Real Estate - RHB Invest 2018-08-28: Ground Checks ~ Savills Luncheon; Upbeat Outlook

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Real Estate - Ground Checks: Savills Luncheon; Upbeat Outlook

• We recently hosted Savills senior director Mr Alan Cheong for an investor group luncheon where he shared his views on Singapore’s residential sector post the property cooling measures. Overall, Savills continues to remain upbeat on the residential price outlook, as it believes the market remains well supported by local buying demand, pent-up household liquidity, and multiplier effects from en bloc sales.
• Savills expects property prices to climb 5-12% each in 2H18 and 2019, slightly bullish when compared to our expectations of a flattish outlook (2H18) and 0-2% price increase (2019).
• Our sector Top Pick is CapitaLand.

Current property market is not in bubble territor

• Savills noted that, based on its Relative Strength Index, the current property market is not in bubble territor. It also does not expect the market to crash in response to the latest cooling measures (see 6 Jul’s Killer Move To Curb “Euphoria” and 23 Jul’s Taking The Wind Out Of Sails for more details).
• Savills’ revised pricing outlook for the primary residential market is still positive and expects prices to increase by 10-12% in 2018 and 5-10% for 2019.

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Savills’ key reasons for demand and prices to sustain:

1. There is still a great deal of pent-up household liquidity in the market. Housing prices remain affordable based on liquid assets/household. Property prices today have not outpaced the income growth since 2013;
2. Based on Savills’ observation, people in the 45-59 age bracket account for significant portion of buying demand in show flats. In terms of absolute numbers, males in this bracket are likely to see a steady increase in population growth until 2021 – this should help buying demand. In addition, it also noted that quite a few buyers are falling back on parental equity support to buy their properties;
3. Buying interest in show flats have sustained, even after the announcement of cooling measures. This was unlike the Total Debt Service Ratio framework announcement in Jun 2013, after which interest levels in show flats collapsed. Consequently, Savills believes the recent measures did not induce a tear in the sales momentum fabric;
4. Buying demand today is primarily driven by locals. The number of foreigners buying prime properties has been declining over the years. Savills believes the increase in Additional Buyers Stamp Duty (ABSD) charges to 20% for foreigners is not as critical as it seems;
5. The multiplier effects from collective sales is tremendous, as it not only creates a wealth effect, but also increases the velocity of transactions;
6. The lower rental yields may not result in fall in prices due to the strong holding power by both buyers and developers;
7. The higher cost of production – as a result of elevated land prices, and differential & land premium increases – limits developers’ ability to lower prices in upcoming launches.

Our view.

• While we agree with most of Savills’ analysis, we are slightly less bullish on our price outlook. This is because we believe buyers are likely to resist price increases in new launches and may defer or channel their liquidity into other investment opportunities instead.
• The upside risk to our call is the market ignoring the cooling measures, which results in a surge in property prices.
• Downside risks are a collapse in property prices and sharp rise in interest rates.
• Our sector Top Pick is CapitaLand (SGX:C31, Rating: BUY, Target Price: SGD4.00).

Savills take on the latest cooling measures:

1. The latest cooling measure announcement was a risk and not an uncertainty like the Asian Financial Crisis, Severe Acute Respiratory Syndrome event or Global Financial Crisis. Property prices have only reacted sharply during uncertain times. Except for the timing of cooling measures – which according to Savills’ Mr Cheong was premature – the measures were largely anticipated by the market;
2. The 25% ABSD and 5% non-remitable ABSD are expected to chock off supply from collective sales. However, this may result in an increase in developers’ pricing power increases from 2H19 onwards – this is if the Government Land Sales programme’s supply remains low;
3. Of the 26 interventions made by the Government to control property prices, only six were pro-market. Consequently, buyers should not expect any relaxation of cooling measures in the near term;
4. The buyers rush to buy 1,022 units on 5 Jul – ahead of the cooling measures’ implementation – showed that people are still positive on the residential market. As the market learns from the past, the latest measures may not dent the sector much.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-28

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