of the rally in property stocks is likely in 2H18, with strong take- up expected in the upcoming new launches, and with demand spilling over into the resale market.

Demand-supply favourable for near-term supply but long-term pipeline building up.

  • Private home supply hit its peak in 2016 and 2017, with nearly 20,632 and 16,215 homes completed respectively, compared to the 10-year average of 11,903 units. Looking ahead, 2018F and 2019F should see units completed halve to 9,908 and 8,060 units respectively.
  • This compares favourably with the 10-year average demand of 10,603 units. Vacancy rates have moderated to 7.4% as at 1Q18 (peak vacancy of 8.9% in 2Q16), but are expected to remain high as the market digests the completed supply that came onstream amidst tight immigration policies.
  • Overall, we expect rents to stay flat and vacancy rates to remain elevated at around 7-8% for 2018. The weak rental market and increase in interest rates remain potential bugbears to a smooth recovery in the residential market in our view.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-07-02
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