Property Sector – Singapore
by Phillip Securities Research

1Q flash estimates for property prices. The URA released the flash estimates of the price index of private residential property for the first quarter (1Q) of 2009 on 1 April 2009. Prices dropped sharply by 13.8% in 1Q 2009, which was much larger than the fall of 6.1% in 4Q 2008. The drop was worse than our expectations. We believe that property prices will continue to decline for the rest of 2009.



URA also provided the details for the various geographical regions. Prices of nonlanded private residential properties decreased by 15.2% in Core Central Region, 17.2% in Rest of Central Region and 7.5% in Outside Central Region. The decreases for Core Central Region and Rest of Central Region were worse than our expectations while the fall for Outside Central Region came in within expectations. We note that buyers have been reluctant in buying high-end and mid-end homes, which are mainly located in Core Central Region and Rest of Central Region respectively. This is because prices have been high and are expected to decline further. Property prices in Rest of Central Region or the suburbs have fallen less due to demand from HDB upgraders who have found the mass-market homes to be more affordable.



Due to the slowdown in the global economy and increase in unemployment, we are revising our estimates for high-end and mid-end property prices to decrease by 25% to 30% and 20% to 25% from 20% to 25% and 15% to 20% respectively for 2009. The estimates for mass-market home prices remain unchanged for a fall of 10% to 15% for 2009.

On the same day, HDB released the flash estimate for the public housing resale price index for 1Q 2009. The index is 138.6, which is a fall of 0.6% from 4Q 2008. This is the first decrease after prices have risen by more than 30% since 2006. We feel that the HDB resale market is relatively stable with demand from permanent residents and young married couples. At the same time, there is limited supply from HDB for new housing flats. Most of the new flats offered are Build-To-Order (BTO) flats, which continue to attract applications of up to three times.

Revaluation losses. Due to the sharp decline in property prices, we expect property companies to write down the value of their existing assets by 20 to 30 percent in 2009. In 4Q 2008, property companies have written down their asset values by less than 10% as the property prices have only dipped slightly. We believe that write-downs will accelerate in 2009. This will cause the companies to report lower profits or even losses in 2009.

Interest Absorption Scheme. The government had scrapped the Deferred Payment Scheme (DPS) to curb property speculation and prevent defaults as the property market slows down. As a result, developers have introduced the Interest Absorption Scheme (IAS) that is similar to the DPS. Under the IAS, buyers sign up for loans and make the 20 percent downpayment when they book property units. They will not have to make progressive payments until the project obtains the Temporary Occupation Permit (TOP). However, they have to pay a premium of about 3 percent for the IAS.

Interest in mass-market properties in February. In February, there is a substantial increase in interest in mass-market private residential properties that are located at the suburbs. Caspian (median price S$604 psf) at Jurong, Alexis (median price S$1,083 psf) at Alexandra and The Quartz (median price S$591 psf) at Sengkang reported strong sales. The key attraction was the lower prices psf as developers recognize the slowdown in the economy and cut prices to attract buyers. At the same time, the developers reconfigure the homes into smaller units such as studio apartments, one-bedroom and two-bedroom units that resulted in lower prices per unit.

However, there was little interest in mid-end and high-end properties as these are deemed to be expensive and we feel that there is room for further price corrections for this year. The developers are also holding back launches and waiting for signs of recovery before they can price their new units.

More launches in March. Inspired by the success in February, the developers have launched more mass-market properties in March. For instance, Far East Organization launches its 99-year leasehold Mi Casa condominium near Choa Chu Kang MRT Station. At Balestier Road, City Developments is selling The Arte at Thomson freehold condominium. Meanwhile, at Somerville Road, HLH Group is marketing its D'Almira freehold condominium. The developers have reported strong interest for their properties.

Support from HDB upgraders. The developers mention that most of the buyers of mass-market properties have HDB addresses. We feel that these HDB upgraders have delayed their purchases of private apartments in 2007 and 2008 due to escalating prices of private properties. With the fall in private property prices, massmarket properties have become affordable. This is not surprising given that HDB flats prices have increased rapidly between 2006 and 2008, and resulted in the narrowing of the price gap between HDB flats and low-end private properties.

Price to book graph. We plotted graphs of price to book ratios of four major property companies, City Development, Keppel Land, CapitaLand and Allgreen from 1996 to 2009.



We note that the price to book ratios of the property stocks reach further new lows in early March 2009 as investors fret about the banking crisis in U.S. Following that, there was a recovery of 30 to 50 percent following the announcement of the U.S. toxic assets plan and better U.S. economic data. We believe that there is scope for recovery of the stock prices as the graphs show that the price to book ratios can rise much higher than 1 during economic booms.

Our call for the sector as a whole. In Q1, the dip in property prices for the Core Central Region (CCR) and Rest of Central Region (RCR) were worse than our expectations while the fall for Outside Central Region (OCR) came in within expectations. This shows that buyers are price-conscious and are likely to select properties within their budget. We expect property prices to fall further in 2009 due to the contraction in global economies. We believe that property prices will rise after the recovery of the economy, which is expected to be in 2010.

In response to the slowdown in the property market, property stock prices have dropped sharply. They are trading at large discounts to their book values. Long-term investors can consider holding the stocks in their portfolios for capital gains. In summary, we maintain the neutral view on the property sector.

Stocks that we cover. We have listed the current recommendations for the stocks under our coverage.

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©     2006 Phillip Securities Research Private Limited.

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