Singapore Developers - DBS Research 2019-01-03: Waiting For Its Turn To Shine

Singapore Property Developers - DBS Group Research | SGinvestors.io

CAPITALAND LIMITED (SGX:C31) CHIP ENG SENG CORPORATION LTD (SGX:C29) CITY DEVELOPMENTS LIMITED (SGX:C09) FRASERS PROPERTY LIMITED (SGX:TQ5) ROXY-PACIFIC HOLDINGS LIMITED (SGX:E8Z) UOL GROUP LIMITED (SGX:U14)

Singapore Developers - Waiting For Its Turn To Shine

A tad too early to turn positive despite attractive valuations
Singapore residential market projected to exhibit both volumes and price weakness in 2019.
Hopes from a boost in volumes by displaced en-bloc buyers to disappoint.
Prefer diversified plays like CAPITALAND LIMITED (SGX:C31) and FRASERS PROPERTY LIMITED (SGX:TQ5).

Developers – A range-bound trade

Government measures curb investor sentiment.

Singapore’s property developers (measured by the FSTREH index) had a strong start to 2018 but prices fell from Jul’18 after the government tightened property measures in July and October 2018, which surprised most investors. As such, developer share prices reacted negatively and we saw share prices falling by 20-25% but have remained weak since.
On a YTD18 basis, the FSTREH Index (Developer index) is down by c.14% (including dividends), underperforming both the FSTREI and the STI.

Developers to trade in a “new normal” in 2019.

With recent government policy curbs likely remaining at least for the medium term, we believe that developers’ share prices will likely remain range bound in 2019. We found that developers tend to see a drop of between -3% to -10% immediately after the announcement. Thereafter, depending on the property market outlook, stock prices generally weaken further and could fall by up to 15% a month after.

Transaction volumes and prices have historically been key drivers of developers’ stock prices.

In 2019, we expect developer’s valuations to be weighed down by a projected slowdown in sales volumes and declines in property prices as measured by the property price index (PPI).
With developers trading at c.0.7x P/NAV currently, we believe most the negative news has been factored in. However, further negative newsflow to come is likely to continue to weigh on developers’ share prices.

Demand for new homes to fall back

New cooling measures to raise uncertainty in the property market.

We believe that the recent introduction of cooling measures in July and October 2018 will create uncertainty and curb investors’ interest in the property market in the immediate term. The revised additional buyer stamp duty (ABSD) and loan-to-value curbs imposed in early July 2018 have effectively raised the cost of acquiring a new home which we believe will impact investors and foreigners the most, while keeping the genuine homebuyers or home-upgraders largely spared. Based on an assumed S$1.5m price for a new home, we estimate that the new measures will raise the transaction costs by an additional S$75,000 for homebuyers (from higher cash down payments from tighter loan limits). 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).
The policy announced in October 2018 regarding the reduction of average minimum size for developments which will be effective for new developments approved from early January 2019 infused more uncertainty in the market. This will be a dampener on sales volumes as we believe that homebuyers and potential investors who are not in a hurry might adopt a “wait-and-see” attitude before committing to a purchase of a new home.

Primary sales demand to drop back to 7,500-8,500 units in 2019.

The slowdown in sales momentum has already happened, as evident in the primary sales momentum falling to c.500-800 units per month since July 2018 which we believe will remain the “new normal” going into 2019. As such, we project primary home transaction volumes to fall to 10,000-11,000 units in 2018 (YTD 11M18 transaction volumes reached c.9,300 units sold).
Thereafter, we expect primary market volumes to decline to 7,500-8,500 units per annum, in line with home formation levels. This is similar to the transaction volumes seen back in 2014-2016, post the last round of cooling measures introduced from 2010-2013.

En-bloc buyers to still boost the market in the near term but impact to taper off from 2H19.

With an expectation of a slowdown in transaction volumes in 2019, we see near-term sales being boosted somewhat as home owners look for a replacement home from 2019 after receiving their proceeds from the en-bloc. Based on our estimates, assuming that these home owners are paid nine months after the close of the en-bloc tenders, we estimate another c.S$4bn could be paid in 1H19 or close to another 1,000 units.
While demand for replacement units may be strong near term, we question the longer-term sustainability of demand from en-bloc buyers.

Market absorption rate to hit > 5.0x, implying downside in prices.

At the assumed primary market transaction volume of 7,500-8,500 annually, the market absorption rate is estimated to be c.5.1x when compared against the supply of close to 41,000 units (11,000 units from unlaunched phases from existing projects and another 30,000 from projects that have yet to hit the market). At absorption rates of > 3.0x, we typically have seen weakness in property prices.

Who’s buying residential property in 2018?

Singaporean households remain the key buyer of new homes.

Based on data compiled by Realis as at 27 November 2018, out of the 22,000 units transacted in 11M18 (9,300 in the primary sales, 12,700 in the secondary market), a majority of the buyers in 2018 were Singaporean households, accounting for close to 79% of total sales with Singapore permanent residents (PRs) accounting for another 15% and the remaining 6% from foreigners. Foreigners and PRs who are active in the property market come mainly from China (6.1% of total PR and foreigner transactions), followed by Malaysia (3.8%), India (1.8%) and Indonesia (1.8%).
Close to 34% (or potentially more) of sales are made to upgraders (denoted as buyers with public housing addresses [HDB]) looking to purchase a private home, which implies that there is strong underlying demand from Singaporean households to upgrade to a new home.

Robust upgrader demand to yield another 6,000 units per annum.

We find that the “upgraders” (home owners who have already bought their first HDB homes) who are looking to buy a bigger home due to a growing family or aspirational reasons are a big source of demand. In our analysis, the number of HDB flats that would have achieved the minimum occupation period (MOP) is estimated to increase to 17,000- 19,000 per annum over the next 10 years.
While there is a significant number of households that can chose to upgrade to the private market, the timing of these households opting to enter the market remains uncertain for now. Developers will likely cater their projects to attract this market.

The best-selling projects of 2018

Top-performing new launches.

Developers have been relatively successful in their project launches over 2018. Based on Realis data extracted as of 27 November 2018, we note that the 15 best-selling projects sold close to 5,653 units, capturing almost 61% of the total sales in the primary market over the same period. These projects collectively sold close to 75% of the units launched during the period. When compared against the total number of units in these projects, developers have achieved a sell-through rate of 44%, a respectable number in our view, despite the uncertainty brought about by the new measures from July 2018.
The top 5 selling projects in terms of units sold include the likes of Riverfront Residences, Rivercove Residences, Park Colonial, Stirling Residences and The Tapestry, which are launched before the introduction of the property measures in Jul’18. We note that these projects achieved between 64-100% sell-through rates for units launched for sale and we believe that given the good sales momentum in the initial phase of the project, may continue to achieve strong sell-through rates going into 2019.
We also note that Riverfront Residences and Stirling Residences have only sold 47% and 37% of the total number of units respectively, implying that there is still some way to go before the projects are sold out.
Refer to the PDF report attached for the listing of top 15 performing projects in 2018.

Selected launches are fully sold; past projects also saw strong take-ups as developers took advantage of positive buyer sentiment.

Projects that sold well include the likes of Rivercove Residences, an executive condominium and The Verandah Residences which were sold out within a year of launch. Park Colonnial by a CHIP ENG SENG CORPORATION LTD (SGX:C29)-led consortium sold c.65% of the total project within four months of launch, which is commendable given supply build-up in the vicinity. Twin Vew (the first project by China Construction in Singapore), located in West Coast, has also reportedly sold 88% of its 520 units launched for sale.
Past property launches in 2017 also leveraged on the positive market sentiment to launch their remaining phases – Park Place Residences at PLQ by Land Lease (429 units, 95% sold) and Seaside Residences (841 units, 86% sold) are substantially sold ahead of completion.

Oxley, City Dev and Chip Eng Seng launched the most number of units.

Developers have launched close to 10,000 units (estimated from new projects and new phases of existing projects) as of 27 November 18, higher than a year ago. This comes on the back of active land-banking activities in the en-bloc market since late 2016.
In terms of market share, we note that the OXLEY HOLDINGS LIMITED (SGX:5UX)-led consortium came out tops at close to 19%, meaning that nearly one out of five new units launched in the market comes from the company. Meanwhile, CITY DEVELOPMENTS LIMITED (SGX:C09) was second with a market share of 9%. Other developers that have been active in launching their suite of projects include the likes of Chip Eng Seng (9%) and Qingjian (9% market share from existing project Le Quest and the most recent launch Jadescape).

Which developers sold well in 2018?

In terms of market share, Oxley is the top-selling developer in 2018, securing close to 16% of the total sales of close to 9,500 units (as of 27 November 2018) across its seven projects launched to date, followed by City Developments with 8% of market share from its projects. Meanwhile, Chip Eng Seng and its partners sold 7% of total units at Park Colonnial and existing project Grandeur Park Residences.

Project sell-through rates have slowed.

Project launches as of 10M18 had generally slowed y-o-y, achieving a take-up rate of at least c.38% within one month of launch, which is down close to 12ppts compared to a year ago (c.50% for 10M17). If project sell-through rates remain at current levels, the property market conditions will be similar with that in 2014-2015.
Based on a selected sample of project launches over 2018, we found that project launches in the first six months of 2018 saw an average take-up rate of 75%, with projects like Twin Vew and Rivercove Residences being at 88% and 100% sold respectively. Since July 2018, projects launched up to September 2018 have managed to sell on average c.30% of their total units.
We attribute this weakness to the uncertainty arising from the introduction of property cooling measures in 2018, which resulted in a slowdown in purchases while developers have been more cautious in their launch strategy, preferring to release a smaller quantum to the market at launch. With the recently revised minimum size rules for new developments in 2019, we believe that primary sales volumes are likely to remain slow as home buyer grapple with the impact of the new rules on future home prices.
Refer to the PDF report attached for listing on performance of selected project before and after property cooling measures.

New supply of units will enter the market

Close to 40,000 units of new launches in the pipeline for sale in 2019 and beyond.

Developers have launched c.10,000 units YTD and there are a further 40,000 units in the pipeline (10,000 from un-launched phases in existing projects and 30,000 from yet-to-be launched projects). While 2018 launches are skewed towards projects located in the suburbs and fringe areas of the central region, we note that this is expected to change in 2019. We estimate that in 2019, 41% of the units will be in the outside central region (OCR), followed by 35% in the core central region (CCR) with the remaining 24% from the rest of central region (RCR).
Given a strong pipeline of new projects, buyers are spoilt for choice and given the new property measures in place, we believe that buyers might take their time to commit to a new purchase. Key sizeable projects that we believe will catch buyers’ attention includes the likes of Jiak Kim Site (estimated at close to 455 units), Cuscaden Walk (170 units), and a number of projects located along Holland Road which went en bloc in 1H18 and were sold in the GLS.
Three executive condominiums (EC) sites have been awarded in 2018, yielding close to 1,800 units which will be launched progressively from 2H19 onwards. Most of these projects are expected to test the S$1,100 psf level, which will be a new level for EC launches.
Refer to the PDF report attached for listing of selected projects to be launched in 2019.

Potential price cuts only after an extended period of low sell-through rates.

A “buyer-seller stalemate” is generally negative for developers given the maximum timeline to completely sell any project, failing which developers will incur failing hefty penalties which include payment of the additional buyer stamp duties (ABSD) on land purchase and potential extension charges (for en-bloc sites) in year 5 and year 7 respectively.
With projected margins already thin at < 12% (based on target launch prices) for most of the projects to be launched next year, a slow sell-through rate implies that the risk of a potential write-off in project costs will rise in the medium term.

Launch galore in district 10, will there be an oversupply?

We see a potential oversupply in district 10 along Holland Road vicinity, where close to 10 sites were sold en bloc over February- May 2018. They are expected to hit the market in 2019, and we estimate that close to 2,000 units could be launched (current 470 units). Developers had bid aggressively for the sites, averaging S$1,500-1,800 psf, implying breakeven levels of close to S$2,500 psf which is above current market transaction levels. It remains to be seen if buyers would still be interested at levels above that.

Which developers have more exposure to the Singapore Residential market?

Punitive measures for developers to land bank further; demand for en bloc to grind to a halt.

In the land-banking cycle over late 2016-1H18, developers had invested close to S$30.0bn to acquire land across c.100 land sites through the GLS and collective-sale market (en-bloc deals), representing one of the most active periods since 2013. As the government moves in with more restrictive measures to curb both demand and supply, we expect developers to focus on clearing inventories rather than to add more, given expectations that the market sales momentum will likely slow in 2019-2020.

Further land-banking activity to turn more subdued.

The increase in ABSD to 25% (vs 15% previously) and the additional 5% non-remittable ABSD have increased the capital commitment and significantly increased the risks for developers looking to add to their land banks. While developers might apply for remission of the 25% ABSD, expectations of a slowdown in sales velocity in 2019 might make developers re-think their land-banking strategy or even make them stop looking (especially for the larger sites) altogether.

Which developers are more exposed?

Based on our estimates, as of 3Q18, among the listed developers (covered by DBS and other selected names), after a year of strong pre-sales, developers which still have an exposure to the residential market (% of unsold stock compared to the market) are City Developments, Oxley and Partners, UOL GROUP LIMITED (SGX:U14), MCL Land and Sim Lian, taking the top 5 spots.

Developer Picks

A range-bound trade in 2019 with valuations being a catalyst.

Given the surprise introduction of tightening policy measures in 2018, property developers' share prices have taken a hit and have been weak since July 2018. The sector now trades at a P/NAV of 0.70x or a P/RNAV of 0.60x.
Looking into 2019, we see a slowdown in the physical property market – and project transaction volumes to decline 20% y-o-y coupled with pricing pressures, therefore, developers’ stock prices will likely remain range bound. We believe that their share prices might mirror that seen in 2H13-early 2017.
Over that period, developers were trading at a wide band of an average of 1.0x P/NAV with -1 standard deviation (SD) of 0.80x. The trough in valuations over the period is close to 0.67x. While there is value at current valuations at close to -1.5 SD and looking attractive from a valuation stand-point, we believe that given the market uncertainty, investors might be more willing to buy into developer stocks that are close to through levels, which implies a downside of close to c.5%.

Prefer diversified plays.

We prefer developers with a bigger exposure to the commercial sub-segments like CAPITALAND LIMITED (SGX:C31) and FRASERS PROPERTY LIMITED (SGX:TQ5) which have been focusing on growing their recurring income base. With limited exposure to the residential sector at 7% and 5% of RNAVs respectively, we believe that CapitaLand and Frasers Property Limited will continue see stable returns.
For developers which have been active in land banking like City Developments and UOL Group, our focus will be on their ability to achieve strong sell-through rates in order to minimise their exposure to the slowing real estate market.

Key Risks

Higher interest rates and elevated vacancy rates could dampen price increase momentum.

As global interest rates are expected to rise in 2018-2019, a key uncertainty will be the pace of increase negatively impacting homebuyers’ purchasing ability. The high vacancy rates of c.8.4% could also cap further price increases especially when investors are unable to find tenants and thus, have to take on the additional mortgage burden.

Further government tightening measures, although unlikely in our view.

The government has kept a close watch on the robust demand in the collective sales market (en bloc) which has become an alternative means for developers to land bank. While the government is wary of a potential bubble in land prices, we believe it is unlikely to introduce further tightening measures at this point unless the property price momentum rises at an unabated pace. However, indirect measures could be implemented to limit over-leverage in the system, such as introducing more supply in government land es (GLS) or curbing bank lending.

Stock Profiles

Derek TAN DBS Group Research | Rachel TAN DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-01-03

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