Property: Maintain overweight

Government measures negative near term but positive over the mid to long term – By OCBC Research

The National Development Minister, Mah Bow Tan said that the Singapore government has decided to adopt several measures to temper the exuberance in the market and pre-empt any speculative bubble from forming.

These include reinstatement of the confirmed list sites and replenishment of the reserve list sites as part of the land sales programme for 1H10, and disallowing the interest-absorption plan and interest-only loans currently offered to buyers of uncompleted private homes. The measure on disallowing the interest-absorption plan and interest-only loans will take effect immediately for all private residential projects. However, the interest-absorption plan will be permitted for developments that are already on sale and that had previously offered the program.

While the supply side initiatives as part of the government land sales programme were largely anticipated, the measure on the removal of interest absorption scheme was expected to be introduced a later stage. However, taking cues from the previous property boom when the supply side initiatives had been less effective in curbing speculation compared to the measure on the removal of the deferred payment scheme, the government has decided to act rather quickly this time round.

The Interest Absorbtion scheme is much less susceptible to speculation compared with the deferred payment scheme. The Deferred payment scheme (DPS) (scrapped in Oct 2007) was different from the Interest Absorbtion Scheme (IAS) in that there was no bank involvement leaving the credit checks at developers' discretion. The developers would usually not perform any credit checks and sell the units as long as they collected the 20% downpayment.

This was fuelling excessive speculation. As an example, a buyer with S$1 million in cash and zero borrowing capacity, could purchase 5 units worth a million each by giving a 200k downpayment for each of the units. And then, later on flip the units before the loan was due.

In contrast, under the IAS scheme, the bank is involved right from the beginning. The developer will tie up with the bank that will approve the loan for the customer with the drawdown deferred until project completion usually two years later. The developer in the meanwhile will subsidize the bank interest cost and hence the term "Interest Absorbtion scheme".

It provides tools for better cashflow management from the perspective of the consumer especially if he/she is planning to sell their existing home to move into the new one and excessive speculation is curbed to a great extent. Using the same example of a buyer with S$1 million in cash and zero borrowing capacity would only be able to purchase a single unit worth a million in this case as the buyer would not qualify for any bank loan.

Maintain Overweight
Near term correction to present buying opportunities. The current recovery in the property market has been supported by the low interest rate environment and high liquidity flows that are expected to remain favourable. While we believe that the removal of the IAS will have a negative impact in the near term as speculative buyers will be driven away, it should have a positive impact over the mid to long term with recovery driven by genuine demand. Hence, we view the near term correction as presenting buying opportunities. We maintain our OVERWEIGHT call on the sector with the top picks being City Developments, Ho Bee, Wing Tai and Allgreen.



Buy into weakness on government measures
By DMG & Partners Research

The Government's reinstatement of the 1H10 Confirmed List and removal of IAS reflect its concerns over excessive speculation. However, we believe demand for mass projects remains sustainable, given that majority of buyers here are genuine home-occupiers and HDB prices continue to rise amid increased demand from Singaporeans and permanent residents (PRs).

While we are cautious of the Government's mindful watch, we see the knee-jerk selldown (-4.4%) as a good opportunity to buy into property stocks. Our big-cap and mid-cap top picks within the OVERWEIGHT property sector remain CityDev and Wing Tai respectively.

To ensure a stable property market and prevent excessive speculation, the Government will (1) reinstate the Confirmed List for the 1H10 Government Land Sale (GLS) Programme, (2) remove with immediate effect the Interest Absorption Scheme (IAS) and Interest Only Housing Loans and (3) end the Jan 09 Budget assistance measures for the property market upon their expiry in Jan 10 – 11. Aside from revealing the number of Confirmed List's sites towards end-2009, the Government will increase the number of Reserve List's sites from the current 16. IAS will still be allowed for projects where units have already been offered for sale under the IAS prior to the announcement. We think existing projects with IAS could see increased demand from buyers who remain comfortable with paying only 20% of sale price prior to TOP.

Both the GLS and IAS measures are in line with what Minister Mah previously suggested during the Jul – Aug 09, while we reckon the third measure is comparatively less forceful. We also gather from recent showflat visits and talks with developers/agents that over the past few months more buyers opted for Normal Progressive Scheme over IAS. Out of 10 buyers, 2 to 4 would choose IAS presently (compared to 6-8 previously). We expect the IAS measure to drive out pure speculators with the sole intention of buying properties to sell within 2 to 3 years. This announcement and weakness within regional bourses should trigger a knee-jerk sell-off of property stocks. But, we continue to see value in property counters given the upcoming integrated resorts (IRs), improved macroeconomic signs, low interest rates and prime-luxury prices remaining 15 – 25% off 4Q07 peaks.

Hints of a sustainable mass-market demand
While the Government could have brought in the Confirmed List immediately and introduced more forceful measures to calm the current buying frenzy, we believe this could run counter to its overall cautious tone on the economy. Further, we view the Government's measures as an indication that demand for mass projects is sustainable, especially when HDB prices continue to rise amid increased demand from locals and PRs. Without a healthy supply of mass-market sites, a subsequent hike in mass prices from current levels could further widen the gap between mass projects and HDB flats, thus delaying the Government's vision of encouraging higher ownership of private homes.

More

Mining for the years ahead
Moving up the mining value chain is what commodities trader and mining stock Abterra is now working towards for sustainable future growth, now that the dust is slowly settling on the economic crisis over the past year, says its executive director Mahesh Mehta.

Investing in the global recovery through ETFs
Barclays Capital has launched a fund that gives investors a chance at participating in the global recovery pie by riding on the wave of fiscal stimulus packages announced in the last year by various governments around the world.

Q&A with Andrew Robinson, FX Strategist at Saxo Capital Markets
With more headlines seemingly reporting of improving manufacturing, export, trade numbers and now some central banks looking to hike interest rates – what is Saxo's view of the outlook for the global economy?

Q&A with Aaron Smith of Superfund Financial Singapore
With more news headlines reporting improving manufacturing, export, trade numbers and with now some central banks looking to hike interest rates, what is Superfund's view of the outlook for the global economy?

Market Outlook by OCBC Research
In the past few days, there were softness and consolidation in the market. We view this favourably as the STI has already gained about 80% from the low in March (vs. 54% for the S&P 500).

DMG: Bearish on Singapore Market
Having risen to 2686, the STI P/B of 1.65x is already back to the 12-year (we use the period commencing Asian Financial Crisis to cover one full cycle) average of 1.61x.

High-end gains traction despite slowdown in overall sales
The pick-up in high-end transactions despite the slowdown in overall sales volumes should benefit high-end developers such as SC Global, Ho Bee, Wheelock Properties and Wing Tai. Maintain OVERWEIGHT. By UOB Kay Hian

Stock Pick
CNA: Buy (DMG, 18 Nov), Kian Ann Engineering: Neutral (DMG, 18 Nov), SPH: Buy (UOB Kay Hian, 17 Nov), Singapore Airlines: Buy (Kim Eng, 17 Nov), Oceanus Group: Buy (OCBC Research, 17 Nov), Swiber Holdings: Hold (OCBC Research, 17 Nov)