Real Estate - RHB Invest 2020-05-29: Ample Room To Cushion A Fall; OVERWEIGHT

CAPITALAND LIMITED (SGX:C31) | SGinvestors.io CAPITALAND LIMITED (SGX:C31) CITY DEVELOPMENTS LIMITED (SGX:C09) APAC REALTY LIMITED (SGX:CLN) OXLEY HOLDINGS LIMITED (SGX:5UX)

Real Estate - Ample Room To Cushion A Fall; OVERWEIGHT

  • Upgrade sector to Overweight from Neutral; CapitaLand (SGX:C31) remains our preferred pick.
  • While COVID-19 has markedly deteriorated the outlook of Singapore’s residential sector, we expect to see more of a price correction than a collapse. The key reasons are: persistently low interest rates, limited room for developers to cut prices, and sufficient policy buffers.
  • Overall, we expect a 5-10% correction in property prices, and a 30-40% decline in private residential volumes for 2020. With developer stocks are trading at attractive 40-60% discounts to RNAV, we upgrade our sector weighting on valuation grounds.



Ample policy buffer to prevent property price collapse.

  • Over the last decade, there have been nearly ten rounds of cooling measures to keep housing prices stable. While some were structural and permanent in nature (eg total debt servicing ratio), there is room to tweak others if market conditions call for it. Thus, unlike the GFC or Asian Financial Crisis, the Government is on much better footing in terms of policy adjustments, if prices deviate sharply from economic fundamentals. The recent temporary relief measures extending additional buyers’ stamp duty (ABSD) deadlines by six months, is one such example that the Government is closely monitoring the market.
  • Looking ahead, Singapore will likely further moderate land supply via government land sales (confirmed list), possibly followed by an additional extension to ABSD remission deadlines, if needed. In the extreme case, the Government could also tweak ABSD rates for second property purchases by locals.


Persistent low interest rates and liquidity remain supportive.

  • A key difference between the current crisis and past ones has been the coordinated swift response by the central bank to inject liquidity and intentions to keep interest rate low. This resulted in the SIBOR rate (to which home loans are mostly pegged) falling below 1%, and this is expeted to stay low.


Unsold units on a declining trend since 2019.

  • After peaking in 1Q19, unsold units have declined, with 31,099 units (including executive condominiums (EC)) as at 1Q20 vs 38,710 units as at 1Q19. Similarly. overall vacancy rates have also declined to 5.4%. While there are still some units in the launch pipeline arising from the 2017-2018 en bloc cycle, supply pressures should ease post 2021, if demand continues to stay resilient.


Limited room for developers to cut prices.

  • Another key difference limiting price drops is development margins, which will largely remain squeezed at 5- 15% vs pre-GFC levels of 20-30%. This is due to higher land costs paid on the back of increased competition. Also, construction costs are expected to rise due to the anticipated increase in manpower costs, further limiting margins.
  • With lower margin limiting price wars among developers, we expect developers to offer more soft discounts compared to outright price cuts.


A strong household balance sheet pre-COVID-19 and local buying limits fire sales.

  • MAS Financial Stability Review (Nov 2019) indicates that household balance sheets remain strong, with average LTV ratios of housing loan dropping to 49% in 3Q19 (2017: 54%). Also, buying demand over the last few years has been local-driven (~80%), with limited speculative buying.





Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-29
SGX Stock Analyst Report BUY MAINTAIN BUY 4.000 SAME 4.000
BUY MAINTAIN BUY 9.500 SAME 9.500
BUY MAINTAIN BUY 0.600 SAME 0.600
BUY MAINTAIN BUY 0.29 SAME 0.29



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