Property Stocks Singapore - DBS Research 2018-07-06: Hitting A Roadblock


Singapore Property - Hitting A Roadblock

  • UNDERWEIGHT property developers, new property curbs will hit share prices of developers.
  • Sales momentum to turn cold as increased upfront capital commitments will deter potential buyers.
  • En-bloc activity to wane as developers re-calibrate strategies to clear stock at high prices.

Killing Me Softly

Developers’ share prices to fall on property curbs.

  • After warning of a “market exuberance” for the past 6 months, the government has reinstated property curbs through raising Additional Buyer’s Stamp Duty (ABSD) rates by 5ppts and tightened Loan-to-Value (LTV) limits by 5ppts. The aim of these measures is to curb excessive property price increases, which came as a surprise in our view and will likely have caught investors unawares.
  • With sentiment for developers expected to weaken with up to a c.20% potential downside in share prices, we expect further selling pressure on developers in the near term.
  • We cut Developers to UNDERWEIGHT, and downgrade the following stocks: 
    • City Dev to FULLY VALUED (Target Price S$10.00)
    • UOL to HOLD (Target Price S$7.82)
    • Chip Eng Seng to FULLY VALUED (Target Price S$0.75)
    • Roxy-Pacific to FULLY VALUED (Target Price S$0.40)
    mainly on increased discounts to RNAV.
  • We also cut APAC Realty to FULLY VALUED, Target Price S$0.66 .
  • We maintain 
    • BUY CapitaLand (Target Price S$3.62) &
    • BUY Frasers Property (Target Price S$1.90) 
    for its diversified business model, lower exposure to residential market < 5% and high dividend yield of 4%-5% respectively.

Sales momentum to turn cold.

  • The combined impact of these measures raises the cost of ownership on an assumed S$1.5m property purchase by S$75,000 (first time buyer) and S$150,000 (investor). With the increased upfront capital commitment, we expect demand from investors and foreigners to cool in the immediate term. 
  • In terms of sales momentum, we expect total volumes to fall to 9,000-10,000 units in 2018, and potentially even further if these curbs remain.

En-bloc market potentially grinding to a halt; developers to recalibrate strategies to clear unsold stock at high prices.

  • We believe that we have seen the end of the current en-bloc cycle. The revised ABSD rates (25% ABSD and an additional 5% non-remittable for en-bloc sales) greatly increases the capital commitment for developers looking to land-bank further in a period of increased uncertainty in buying volumes and heightened supply entering the market in the coming 2 years. 
  • The immediate strategy for developers with upcoming launches will be to re-look at their pricing and launch strategy. In the longer term, if sell-through rates do not follow through, the risk of potential write- off to land values will be a concern. However, this is not a base case scenario at this moment.

Impact on the Residential Market

Last minute sales at showflats.

  • The immediate impact was that showflats for existing and upcoming launches were open till late on the 5 July 2018 as developers looked to capitalise on the previews done in recent weeks. Based on anecdotal evidence and calls to agents, we understand that showflats at Riverfront Residences, Park Colonial and Stirling Residences were packed with prospective buyers looking to secure a new unit before the new measures kicked in.
  • Launches were brought forward to 5 July 2018 while existing launches (Affinity at Serangoon) offered last minute discounts of up to 5% to entice buyers to commit.

Primary sales demand to drop back to 9,000-10,000 units.

  • Both measures will effectively raise the cost of acquisition of a new home for homeowners and impact investors and foreigners while largely having minimal impact on the genuine home owner or home upgrader. Based on an assumed S$1.5m price for a new home, we estimate that the new measures will raise the outlay by an additional S$75,000 for home owners (from higher cash down-payments from a tighter loan limit). For investors and foreigners, the cash and/or CPF commitment increases by a hefty S$150,000 (S$75,000 each from higher ABSD payable and upfront capital).
  • Over the next one year, while we continue to expect sales to be driven by close to c.7,000 displaced home owners looking for a replacement home, demand from these buyers is likely to be strong in the immediate term but is finite. We project home transaction volumes to fall back to 9,000-10,000 in 2018 (YTD 5M18 transaction volumes reached 4,320 units).

Punitive measures for developers looking to land-bank in the en- bloc market; demand for en-bloc to grind to a halt.

  • The increase in ABSD to 25% (vs 15% previously) and the additional 5% non-remittable ABSD increases the capital commitment and significantly increases the risks for developers looking to add to their land-bank. 
  • While developers may apply for remittable of the 25% ABSD, the uncertainty and expected slowdown in sales velocity in 2H18 and potentially 2019 might make developers re-think their land-banking strategy or even put a halt to this altogether.

What are potential tail-end risks?

  • Developers have committed more than S$30bn into the residential market on over more than 70 sites in the en-bloc market and government land sales (GLS) programme over the past 2 years. This translates to over 37,000 new un-launched units in the pipeline. 
  • While take-up rates might turn modest, the medium-term risk, if sell-through rates remain weak or falter, will be potential write-offs to land values on developer’s balance sheets. This is not a near term risk for now but could emerge a couple of years later, if sales momentum falters.
  • Based on our estimates, the developers with the largest exposure to Singapore residential are City Developments (CDL), MCL Land (subsidiary of HongKong Land) , and Oxley Holdings.

Impact on developers’ share prices

More downside to property developer share prices.

  • With sentiment for developers expected to weaken further, we see a knee jerk sell-off for most developers in the near term.
  • Based on historical share price performances, developers tend to react negatively post announcement, and their share prices have tended to fall by 3-5% immediately after the announcement. Depending on the physical market environment, stock prices may weaken further and could fall by up to 15% a month after.
  • Developers’ share prices have been weak recently, falling by 12% to 18% since the recent peak in Apr 2018, and we believe that there is likely to be further downside given that the extent of the property curbs has taken most investors by surprise.
  • Based on historical P/NAV trading bands, developers traded at an average of 1.0x P/NAV during the down-cycle in FY13-17 with – 1 SD at 0.80x and trough at 0.67x. 
  • Given the uncertainty in physical property market conditions, we cut our property sector call to Underweight.

Derek TAN DBS Group Research Research | Rachel TAN DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2018-07-06