Singapore Residential Sector - OCBC Investment 2018-09-14: Life’s Not A Bed Of Roses

SGinvestors.io

CAPITALAND LIMITED SGX:C31 UOL GROUP LIMITED SGX:U14 CITY DEVELOPMENTS LIMITED SGX:C09

Singapore Residential Sector - Life’s Not A Bed Of Roses

• Share prices have come off.
• Lack of near-term catalysts.
• Tepid headlines.

Total returns largely negative since property tightening measures were announced

• Following the Singapore Government’s decision to implement a stringent set of property cooling measures in relation to the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits with effect from 6 July this year, the share prices of SG developers nose-dived, although some have since regained some ground.

Valuations undemanding, but lack of near-term catalysts

• The Singapore-listed developers under our coverage have seen total returns ranging between -22.5% (City Developments (SGX:C09)) to +28.7% (Wheelock Properties (SGX:M35) due to its privatisation offer) after the Singapore Government announced the latest set of property cooling measures on 5 Jul this year.
• Unsurprisingly, City Developments fared the worst, given its relatively significant exposure to the Singapore residential market.

~ SGinvestors.io ~ Where SG investors share

Unsurprisingly, ASPs have come under some pressure

• July 2018 saw a significant spike in new launches by developers and frenzy buying by consumers on 5 Jul as market participants rushed to beat the deadline before the property cooling measures came into effect. A total of 1,724 private units were sold by developers that month (+55.0% y-o-y). This figure is likely to be an aberration due to the aforementioned reason.
• Data extracted from URA REALIS points to ~637 new private home sales transactions in Aug. Further checks on projects which were launched on or shortly before 5 Jul revealed that there have been some pricing pressures post the cooling measures, as ASPs have declined by 0.4% to 6.2% (data from 6 Jul to 2 Sep) as compared to 1 Jun to 5 Jul ASP levels for the following projects: Affinity at Serangoon, Margaret Ville, Park Colonial, Riverfront Residences and Stirling Residences (Garden Residences saw ASP growth of 0.4% but there were only two transactions from 6 Jul till 2 Sep). The limitations to this data set include a small sample size and the fact that Aug included the Hungry Ghost Festival period which is seasonally a weak month for housing sales.

Developers’ leverage has increased, but balance sheets remain largely healthy

• The developers we track registered a higher net gearing ratio as at the end of 2Q18 due to more active land banking activities prior to the announcement of the property tightening policies. For example, City Developments’ net debt to equity ratio increased from 10.0% in 1Q18 to 18.9% in 2Q18 due to more loans taken up for the acquisition of land sites at Amber Park and Sumang Walk, but we believe this is still at a healthy ratio.
• Oxley (SGX:5UX)’s net gearing ratio stood at 217.0%, as at 30 Jun 2018, a decrease from the 239.4% in the preceding quarter. Approximately 20% and 3% of its debt are denominated in USD and MYR, respectively, with the balance in SGD. 
• Overall net gearing for the developers we track came in at an average of 58.7% (+6.0 ppt), which we opine is still at a manageable level. This will allow them to withstand the challenging market conditions ahead. 
• Furthermore, the cooling measures are likely to instil a stronger sense of discipline amongst developers when they submit bids for GLS and collective sales. This would allow the property market to become more sustainable over the long run, in our opinion.

Active share buybacks by CapitaLand and CDL

• We note that CapitaLand and City Developments have been active in carrying out share buyback activities after the release of their 2Q18 results. 
• For City Developments, it started its inaugural share buyback programme on 16 Aug this year, and has since purchased 1.1m shares in the open market for a combined value of S$10.4m. We see this as a reflection of confidence in its cash flow position and balance sheet strength, coupled with creating value for its shareholders.

Recurring income growth and capital recycling the key amid residential headwinds

• Even prior to the cooling measures announcements, SG developers had already placed firm emphasis on growing their investment properties portfolio to generate recurring income streams. Following the policy tightening on the residential sector, we believe developers would continue to focus on this aspect and also to seek capital recycling initiatives and overseas expansion opportunities.
• City Developments has set a 10-year target to achieve S$900m of recurring EBITDA per annum, versus its current run-rate of ~S$550m-S$600m. Management aims to attain this goal via AEIs and repositioning its investment properties to create value, while also growing its fund management business to drive its management and performance fees at the same time. The Business Times also reported yesterday (13 Sep) that a potential buyer is in advanced negotiation to acquire Manulife Centre in Bras Basah Road from Alpha Asia Macro Trends Fund (60%) and City Developments (40%). The potential price being mentioned is ~S$550m, or S$2,300 psf on NLA.
• Meanwhile, 67% of Frasers Property Limited (SGX:TQ5)’s 9MFY18 operating PBIT is derived from recurring income sources, versus 61% in FY17. 
• CapitaLand (SGX:C31), on the other hand, made S$3.1b worth of divestments in 1H18 and realised S$140.4m of gains, while redeploying S$1.8b into new investments including a mixed-use site in Chongqing, the Pearl Bank Apartments collective sale and a Grade A Office in Frankfurt, Germany. Looking ahead, it has targeted a 20:80 ratio between trading properties and investment properties for its total asset base. 

New CEOs for CapitaLand and UOL

• Following the surprising announcement in Jun that its current CEO Mr. Lim Ming Yan would be retiring as the President and Group CEO of CapitaLand, it was subsequently announced in end Aug that the current Group CIO Mr. Lee Chee Koon, 43, would be taking over the helm as President and Group CEO with effect from 15 Sep this year. This has removed an overhang surrounding CapitaLand’s leadership direction and we expect the transition to be smooth given that Mr. Lee has been with CapitaLand for more than a decade.
• Another less surprising leadership change was the promotion of Deputy Group CEO Mr. Liam Wee Sin to Group CEO of UOL Group (SGX:U14) . This comes after the announced retirement of Mr. Gwee Lian Kheng. Mr. Liam has been with UOL Group for the last 25 years and will assume his new role on 2 Jan next year. He had already been actively hosting the analyst results briefings/conference calls and engaging the investment community.

Government’s public housing policies to have indirect positive impact to private sector, albeit in the long-term

• The recent announcements on the real estate market made by PM Lee Hsien Loong during the National Day Rally focused more on the HDB segment and appear to not have a direct impact on the private residential sector. However, we believe there are indirect positive implications. 
• The Home Improvement Programme (HIP) II will enhance the value of the flats undergoing their second upgrading phase, while we believe the Voluntary Early Redevelopment Scheme (VERS) would increase the viability of older 5-room flats being sold in the secondary market in the future when it is eventually implemented, while also increasing liquidity for owners who are eligible to qualify for the VERS. All these factors would support the ability of public homeowners to potentially upgrade to private homes. 
• In Parliament, National Development Minister Lawrence Wong also highlighted recently that private developers may be involved for VERS, and this may provide a potential new revenue stream in the future, although details are still lacking.

Valuations undemanding, but lack of near-term catalysts

• Using the FTSE ST Real Estate Holding & Development Index as the benchmark, we note that valuations for SG developers are undemanding, given that the blended forward P/B ratio currently stands at 0.55x, which is 1.6 standard deviations below its 10-year average of 0.78x. Notwithstanding this, we believe investor confidence towards the sector remains muted, while there is also a lack of near-term catalysts.
• Buyer sentiment in the Singapore residential space will likely be subdued at least in the near term and the real impact of this can only be assessed in the coming months. Buyers and developers have adopted a ‘wait-and-see’ approach, taking time to adjust and see how the situation pans out. However, it is not all doom and gloom, as we believe there will still be a ready market for first time buyers and HDB upgraders to a certain extent. 
• City Developments also recently highlighted during its 2Q18 analyst briefing that it managed to sell five units of its high-end New Futura project after the cooling measures came into effect.

We maintain NEUTRAL on SG developers. 

• We narrow our private residential price growth forecast to 8%-10% for 2018 (previously 8%- 12%; 1H18: +7.4%), and also trim our private transaction volumes projection to 8k-10k units from 10k-12k units. 
• As we believe the market is now trying to find a new equilibrium following the surprising measures, coupled with increasing macroeconomic uncertainties, the impact on price changes and sales volume for 2019 would be difficult to ascertain at this point in time.

Preferred picks are CAPL and UOL

• Our preferred sector picks are CapitaLand (CAPL SP) [Rating: BUY; Fair Value: S$4.09] and UOL [Rating: BUY; Fair Value: S$8.48]. 
  • For CapitaLand, we like its proactive capital recycling initiatives to unlock value and drive higher ROE for its shareholders. 
  • For UOL, we believe negatives have been priced in and we see deep value given its attractive P/RNAV of 0.53x. 
• We expect developers to focus more on growing their recurring income streams amid residential headwinds and seek overseas opportunities, while being more prudent in their land acquisitions in Singapore.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2018-09-14

SGX Stock Analyst Report BUY Maintain BUY 4.090 Same 4.090

BUY Maintain BUY 8.480 Same 8.480

HOLD Maintain HOLD 9.810 Same 9.810