SINGAPORE (Aug 25): Maybank KimEng believes investors’ rising concerns that escalating land prices could lead to a margin squeeze for property developers, are overblown.
The recent pickup in new home sales has led to a sharp fall in unsold inventory in the market. The 16,900 unsold units in the market today is less than half of the 40,400 at ots peak in 2011.
While the favourable shift in the inventory-to-sales ratio would give developers scope to raise ASPs, it has also led to aggressive land bids given shrinking landbank among developers.
Consequently, investors are increasingly worried that escalating land prices could lead to a potential margin squeeze for developers.
While it is a valid concern, analyst Derrick Heng in a Friday report says the resurgent en bloc market offers alternative land banking opportunities for developers and could ease upward pressure on land prices.
So far, over $30 billion of deals have been concluded and media reports suggest another 30 properties are in various stages of en bloc process.
Of these, six deals in the market today could lift sales value by another $2.3 billion and add 4,600 units to the pipeline when completed.
Apart from the private land market, the six sites on the 2H17 GLS confirmed list will add 2,800 units to inventory in the year ahead. Another 5,000 units on the reserve list could be triggered by developers.
Furthermore, en bloc sales effectively “front loads” demand and pushes out supply, says Heng.
This means every household displaced from the en bloc market would be on the lookout for a new property.
The 11 deals concluded so far will already lead to the demolition of 1,600 units from the existing housing stock in the year ahead.
The other six deals in the market today imply that another 1,300 units could potentially be removed if completed.
“UOL and City Developments continue to be the best large-cap picks to an impending rebound in Singapore’s property prices,” says Heng, “For investors with lower liquidity thresholds, GuocoLand offers compelling relative value with improving fundamentals.”
Shares in UOL, CityDev and GuocoLand are trading at $8.06, $11.43 and $2.29 respectively.
