SINGAPORE (Oct 20): Deutsche Bank is positive on Singapore’s property market as it expects pricing power to return to developers.
This comes on the back of record low unsold inventory plus the withdrawal of supply over the next 12 months.
As a result, the research house has raised its average selling price (ASP) forecasts for 2018 and 2019 by 10% and 7% respectively, while raising RNAV estimates by 18-31% for stocks under its coverage on the back of its revised residential forecasts and recent acquisitions.
With that, Deutsche has added Wing Tai Holdings to its top “buy” picks list alongside CapitaLand at target prices of $2.60 and $4.60, respectively – while also raising its target price for UOL Group, rated “hold”, by 23% to $9.20 from $7.50 previously.
It also believes smaller mid-cap developer stocks may also catch up in performance.
In a Thursday report, lead analyst Joy Wang says there are $19 billion worth of projects in the pipeline of en bloc transactions. This coupled with declining completions over the next two years, creates “a perfect squeeze” that is likely to significantly improve the pricing power for sellers and landlords.
“In fact, we believe that the near-term squeeze could be stronger than the market anticipates and could trigger a return of the ‘herd instinct’ to the property market. Recall that the 2005-07 en bloc cycle saw a total of $22 billion transactions, removing c.14,000 units,” says Wang.
Noting that stocks are currently pricing in a recovery of the Singapore property market, Wang says she senses a fair amount of scepticism around this upcycle as the long-term supply pipeline is a key concern.
In her view, the property sector is trading below the long-term average discount or premium to RNAV and P/B, while her analysis suggests that developers generated an average return of 165% in the last four cycles versus the current return of 70% over the last two years.
The analyst is expecting 14 upcoming launches totalling 6,513 units through 1H18, driven by the launch of government land sales (GLS) sites from 2H16 and 1H17 as well as follow-on launches of projects that were pulled back in anticipation of higher pricing.
She sees significant intensification of unit completions by end-2018 and early-2019, as a result of the strong en bloc market, to build up medium-term supply.
“However, should the population growth exceed our forecasts, we expect a sustained shortage in housing supply. We note that if population growth rises to 1.5%, the vacancy rate could fall to an all-time low of 4% by 2020, and to negative rates should Singapore’s population grow at 2.2% through 2020,” cautions Wang.
As at 4.43pm, shares in Wing Tai are trading at $2.33 or 0.5 times FY17 book; shares in CapitaLand are trading at $3.70 or 0.8 times FY17 book; shares in UOL are trading at $8.84 or 0.9 times FY17 book.
