Navigating Singapore 2019 ~ Property Sector - CGS-CIMB Research 2018-11-29: OVERWEIGHT From Neutral

Navigating Singapore 2019 ~ Property Sector - CGS-CIMB Research | SGinvestors.io CITY DEVELOPMENTS LIMITED (SGX:C09) CAPITALAND LIMITED (SGX:C31) UOL GROUP LIMITED (SGX:U14)

Navigating Singapore 2019 ~ Property Sector - OVERWEIGHT From Neutral

(Semi) Positive Trends in 9M18

Take up rates are lower but have not dried up.

  • Post the Jul 18 property cooling measures, residential transaction volumes has declined 19% y-o-y in Aug and Sep to 1,549 units.
  • But more importantly, take up rates (units sold/units launched) have stayed at about 0.9x over the same period (vs 1x for 9M18, 1.3x 1H18) on moderated buying appetite. This is accompanied by a slower pace of price increase of 0.5% q-o-q indicating that buyers have turned more selective and factoring in higher transaction costs into their purchases.

Enbloc replacement demand could underpin near-term secondary market sales.

  • Up to an estimated 6,800 homeowners could be displaced if all announced enbloc sales are completed. We believe a large portion of the displaced have yet to relocate into new premises. This could provide some near-term support for volume sales.

Negative Trends

Rising interest rates.

  • Apart from higher transaction costs, rising interest rates are expected to erode purchasing power of homebuyers. Three-month SIBOR have risen by 0.26% since the beginning of 2018 and mortgage rates have risen in tandem.
  • For every S$100,000 of outstanding loans, a 10bp upward re-pricing in mortgage rates could result in a 1% increase in monthly mortgage installment payment. This would erode buyer affordability.

Margin compression.

  • Land prices have risen on the back of landbanking fervor, resulting in high landbank cost. Any significant selling price retracement or prolonged land holding period could adversely impact development margins.
  • Good sell-through rates and faster asset turn are key to preserving development margins.

Stock Preference

  • Developers generally reported 3QCY18 results that were in line, at 60-75% of our full-year forecast. Results came in mixed, at slightly better or slightly lower y-o-y. Nonetheless, the expectation is for 4QCY18 to be slightly better.
  • CapitaLand (SGX:C31) expects strong China residential unit handovers in 4Q, which is equivalent to its 9M quantum, while the sale of the high-end South Beach Residences condos would be progressively recognised from 4QCY18.
  • For UOL Group (SGX:U14), we anticipate a higher proportion of billings from The Tre Ver which was launched in Aug. Given this prospect and moderate take-up rates at new launches, we think developers would likely trade in line with the broader market.
  • We upgrade our call on developers to OVERWEIGHT on valuations as the sector is trading at a 50% discount to RNAV, which is at -1.5 s.d. from the mean. We see trading opportunities within the sector as latest new launches show inventory clearing at a moderated price and volume expectations, thus mitigating the risk of inventory or land banking writedowns. Catalysts could also emerge as we move closer towards the end of the interest rate normalisation cycle in late-2019.
  • We continue to prefer diversified developers with a high proportion of recurrent income, such as City Developments (SGX:C09) and CapitaLand.
  • Upside risks to our view include higher-than-expected transaction volumes while downside risks include a faster-than-anticipated rise in mortgage rates, which will erode affordability.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-29
SGX Stock Analyst Report ADD MAINTAIN ADD 10.650 SAME 10.650