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.
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.
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.