Real Estate - RHB Invest 2018-07-06: Killer Move To Curb “euphoria”

Real Estate - RHB Invest 2018-07-06: Killer Move To Curb “euphoria” Singapore Real Estate Sector Property Cooling Measures APAC REALTY LIMITED SGX: CLN

Real Estate - Killer Move To Curb “euphoria”

  • We are reviewing our sector call and stock recommendations – our current call is OVERWEIGHT.
  • Last night, the Government negatively surprised the property market with stringent demand-side measures, which included higher ABSD charges and the lowering of LTVs. See Measures To Cool The "Euphoria" in Singapore Property Market | SGinvestors.io. The move is aimed at cooling down investment/speculative demand. We believe this will have bigger impact on high-end projects. Transaction volumes and prices overall are expected to see a slowdown as a result.
  • We expect a knee-jerk reaction on property sector stocks, with share prices likely to see a 5-10% correction. We are of the view that developers holding large unsold Singapore residential landbank will see a bigger impact.
  • For property agencies, the impact from a transaction volume slowdown is likely to be partially mitigated by possible increases in developer commissions. This is due to their need to sell units within the 5-year deadline.

Additional buyer stamp duty (ABSD) rated 5-10%.

  • Last night the Government announced an increase in ABSD rates by 5% (except for first property purchases by locals) and reduced loan-to-value (LTV) limits by 5ppts (Figures) on residential property purchases. 
  • Developers’ ABSD charges, which stipulate them to complete and sell projects within a 5-year time frame, have also been increased to 25% from 15%. The measures are to take effect on all transactions made on or after 6 Jul.

We are of the view that this unexpected negative surprise will spook the property market.

  • The move comes a day after the Monetary Authority of Singapore warned of “euphoria” building in the market. However, the timing of the move clearly caught us and many market watchers by surprise, as property prices have only recovered by 9% over the last four quarters and is still 4% below peak 2013 levels.
  • We deem this set of demand-side measures as “very stringent” and a pre-emptive one, which will have a negative effect on buying sentiment, as well as slowing down property demand and prices in the near term.

The measures target investment and speculative demand, and we believe it will impact the high-end segment more.

  • The higher ABSD rates apply for second property purchase onwards and include all foreign buyers. Anecdotally, we estimate that investment demand is likely to be account for about 30-40% of the overall demand, with the proportion much higher for high-end property purchases.
  • Foreign demand – although still small at ~6% (1Q18) – accounts for bulk of demand in the high-end segment, or ~30-60%. Thus, we expect the high-end segment to see a bigger impact when compared to the mass market and mid-tier segments, which comprise more of first-time buyers.

We believe the developers’ immediate reaction is to rush forward their launches and target more first-time buyers

  • ... by reducing unit sizes and giving additional perks. 
  • We understand that upcoming new launches Riverfront Residences, Park Colonial and Stirling Residences – which were supposed to commence their sales over the coming weekends – were brought forward to last night. Many buyers were seen thronging the show flats in order to rush and submit their purchases before the 6 Jul deadline. 
  • We also understand that existing launches – Martin Modern and Affinity at Serangoon – were offering additional 5% discounts for buyers who committed to purchases last night.

We believe property stocks are likely to see a 5-10% price correction.

  • Among the stocks under coverage,
    • City Developments has the largest domestic landbank with unsold residential units (~3,750 units) and Singapore residential accounts for ~25% of our RNAV estimates.
    • CapitaLand is expected to see minimal impact, as it has cleared bulk of its existing inventory, with only one project – Pearl Bank Apartment en-bloc – in the launch pipeline.
    • For APAC Realty, although the overall property transaction volumes are expected to see a dip – which is likely to impact its bottomline – the stringent ABSD regulations means developers have to sell their projects within five years of acquisition. Thus, we believe the latter might be forced to increase commissions offered to property agents, which could partially mitigate the impact.

Reviewing our sector call and recommendations.

  • We were expecting property prices to increase by 5-10% in 2018 and 2019, and transaction volumes to increase by 15% this year. However, with the sudden implementation of these cooling measures, we place both our assumptions under review. Our initial take is that property prices will likely to stagnate around current levels for next few quarters and could potentially see more downward pressure.
  • Our sector rating and counter target prices are under review – our current call is OVERWEIGHT. We are currently reviewing our ASP and transaction volume assumptions for developers under our coverage.
  • We will also review our RNAV discounts, considering that property sector sentiments are expected to see a hit in the near term.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-07-06
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