Singapore Residential Sector - OCBC Investment 2020-07-02: Further Correction In Home Prices

CAPITALAND LIMITED (SGX:C31) CITY DEVELOPMENTS LIMITED (SGX:C09)

Singapore Residential Sector - Further Correction In Home Prices

URA private residential property prices fell 1.1% q-o-q in 2Q20 based on flash estimates.
Government Land Sales programme tapered down in light of Covid-19.
Preferred SG developer picks: CapitaLand (SGX:C31) and City Developments (SGX:C09).

URA released its flash estimates (transactions up till mid-Jun) for the private residential property price index (PPI) for 2Q20. The overall decline came in at 1.1% on a q-o-q basis, which is better than our expectations and highlights the resiliency in the market. Landed and non-landed home prices saw a decline of 2.7% and 0.6%, respectively.
Surprisingly, non-landed private home prices in the Core Central Region (CCR) fell only 0.1% q-o-q. We expect this segment to be the worst hit this year given the higher reliance on foreigner demand and the large number of new launches expected, especially in District 10. Price growth in the Rest of Central Region (RCR) and Outside Central Region (OCR) came in at -1.9% and flat q-o-q, respectively.
The decline in 2Q20 was the second consecutive quarter of negative home price growth following 1Q20’s 1.0% dip, and culminated in an overall residential PPI growth of -2.1% YTD. We narrow our private residential price growth forecast to a 5-8% decline in 2020 (previously 5-10%). That said, we are still expecting the economic fallout from Covid-19 and rising job security concerns to be felt more tangibly in 2H20.
Despite the softening home prices, we do not expect the government to introduce any broad-based relaxation of the current property cooling measures in the near-term such as the ABSD and LTV ratio, as housing affordability remains an important issue.

HDB also provided flash estimates in 2Q20 for the resale public housing market. The HDB Resale Price Index improved marginally by 0.2% q-o-q following a flat 1Q20. Given the divergence in performance between the private and public housing market in 2Q20, the price premium narrowed from 15.7% in 1Q20 to 14.1%. However, this is still above the average 15-year gap of 11.8% since 2Q05.

In light of the soft market conditions, the Singapore government recently announced in late Jun that the Government Land Sales (GLS) programme in 2H20 would comprise only three Confirmed List sites and nine Reserve List sites. These sites would yield ~6,670 private residential units, of which 1,370 are from the Confirmed List and the remaining 5,300 units are from the Reserved List. There is also a total of 101.5k sqm of commercial space and 1,070 hotel rooms from these GLS sites.
We note that the number of units in the Confirmed List for 2H20 represents the lowest level since 2H09, when no sites were released. URA highlighted that the GLS programme has been calibrated to factor in the Covid-19 situation.
Furthermore, the Confirmed List sites will be launched in 4Q20 and each site will have a longer tender period of about six months. This is intended to give developers more time to assess the situation. However, URA also mentioned that it has to calibrate the reduction carefully to prevent potential supply shortfalls over the medium to longer-term.
For the public housing space, HDB will offer 7,800 and 5,700 Build-to-Order flats in Aug and Nov this year, respectively.

Singapore developers continue to trade at depressed valuations. The FTSE ST Real Estate Holding & Development Index (FSTREH) is trading at a blended forward P/B ratio of 0.43x, which is 1.9 standard deviations below the 12-year average of 0.74x.
Within the Singapore developers sector, our preferred picks are CapitaLand (SGX:C31) and City Developments (SGX:C09).

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-07-02

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