Property Sector Review

Where's the private residential property heading?
Property prices to trend up in 2008, say consultants
Property Sector Review - SIAS Research - Johnny Kwon
Property Stocks Picks





Where’s the private residential property heading?
by Colin Tan

One could almost sense that the private residential market is fast approaching a turning point.

There has been a small but noticeable rise in property advertisements. It was as though some sellers are sensing that it’s the last window of opportunity to sell while prices were still good. At the current price levels, sales have all but dried up. The market is practically at a standstill.

The market for uncompleted properties registered a mere 185 sales in February 2008, a huge climb down of more than 90% from last August’s sales of 1,885 units. Only those – who for some reason or other who need to buy or sell – are the only ones doing so.

Everyone else is on the sidelines from potential buyers eagerly waiting for prices to correct to sellers who are hoping for some positive signs such as bad news from the US subprime crisis fading into the background.

Mixed Signals
So, what were the market signs? On the demand side, before February's surprising numbers, sales volumes have already been on the wane over past six months. Based on anecdotal evidence, asking prices and rentals have definitely fallen even if the majority of actual transacted prices and rentals have not declined.

On the supply side, the number of en-bloc sales have fallen away dramatically from the second half of 2007.

Government land sales have been drawing mixed results. Some land parcels have received lots of interest while the reception for others were poor to lukewarm leading to at least one site being withdrawn due to low bid prices.

Successful bids are no longer record setting if not actually declining. These are all signs that developers are getting more selective or to put it in another way, getting cautious.

The mixed market signals point to the classic sign that the market is turning.

Of course, one can also hold the view the turning point is merely a point of inflexion. Or in other words: It's taking a breather while appearing to stall. But because the underlying long-term economic fundamentals remained strong, the market will soon resume its upward trend after an appropriate period of consolidation.


Property as a good long-term investment
So what has been holding back the market from actually reaching the "price correction" stage?

Well, the answer is holding power.

It has helped that almost all of the new properties purchases sold during the rapid price run-up were from projects under construction. There was also no reason for buyers to panic even if they are unable to offload them under the current climate for a quick profit.

After all, no one disagrees with view that Singapore is still a good long-term investment.

Often cited factors - the launch of the new Business Financial Centre, the award of the two integrated resorts, the winning of the right to host Formula One race on the streets of Singapore and the Youth Olympics. All of these certainly placed the Singapore market potentially on a new and higher demand curve, which translates to a higher price plane.

As the reasoning goes, if you can hold onto your property investment for over a single cycle, it will eventually come good.

According to official figures, about 7,400 units are expected to be completed in 2008. The number rises to 11,662 units for 2009. Compare this to an average annual demand of 7,900 units in the four years between 2003 and 2006.

The majority of these units were purchased at high price levels, which means they are likely to have been bought by investors rather than owner-occupiers. This is because most prices are beyond the affordability of most ordinary Singaporean households whose incomes have not risen at the same rate as housing prices.

When these units are completed over the next 12 to 24 months, their owners will either have to sell them or rent them out. Most are likely to rent them out as rentals are still high.

However as more units go on the market, rents will start to soften. Eventually when declining rents fall far short of mortgage instalments, the decision whether to sell will surface.


Weakest Link
Among the players in the current market, who is the weakest link? Developers?

Surely not. Most definitely, not the property majors.

They have been earning supernormal profits for the past year. Between the second quarter of 2006 and third quarter of 2007, developers sold an incredible 22,651 units. This works out to an about 15,100 units, or about double the long-term annual average absorption rate.

Over the same six quarters, average prices rose by 42.6% in the Core Central Region (prime), 24.3% in Rest of Central Region (prime fringe) and 22.7% in Outside Central Region (suburban).

So by any measure, property developers are not the weakest link.

What about investors? According to URA’s fourth quarter figures for 2007, Singaporeans hold the majority or 60.6% of all uncompleted properties sold. Permanent residents account for 7%. Corporates hold 15.9% and foreigners account for 16.6%.

In short, Singaporeans rather than foreigners hold the majority of units. Time and again, we hear that foreigners are the cause for the jump in sales and prices. Actually more foreigners bought at the start of the price run up rather than later which means locals are holding some of the more pricier properties.

So, the direction of the market appears to hinge on the local investors.

Some may have made their property purchases after making gains in the stock market, which has since come off considerably. Some well-heeled locals with deep pockets appeared to have geared themselves highly across a string of properties, some – going by anecdotal evidence – as many as more than 10 properties.

Thus, most definitely, highly geared local investors make up the weakest link. As mentioned earlier, the trouble will only come when the units start to complete.

Extent of Price Correction
But how much will prices correct? There are two possible outcomes depending on how one read the linkages in the global economy.

In the first scenario, the Singapore economy is inextricably linked to the US economy and affected by a recession on the other side of the Pacific Rim. If that bears out, we can expect prices to correct more significantly and stay down for as long as a year or two depending on how fast the US economy recovers. The price correction will be deep. Optimistically, it may hover just above the point before the market took off in 2006.

In the second scenario, the economies of China and India act as a cushion. There is no recession in Singapore but there will be slower growth. The majority will get to keep their jobs. The correction is healthy and allows the economic fundamentals to catch up with price levels. For local investors, hopefully it is the latter scenario that will prevail.

The writer is the Director and Head of Research & Consultancy at Chesterton International

Property prices to trend up in 2008, say consultants

The Singapore residential market was at a virtual standstill during the first quarter of 2008, but property consultants say prices should still trend upwards in 2008 as economic fundamentals remain intact.

New state land for parcels put up for tender during the first quarter have drawn mixed results with a West Coast parcel drawing strong interest from a dozen bidders while the reception for others were poor to lukewarm leading to some plots being withdrawn. Successful bids for state sites are no longer record setting if not actually declining.

But these are merely signs of developers getting more selective after gouging on collective sales in the previous year. Many of the major developers are already sitting on a substantial landbanks as well as exceptional profits from 2007 sales.

Most property consultants are of the view that residential property prices should still see upside as economic fundamentals for Singapore remain intact despite market volatility arising from concerns stemming from U.S. sub-prime woes.

Here’s a look at what some of them have to say:

Savills Singapore:
We still see growth for 2008, driven in particular by the mass-market sector. 15% growth on the index is possible. 1st quarter flash numbers for 2008 from URA already showed 4.2% increase so for the next 3 quarters, we would need a growth of about 4% per quarter for achieve a 15% growth target.

CB Richard Ellis:
Should the US enter a mild recession in 2008 and the sub-prime problems clear up so that sentiment improves after June 2008, the private residential market should continue where it left off in the third quarter of 2007. Luxury prices would remain firm, mid-market homes would be expected to rise by 5 per cent to 10 per cent while mass market homes could grow by 10 per cent to 15 per cent in 2008, once the situation becomes more positive.

In the worst case scenario, where the US sub-prime problem becomes more protracted to the end of 2008 and beyond, prices of luxury properties may ease marginally, while mid- and mass market homes would still see price increases, albeit at 1 per cent to 2 per cent and 3 per cent-5 per cent respectively.

Colliers International:
Healthy economic fundamentals – such as continued economic expansion, low unemployment rate, continued wage growth in view of tight labour market and falling mortgage rates – will continue to underpin price growth momentum in the next one or two quarters, in the same way it has supported price growth in the last two quarters amidst thin volume of transactions.  Marginal price growth in the range of 2% to 3% can thus be expected for all homes across the island for the next one or two quarters.
 
The full impact of the slowdown in the US economy will probably set in by the end of 2008.  However, this is likely to be more than mitigated by the positive sentiments that the buzz surrounding the F1 night race taking place in September and the near opening of the two integrated resorts and Marina Bay Financial Centre will bring.  

Hence, if the US economy begins to show recovery by the end of the year, there is a possibility that home price could stage a stronger growth of 5 to 8% in the final quarter of the year, bringing the entire year’s price growth to between 12% and 15%.

In the event that the US slips into a severe and prolonged recession, home price may then stage a marginal decline of not more than 4% in the final quarter of the year.  Nevertheless, on the back of 1Q 2008’s estimated 4.2% growth, home price could possibly still show a growth of between 5% and 10% for 2008 as a whole even under this worst-case scenario.

Property Sector Review
SIAS Research – Johnny Kwon

2007 -Another Record year
It has been an active year buzzing with activity for the Singapore Property Market. Taking cue from the previous year, 2007 saw a few more record prices for most segments of the residential property market. Eyebrows were raised when the news reported several types of properties setting new benchmarks such as a 5 room HDB flat being sold for $730,000 in the Marine Parade area to a condo unit in the ultra luxurious Orchard Residences at $28million.

Overall, the Urban Redevelopment Authority reported that the Singapore residential market had an impressive result for 2007. Prices of private residential properties rose 6.8% in the 4th Quarter 2007, compared with an 8.3% increase in the previous quarter. For the whole of 2007, prices appreciated by 31.2% as compared to 10.6% in the previous year.

The rental market has performed strongly as well with rentals of private residential properties rising by 6.8% in the 4th Quarter 2007 and a total increase of 11.7% for the year of 2007 as compared to the previous years.  The areas that registered the biggest jump in rents were the core central regions and the rest of central regions.

2008- A softening market
Given that prices has jumped to a record high for 2007, the remaining of 2008 is likely to be a cautious year for the property market as prices has appreciated too fast. In fact, several warning signs that the property market is heading towards moderation have appeared.

Most notably, number of collective sales from beginning 2008 till mid March 2008 was a measly one compared with 25 in the same period last year. Property developers sold 185 new units in February after launching 343 new units. 328 new units were sold in January. In contrast, 14,811 new homes were sold in 2007 working out to an average of 3700 per quarter. The good news is the stability of property prices so far.

This was followed by the lapsing of 97 options in Goodwood Residences, which Guocoland granted Kuwait Financial House in a high profile deal announced last December. The deal was reportedly worth more than $800 million. 

The cautious mood could also be seen at the tender box with the dwindling amount of bids submitted by developers for state land.

Souring the mood further, market sentiments have been relatively weak as the sub prime issue persisted- reflecting investor’s low appetite for risk. Many property stocks have corrected from their all time highs as concerns and fear of a stagnant or correcting market was prevalent in the market. This is reflected in the FTSE Real Estate Index.

Government Land Sales-moderation in bids
Despite the weakening of the resale market and discouraging new sales, land sales by the government have not really been affected. Bidders are still vying with each other at the tender box. However, the bids reflected at the tender box shows a cautious attitude among the bidders.

Interest in transitional office sites, which was shown interest by developers last year, seems to have cooled down with only one bid submitted for a site in Aljunied Road. And for the first time since 2001, URA decided to reject the bid and not award the land parcel to the winning bidder.

Developers are getting more picky and selective on the land they are bidding for and are also more careful with their bids. Given the weak market sentiment, most of them are factoring in a safety net by pricing their bids lower. 

The recent land parcel launches by the government all attracted strong interest especially the residential site at West Coast Crescent where the top bidder was a subsidiary of Cheung Kong. And most notably, a site earmarked for hospital use at Novena set a record when Parkway Holdings bided 1.2billion for the land.

After all, it still makes sense for developers to acquire land from the government land sales programme as it is now difficult to acquire new land bank through the en bloc process.

Prudence is the word of the day
The local property market remains strong backed by fundamentals. With current low supply, the office rental market is still strong. The projected increase in population level raises demand for residential units.

However, many potential investors are most likely to adopt a wait and see attitude before committing to a property investment given the weak market sentiments and perceive high price levels of the property market.

Given the above factors and declining interest rates, all it takes is a possible home loan interest war to break out among the banks to stimulate interest and draw investors back into the market. Even so, the advice for investors at the end of the day is to tread carefully.

Property Stocks Picks

Ho Bee: Buy – Target $1.77 (SIAS Research)
FY07 net profits rose 176.1% to $272.2m on the back of a 51.7% surge in revenue to $596.1m. Quarter -on-quarter net profit eased 1.5% following a 53.2% drop in revenue. The result is a record for the group following the strong property industry performance last year. With the revenue pipeline from sold properties as well as future development projects, revenue and net profit over next one or two year should be respectable.

Ho Bee: Buy – Target $2.13 (Phillips)
Ho Bee is definitely a BUY for investors. It has successfully sold its waterfront residential projects at Sentosa Cove. With the cash flow from its residential projects, it can acquire new land sites and embark on expansion plans for the group.

Soilbuild Group: Buy – Target $1.60 (SIAS Research)
Net profit rose 7-fold to S$52.4m from S$7.1m on the back of strong performance from sales of residential projects. We like Soilbuild for being nimble, its clever cashflow management and its prudent investment philosophy.

Soilbuild Group: Buy – Target $1.26 (Phillips)
Our fair value for the stock is S$1.26 based on 30% discount to RNAV of S$1.80. We are valuing the stock at a discount because the construction costs of the residential projects have increased and the expecting sales prices have been reduced in our estimates to reflect the current cautious property market sentiment.

SC Global Developments: Buy – Target $3.80 (Lehman Brothers)
The management is seeking shareholder's mandate to buy back 10% of the share capital. We see positive implications in this action in that the management is of the view that the stock is deeply undervalued at current conditions. While SC Global shares has fallen about 45% since the beginning of the year based on market pricing in a potential 49% downside in home prices, we think this is over-pessimistic even though the group’s high-end residential exposure is likely to face some headwinds this year.

SC Global Developments: Buy – Target $2.84 (Phillips)
We have reduced our fair value to S$2.84 by pegging our fair value to parity with RNAV. This is because the construction costs of the residential projects have increased and the expecting sales prices have been reduced in our estimates to reflect the current cautious property market sentiment.

Wing Tai : Hold – Target $2.11 (Prev S$ 3.14) (DBS)
Wing Tai has land bank with about 1.1 million sq ft. Of this, the high-end segment accounts for around 60%. Going forward, under its growth strategy, Wing Tai aims to diversify its business regionally into countries such as Hong Kong, Malaysia and China in the next one to two years. But the bulk of its property development business (50-60%) will remain in Singapore. We have lowered FY08F and FY09F revenue to S$369m and S$803m, respectively, on the back of extended sale duration assumptions for its new developments and upward adjustments to construction costs. We also widened our fair discount to RNAV to 25% from 10% in view of the execution risks facing Wing Tai in its overseas expansion initiatives, greater uncertainties ahead for the ASP (average selling prices) of new projects due to it having to delay in project launches, and Wing Tai's tendency as a mid-cap stock to trade below its big-cap sector peers in a bearish market. Consequently, we downgrade Wing Tai to HOLD with a 12-month target price of S$2.31.

Bukit Sembawang: Outperform – Target $13.04 (CIMB - GK)
We believe that Bukit Sembawang is unlikely to appeal a High Court judgment over the collective sale of Airview Towers, after two unit owners had failed to sign the sale agreement on time. Instead, Bukit Semb is likely to develop the former Chez Bright site on a standalone basis. The two sites were acquired in 2H06 and 2H07 respectively and were initially meant to be amalgamated and developed as a residential project. With the latest change in en-bloc rules, an appeal would likely mean a longer-than-expected process before a conclusion can be reached. Given current uncertainties in the sector, we believe withdrawal from the purchase of Airview Towers could work in Bukit Semb's favour. While this would affect earnings accretion from the project, net margin is expected to improve from 33% to 49% previously, due to the lower land cost achieved for Chez Bright (S$561 psf vs. S$879psf previously). With the possible delay of the official launch of Paterson Suites and The Vermont on Cairnhill till the latter part of 2008 or early 2009, depending on market conditions, we are adjusting our earnings recognition for Bukit Semb. Our FY09-10 EPS estimates have been reduced by 17-20%.

Keppel Land: Outperform – Target $7.71 (CIMB - GK)
The potential break-up of its capital-recycling business if KepLand is forced to consolidate K-REIT on its books (in the event that minorities decline to take up their rights entitlement of KREIT) has been weighing on KepLand’s share price. However, we believe that valuations are now starting to look compelling.

Singapore Land: Underperform – Target $7.23 (CIMB - GK)
We leave our FY08-10 EPS assumptions unchanged. Our end-CY08 RNAV estimate has been reduced by 19% from S$12.64 to S$10.33, on a 20% cut in office capital value assumptions based on new yield expectations of 5.5%-6%.

Capitaland: Underperform – Target $6.49 (CIMB - GK)
While we continue to like CapLand's continued expansion of its assets under management (AUM), we believe investors are now unwilling to pay a higher premium for its fund management business, given the deteriorating climate for fund-raising.

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