Res­i­den­tial Prop­erty: value op­por­tu­nity in a Richly Priced world

Hous­ing af­ford­abil­ity in the city-state is at its best in the past twenty years. An­a­lysts be­lieve that one fea­ture of this nascent hous­ing bull so far is that it has been driven by mostly do­mes­tic buy­ers.

Singapore Business Review - - CONTENTS -

The Sin­ga­pore hous­ing sec­tor has re­cently re­bounded af­ter a four-year bear cy­cle, emerg­ing as an at­trac­tive op­por­tu­nity in an in­vest­ment uni­verse that is in­creas­ingly chal­leng­ing to find value. As home prices fell 12% over the last four years, hous­ing af­ford­abil­ity has im­proved mean­ing­fully to their best lev­els in 20 years. In con­trast to ma­jor peer cities – in­clud­ing Hong Kong, Tokyo, Syd­ney, Lon­don and San Fran­cisco – where home prices have in­stead in­creased and hous­ing af­ford­abil­ity has wors­ened over the same pe­riod, we be­lieve Sin­ga­pore now presents at­trac­tive rel­a­tive value.

One fea­ture of this nascent hous­ing bull so far is that it has been driven by mostly do­mes­tic buy­ers, but go­ing for­ward we be­lieve the re­turn of for­eign buy­ers seek­ing rel­a­tive value could kick the up­turn into a higher gear, par­tic­u­larly in the prime res­i­den­tial seg­ment.

With the bull cy­cle still in the early in­nings, we ex­pect Sin­ga­pore home prices to rally 3% - 8% in 2018. This will be sup­ported by a re­cov­ery in hous­ing rentals which are fore­casted to in­crease 5% - 10%. A buoy­ant en-bloc mar­ket and the govern­ment’s neu­tral reg­u­la­tory stance should pro­vide fur­ther mo­men­tum.

Whilst ris­ing rates may par­tially off­set fun­da­men­tal tail­winds, the over­all im­pact will be lim­ited with do­mes­tic mort­gage rates fore­casted to only in­crease 100 to 150 ba­sis points from now to end 2020.

Not­with­stand­ing their healthy per­for­mance over the last two years, Sin­ga­pore devel­op­ers have not fully priced in the bull cy­cle, in our view, and we ex­pect the share price up­trend to con­tinue in 2018. We like City De­vel­op­ments (CIT SP) and UOL (UOL SP), both with sig­nif­i­cant do­mes­tic land­bank and poised to ben­e­fit from stronger home sales for their launch pipe­line ahead.

In ad­di­tion, we also like Cap­i­ta­land (CAPL SP) which is on track to achieve its el­e­vated 8% ROE tar­get through ac­tive as­set re­cy­cling. A hous­ing bull mar­ket will also

With the bull cy­cle still in the early in­nings, we ex­pect Sin­ga­pore home prices to rally 3% - 8% in 2018.

pro­vide a fa­vor­able back­drop for the group to seek ac­cre­tive land-bank­ing op­por­tu­ni­ties.

Com­pelling value ver­sus ma­jor global cities

Due to fall­ing home prices over the last bear cy­cle and ris­ing house­hold in­come, hous­ing af­ford­abil­ity in Sin­ga­pore has im­proved mean­ing­fully since 2010, with the pri­vate home price-to-in­come ra­tio fall­ing to 20 year lows. This stands in con­trast to ma­jor peer cities, such as Hong Kong, Tokyo, Syd­ney, Lon­don and San Fran­cisco, where home prices have in­stead in­creased and hous­ing af­ford­abil­ity has wors­ened over the same pe­riod. We be­lieve Sin­ga­pore res­i­den­tial prop­erty now presents at­trac­tive rel­a­tive value.

Re-emer­gence of for­eign buy­ers

A fea­ture of the Sin­ga­pore hous­ing re­cov­ery so far is that it has been mostly driven by do­mes­tic buy­ers. In 2017, there were only 1.6k trans­ac­tions at­trib­uted to for­eign buy­ers, markedly lower than the long term av­er­age of 2.2k trans­ac­tions per year and the last bull mar­ket (2010 – 2013) av­er­age of 3.6k per year. In terms of per­cent­age of to­tal trans­ac­tions, only 5.6% of trans­ac­tions in 2017 were at­trib­uted to for­eign­ers ver­sus a long-term 18-year av­er­age of 8.7%.

As the hous­ing up­turn gains fur­ther mo­men­tum ahead, we see the re-emer­gence of a larger set of for­eign buy­ers be­com­ing a mean­ing­ful tail­wind and kick­ing the bull mar­ket into a higher gear.

Whilst the sig­nif­i­cant ad­di­tional buyer stamp du­ties (ABSD) of 15% for for­eign­ers re­main in place, the Sin­ga­pore au­thor­i­ties were ahead of the curve in im­ple­ment­ing them over 2011-2013. We be­lieve these mea­sures now ap­pear less oner­ous rel­a­tive to key peers such as Hong Kong and China, which have in­cre­men­tally caught up in terms of tight­en­ing hous­ing mar­ket reg­u­la­tion.

For in­stance, in late 2016, Hong Kong raised its res­i­den­tial stamp du­ties to 15% for all res­i­den­tial pur­chases, ex­cept for first-time buy­ers who are per­ma­nent res­i­dents. Be­fore that, in Hong Kong, the high­est levy for res­i­dents was 8.5% whilst for­eign­ers were al­ready sub­ject to a 15% stamp duty. Af­ter a four-year bear mar­ket, Sin­ga­pore hous­ing prices bot­tomed out only late last year, af­ter de­clin­ing some 12% from the last peak in 2013.

We be­lieve the Sin­ga­pore hous­ing mar­ket is in the early stages of a bull cy­cle and fore­cast for Sin­ga­pore hous­ing prices to in­crease 3% - 8% in 2018. We also ex­pect pri­vate pri­mary sales vol­ume to rise in tan­dem to 12k-15k units, up from 10.6k units sold in 2017.

Re­cov­ery

The hous­ing up­turn will also be sup­ported by a re­cov­ery in rentals, which are ex­pected to hit bot­tom and rise 5% 10% in 2018. Rentals have been on a down­trend since late 2013 due mostly to phys­i­cal over-sup­ply in the mar­ket. Over 2014 to 2016, new units com­ing into the mar­ket rose to around 50k units per year, which ex­ceeded the rate of house­hold for­ma­tion. Ac­cord­ingly, va­cancy rates climbed three per­cent­age points from 5% in 2013 to 8% in 2017.

This sit­u­a­tion will re­verse in 2018. Due to fewer launches in re­cent years, the an­nual rate of hous­ing com­ple­tions will de­cline by around 40% over 2018-2020. This level will be be­low the needs of pop­u­la­tion growth based on the govern­ment’s pro­jec­tions. In re­sponse, va­cancy rates will drop, driv­ing a re­bound in rentals.

Buoy­ant en bloc ac­tiv­ity

To­tal en-bloc sales in Sin­ga­pore in­creased 7x year-onyear to S$8bn in 2017. The ris­ing trend in col­lec­tive sales can ex­ert pow­er­ful trickle-down ef­fects on de­mand and sup­ply. Af­ter an en-bloc trans­ac­tion, the process to va­cate the orig­i­nal es­tate and com­plete the re­de­vel­op­ment typ­i­cally takes four to seven years.

Over this time, the phys­i­cal stock of homes avail­able for oc­cu­pancy in Sin­ga­pore suf­fers a re­duc­tion as a re­sult. In the ini­tial years of a ris­ing col­lec­tive sales cy­cle, more homes are taken out of the phys­i­cal stock by en-bloc trans­ac­tions than those added back in, ex­ert­ing down­ward pres­sure on va­cancy rates and boost­ing res­i­den­tial rentals.

At the same time, those who sold their homes to devel­op­ers through an en-bloc of­ten en­ter the prop­erty mar­ket rapidly to re-es­tab­lish their ex­po­sure, flush with new cash and bor­row­ing head­room. This adds buy­ers into the mar­ket and in­creases de­mand.

In ad­di­tion, devel­op­ers typ­i­cally launch new units

Va­cancy rates climbed three per­cent­age points from 5% in 2013 to 8% in 2017.

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