Property Sector - Maybank Kim Eng 2018-07-06: Back To Tightening Mode ~ Let The Dust Settle; Downgrade To NEUTRAL

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Singapore Property - Back To Tightening Mode

Downside to estimates for residential developers

• The Singapore government announced new policy measures to cool the residential property market. We expect them to dampen investment demand, which accounted for roughly half of overall transactions in 2016.
• While the 5% tightening of LTV limits will also affect first-time home buyers, we believe the impact is more muted as their ABSD rates are unchanged. These could weigh on transaction volumes and bring downside risks to our estimates. The introduction of a non-remittable tax on residential sites will also weigh on returns for residential developers.

Raising ABSD and tightening LTV limits

• Additional Buyer’s Stamp Duty (ABSD) rates for individuals buying their second and subsequent properties will be raised by 5%, while that for corporate entities will be increased by 10%. ABSD rates for Singaporeans and Permanent Residents purchasing their first residential property is unchanged. 
• Loan-to-value (LTV) limits for all housing loans granted by financial institutions will be tightened by 5ppt.

New non-remittable tax will affect demand for new sites and weigh on project IRRs

• The government has also introduced a new non-remittable ABSD of 5% on the purchase price or market value of residential properties purchased for housing development. This new measure, along with the revised ABSD of 25% (remittable with conditions), will lead to significant upfront cash outlay for residential developers and affect demand for new development sites. As such, we expect a significant slowdown in enbloc transactions. This should address government concerns over potential oversupply in the medium term.
• The high upfront cash outlay will also weigh on project IRRs for new residential developments.

Let The Dust Settle; Downgrade To NEUTRAL 

Surprise tightening a sector overhang; Downgrade to NEUTRAL

• We cut EPS and RNAV estimates for Singapore property developers to reflect 5-10% cuts in our home-price assumptions. We expect the latest policy tightening to weigh on sector sentiment and raise our discounts to RNAV by 5-30%, according to developers’ exposure to the residential market.
• We cut Target Prices across the board and downgrade CityDev, GuocoLand, Bukit Sembawang and Oxley Holdings to HOLDs from BUYs.
• We downgrade the sector to NEUTRAL from POSITIVE in view of the tightening overhang.

ASPs cut to reflect moderation in home-price growth

• With fresh policy tightening, we expect home price growth to moderate in 2H18. With 5-10% increases in the ABSD for property investors, we expect developers to lower their ASPs to stimulate demand. 
• We make the biggest cuts for high-end prices to reflect this segment’s larger proportion of property investors. Smaller cuts have been made to mid-to- mass-market prices as we see a smaller dent on demand from owner occupiers.
• Overall, we expect a 10% increase in the URA PPI for 2018E with the 7.4% climb in 1H18 accounting for the bulk of the increase.

EPS and RNAV impact

• We lower our RNAV for developers by 0.2-4.8% and net profits by up to 16%. We make the biggest cut to Bukit Sembawang’s RNAV, reflecting its pure residential exposure. Earnings for Oxley Holdings have been cut the most with its elevated financial leverage magnifying the impact on its bottom line.
• While we expect a moderation in EBIT margins to single digits for most projects, we do not see any developer losing money.

Valuations undemanding after selloff

• Sector benchmark CityDev now trades at a 32% discount to RNAV after its 16% selloff. With its RNAV discount now at -1SD of its 10-year average, we see limited downside from here.
• Within the large cap space, we advocate a switch from CityDev to UOL and CapitaLand. 
• Ho Bee is now our sole BUY amongst mid-cap developers with the stock’s valuation at undemanding levels.

Company Reports:

• Bukit Sembawang - Most Exposed To Singapore’s Residential Market

• Ho Bee Land (HOBEE) - Diversification Pays Off

• UOL Group Ltd - Oversold

• City Developments - Policy Overhang

• Oxley Holdings - Highly Exposed To Residential Headwinds

• CapitaLand - Small Exposure To SG Residential

• GuocoLand - Limited Upside

Derrick Heng CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-07-06

SGX Stock Analyst Report BUY Maintain BUY 14.200 Same 14.200