Singapore property developers: ‘cheap just got cheaper,’ OCBC says

Singapore 50 dollar bill

OCBC tipped a buying opportunity in Singapore’s property developers, saying the drops in their share prices don’t reflect solid fundamentals.

“Demand factors remain largely robust, from both the perspective of land purchases by developers and demand for property by consumers,” OCBC said on Tuesday in a note titled “Cheap just got cheaper.”

The FTSE ST Real Estate Holding and Development Index (FSTREH) is down nearly 5 percent year-to-date, trading at a blended forward price-to-book ratio of 0.62 times, well below its 10-year average of 0.79 times, it noted.

“We view valuations as compelling,’ OCBC said.

‘Healthy’ sales

It noted that sales launches this year have mostly seen “healthy take-up rates.” OCBC also raised its Singapore residential price growth forecast to 8-12 percent this year, up from 3-8 percent due to the firm physical demand.

But it also lowered its private sales transaction projection to 10,000-12,000 units from 12,000-15,000, based on the current run rate.

OCBC pointed to two concerns that may have dampened interest in Singapore property developers’ shares: potential government cooling measures and potential oversupply.

With vibrant “animal spirits” in the property market, the market may be concerned the government may issue fresh tightening measures, it said.

Cooling measures?

“While it is difficult to predict whether further government measures would be introduced, we note that the official URA private residential price index has only increased 5.5 percent from the recent trough in the second quarter of 2017,” it said. “Hence, further data points may be needed before the next course of action is taken, in our view.”

In addition, with public housing, or HDB, resale prices still on a downtrend, any potential measures would need to be “carefully calibrated,” it noted.

Concerns of potential oversupply are “valid,” OCBC said, but added that it’s likely manageable.

Oversupply?

It noted URA data shows 44,261 units in the supply pipeline at the end of the first quarter, including executive condominiums (EC), which are a public-private hybrid housing model, with the potential supply of another 20,100 units, including ECs, from government land sales and en bloc sale sites.

“Notwithstanding this expected increase in supply, we note that a significant proportion of this potential pipeline will only come on-stream from 2021,” it said, noting that while total unsold inventory may have risen, the lion’s share don’t have pre-requisites for sale yet.

The number of resident households has also been growing by at least 2.0 percent a year over 2013-17, it noted; “we believe this
will put the market in a better position to absorb the upcoming supply.”

OCBC kept an Overweight on the Singapore residential sector, moving UOL Group to the top of its top picks list, followed by City Developments and CapitaLand.