Real Estate Singapore - RHB Invest 2020-10-05: Are Developer Stocks A Better Bargain Than Buying Residential Property?


Real Estate Singapore - Are Developer Stocks A Better Bargain Than Buying Residential Property?

  • Singapore property market has surprised on the upside since the re-opening of the economy, with a strong rebound in transaction volumes and stable prices. This has been driven by ultra-low interest rates, a government economic stimulus and a surge in housing and development board (HDB) upgrader demand. However, the real estate sector index is down 28% YTD with large-cap stocks under coverage trading at -2SD P/BV.
  • We believe the sector offers good value at current levels.
  • Keep OVERWEIGHT; CapitaLand (SGX:C31) is our Top Pick.

Buying demand has roared back since reopening in June…

  • Private home sales have quickly rebounded back to pre-COVID levels since phased opening up of economy in June, with monthly sales in August rising 16% m-o-m and 12% y-o-y. YTD sales volumes are now just 5% below last year’s sales. Key drivers in our view are ultra-low interest rates, a surge in HDB upgrader demand with c.50,000 flats expected to cross their minimum occupation period (MOP) in 2020-21, attractive new project launches, and aggressive marketing.
  • There is also a noticeable shift in buying demand from mainly shoe-box units (ie smaller sized apartments) to across all unit types which we believe is due to buyers’ changing preferences for bigger-sized units post COVID-19 lockdowns.
  • Overall we revise up our 2020 sales volume assumptions to 8,500 – 9,500 units representing a 5-15% y-o-y decline (previously 30-40%).

...but URA’s latest move to clamp down on reissuance of options may cool off some frenzy.

  • Last week, the Urban Redevelopment Authority (URA) announced a restriction for developers to re-issuing options to purchase (OTP) for the same buyer, for the same unit, within 12 months of expiry. URA noted that the move is meant to instil a greater financial discipline in making property purchases under current market conditions, indicating that the Government is closely monitoring the recent spike in sales volumes. The move comes on the back of an increasing number of developers re-issuing OTPs to buyers upon expiry, without the typical forfeiture of booking fees.
  • Some reissuance of options were driven by buyers’ needing more time to dispose of their existing units. The move has also led to an increase in speculative purchases in our view, with some buyers using the option as a hedge against future price increases. Thus, we believe the recent move is likely to have a slight cooling effect (of a 3-5% decline in demand) in the coming months.

Prices have remained largely stable, despite the COVID-19 impact to economy.

  • While unemployment levels have spiked up, the impact on property prices has been muted so far, with latest flash estimates showing a 0.8% q-o-q increase in 3Q. The increase was mainly driven by the landed property segment while non-landed prices were flattish q-o-q. High-end segment (CCR) declined the most by 4.9% q-o-q while the mid-tier (RCR) and mass market (OCR) segments registered a 3.3% and 1.7% q-o-q increase.
  • We adjust our full year pricing assumptions to a 0-3% decline, compared to 5-10% previously. For 2021 we expect property prices to be in the range of -3% to +1%.

Ultra-low interest rates to stay; liquidity still remains aplenty.

  • One of the major factors driving property purchases is the ultra-low interest rates with central banks globally pledging to keep low interest rates for next two to three years. Singapore’s 15-year housing loan rates tracked by Bloomberg show that housing loan rate has dipped by another 43 bps to 2.83%, and it is 150bps below a 18-year average.
  • Globally, governments have also pumped in an amount exceeding USD10 trillion in stimulus packages (McKinsey & Co) which has ensured liquidity and increased investors’ appetite for higher yield real estate assets.

Rentals to remain weak with a decline in non-resident population and tightening immigration measures.

  • Singapore registered its first decline in total population since 2003 with its non-resident population declining 35,800 or 2.1% y-o-y, the steepest fall in more than a decade. With immigration measures tightened further and with a raise in minimum salary requirement for employment pass and S Pass holders, we expect only a flattish to marginal growth in foreigner population over the next 2-3 years. This will continue to impact the rental market which already has been on a diverging trend, with capital values to remain under pressure as foreigners account for a major chunk of rental demand.
  • The impact of weak rental yields on capital values is to some extent mitigated by a low interest rate environment resulting in yield compression across asset classses and stronger holding power among residents and developers.

Developer stocks trading at deep discount to P/BV and RNAV; CapitaLand is our Top Pick.

  • Large cap stocks under our coverage are currently trading at a 40-60% discount to RNAV which is a decade low and closer to a -2SD level. We don’t expect any significant asset value write downs and only expect a modest 2-5% decline in book values as cap rates have largely remained unchanged.
  • CapitaLand (SGX:C31) remains our preferred pick for its globally diversified portfolio, stable REITs and a growing recurring income base from its fund management platform.
  • We also see City Developments (SGX:C09) as a proxy play on a recovery in the Singapore market (with the largest land bank in Singapore) and attractive valuations, which in our view outweigh concerns on its hospitality portfolio.
  • Key risks are imposition of additional cooling measures in the context of a deep and protracted economic recession.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-10-05
SGX Stock Analyst Report BUY MAINTAIN BUY 3.750 SAME 3.750