Singapore Property - DBS Research 2018-10-18: Government Imposes New Restrictions; A Further Headwind For Property Developers

CAPITALAND LIMITED (SGX:C31) FRASERS PROPERTY LIMITED (SGX:TQ5)

Singapore Property - Government Imposes New Restrictions; A Further Headwind For Property Developers

Average development home sizes got “upsized” under newly imposed measures.
Demand to cool as prospective homebuyers take a “wait-and-see” approach before committing.
Final nail in the coffin for the en-bloc market
Developers' share prices could react negatively; prefer diversified plays like CapitaLand and Frasers Property Limited.

URA has revised guidelines on the maximum allowable units in new private and condominium developers outside the Central Area.
Under the new rules, the maximum number of dwelling units per development will be divided by 85 sqm vs the current 70 sqm.
Currently areas in Telok Kurau, Kovan, Joo Chiat and Jalan Eunos are subject to more stringent requirements of 100 sqm. We understand that nine more areas have been earmarked, including areas like Marina Parade, Balestier, Stevens-Chancery, Pasir Panjang, Shelford and Loyang.
The revised guidelines will apply to development applications received after 17 January 2019.
Only formal development applications (excluding outline applications) which have already been granted Provisional Permission or will result in a Provisional Permission that are submitted before 17 January 2019 will not be subjected to the revised guidelines.

The bonus cap for these spaces will be reduced from 10% to 7%.
Developers can still achieve the 10% GFA by qualifying for other incentive schemes, such as Green Mark Bonus Scheme and the new Indoor Recreation Space GFA Scheme.
Total balcony area will be capped at 15% of the net internal area with a minimum width of 1.5m.
The revised guidelines will apply to development applications received on or after 16 January 2019.

The government has introduced a new Bonus GFA scheme to encourage the greater provision of indoor recreation spaces in private non-landed residential developments.
The new Bonus GFA is capped at 1% of total GFA, provided such spaces exceed 0.6% of the total GFA of the development or 10 sqm (whichever is higher).
This is effective immediately.

At one sweep, new development density will fall as the maximum number of allowable units for new developments (from GLS and en bloc) from 2019 will be reduced by up to 20%, which we believe will be effective in curbing land prices from rising further.
In fact, together with hefty additional buyer stamp duty (ABSD) charges, we believe that this set of new rules will push developers to be more cautious in future land tenders and to recalculate their bids/costs. This will potentially bring about a cooling in land prices for upcoming government land sales (GLS) or future en blocs.

Assuming that developers aim to keep price levels at S$1.5m/unit with a 10% profit margin, the revised guidelines could see up to 20%/40% drop in land prices with the revised 85sqm/100sqm rule.

Homebuyers are likely to hold back purchases to 2019 if they can, as most are likely to adopt a wait-and-see attitude in order to ascertain the impact on developers' bids for upcoming land sites post new measures. Annual transaction volumes are likely to fall back to 7,500–8,500 units, which we estimate to be supported by home formation.

While most developers who have yet to complete their en-bloc transactions are rushing to obtain their approvals on time, a scan through the list of completed major en blocs show that most successfully tendered projects to date are unlikely to be impacted, save for any delays in the en-bloc process.
That said, if we assume a conservative 9-month time frame for each en bloc to be successfully completed with Provisional Permission obtained, only Casa Meyfort (tendered on 10 July 2018) by Guocoland runs the risk of breaching this deadline, if there are any delays in the en- bloc approval process/in obtaining Provisional Permission before the deadline.

We believe this will effectively end all hopes of further en-bloc activity going forward. Developers are unlikely to meet current reserve prices as the new rules are likely to have an impact.

In the face of new cooling measures and the prospect of a further drop in sales momentum, we expect developers' share prices to remain under pressure in the immediate term.
Developers' P/NAV multiples are already at 0.73x, which is below -1 standard deviation (SD) of the historical trading range (2013-2017). We believe they could test new trough levels, which imply a near-term downside of up to 10%.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-10-18

SGX Stock Analyst Report BUY MAINTAIN BUY 3.620 SAME 3.620

BUY MAINTAIN BUY 1.980 SAME 1.980