Property Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Big Brother Is Watching You!

Property Sector 2020 Outlook & Strategy - DBS Research | SGinvestors.io CAPITALAND LIMITED (SGX:C31) CITY DEVELOPMENTS LIMITED (SGX:C09)

Property Sector 2020 Outlook & Strategy - Big Brother Is Watching You!

  • Property prices to remain stable as primary volumes expected to remain fairly strong.
  • Listed developers have outperformed peers in terms of sell-through rates; focus is on driving their recurring revenues which form 70-75% of EBITDA.
  • Further government tightening measures a rising risk if property prices increase at an unabated pace or if foreigner buying seeps into the suburbs.
  • Prefer diversified landlords like CAPITALAND (SGX:C31) and CITY DEVELOPMENTS (SGX:C09).


New project launch momentum to dip in 2020.

  • After a robust year of property launches in 2019, we are anticipating a dip in momentum come 2020 as the pipeline of new supply starts to taper off. As of 3Q19, there were 39,000 units (45,000 in 3Q18) in the supply pipeline which will be introduced to the market progressively over time.
  • We note that there is a higher percentage of homes within the core central region (CCR) which implies that actual sell-through rates may start to slow before picking up through the development cycle. As such, we project primary sales volumes to remain stable at 10,000 units in 2020, a similar level to that in 2019.

Property prices to remain firm (+1-2% in 2020) after a year of positive surprises.

  • The Singapore property price index (PPI) is expected to remain on an upward trend and is projected to rise by another 1-2% on the back of a potential 3.0% rise in the PPI in 2019. Prices for new launches and new phases for existing launched projects are likely to be inched up as developers look to lock in additional margins post launch weekend.

Upgrader demand the key to watch!

  • The government’s move towards enhancing grants to increase the affordability of new households to buy their first home in the public market (HDB primary and resale), in our view, has led to improved sentiment for the overall property market. With more transactions expected within the HDB resale market, we believe this will kick-start a trend of HDB owners upgrading to their aspired private properties and as such result in a steadier HDB resale price outlook.

Sales momentum has been weak; but selected developments continue to find buyers.

  • Sell-through rates have been weak across most project launches in 2019 as buyers have more choices while developers have also turned more cautious in their launch strategy and have opted to offer a smaller number of units at each launch. Project sell-through rates have fallen as expected to c.20-30% vs 50-60% after a year of launch. However, selected projects with good attributes have been able to attract more buyers than the market. Sell-through rates have declined to < 40%, implying that developers will take a longer time to sell all their units.
  • We do not rule out price cuts yet but only in the medium term if sales momentum fails to pick up towards the 5-year ABSD deadline.

Residential supply pipeline still high.

  • With a pipeline of close to 30,000 units (estimated from remaining units to be launched from existing projects and unlaunched projects in the pipeline), the slowing sales momentum will mean a built-up in unsold supply of units going forward. Based on the estimated primary sales transaction volumes of 7,500-8,500 units for 2019, this will mean an absorption rate (total unsold supply/total primary sales) of 3.5-4.0x, which historically coincide with property price weakness.

Most property segments in Singapore seeing stronger operating outlook.

  • While the residential market is showing increasing signs of stability, the other property subsectors are projected to remain on a cyclical upturn, largely driven by an improvement in demand-supply dynamics, giving landlords the upper hand in rental negotiations going into 2019.
  • We continue to see a recovery in rents in the office and industrial (warehouse and business parks) sub-sectors while hotels will also see a near-term uptick. This is made possible as supply risks drop off significantly on the back of a robust demand outlook as conference pipelines remain strong. The retail sub-sector, given abating supply risk, should start to see higher rentals.

Asset recycling to remain high on the agenda for most developers.

  • Property developers have executed close to S$15bn in merger and acquisition (M&A) activities in 2019 and most are looking at crystallising value through asset recycling into their listed REITs or other platforms to drive higher returns and returns on equity (ROE).


Higher interest rates, coupled with slowing economic outlook, could reel in price increase momentum.

  • With global interest rates expected to remain low in 2020, buyers and investors may continue to look at investing in properties. However, a key uncertainty will be the pace of increase negatively impacting homebuyers’ affordability as mortgage burden rises.
  • In addition, with the Singapore economy expected to slow on a y-o-y basis, this could impact sentiment and investments in the physical market.

Further government policies to be introduced if property prices rise at an unabated pace.

  • The government is expected to closely monitor the price performance of the Singapore market amid rising interest in the Singapore residential sector from foreigners. If property prices continue to rise unabatedly, we do not rule out further tightening to be introduced in 2019 to further curb demand for homes. Some of these measures could include
    1. a further hike in both buyer and seller stamp duties, and
    2. an increase in supply in the government land sales programme.
  • (See also SGX Listed Real Estate Sector StocksShare Price Performance - Real Estate Sector and more Analyst Reports on Singapore Property Sector.)

Valuations & Stock Picks

Positive sentiment to drive valuations higher.

  • Property developers’ share prices have in general rebounded by c.8% (FSTREH Index) and now trade at 0.8x P/NAV on average, which is at +0.5 standard deviation (SD) of its 5 year historical average. This is on the back of
    • improved sentiment given the higher-than-expected residential sales, and
    • M&A activities.
  • With a more stable property outlook and potential further value-crystallisation activities, we expect property developers to trade closer to their mean of 0.9x P/NAV.

Focus on diversified landlords.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-12-12
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