SINGAPORE (July 14): RHB Group Research is staying “overweight” on the real estate sector, mainly on valuation grounds, with developer stocks trading at attractive 40-60% discounts to book value.
In a Monday report, analyst Vijay Natarajan says, “Despite a sharp deterioration in economic outlook, the property sector has largely remained resilient, as anticipated. “
Key reasons are ultra-low interest rates, government economic stimulus, predominant local buying and healthy household balance sheets pre-crisis. Developers’ low margins have also limited price wars.
Singapore’s general election last week saw the return of the ruling People’s Action Party, albeit with a lower vote share of 61%, compared to 69.9% in 2015. Natarajan believes that the result of the election should not bring about any significant change in real estate policy measures.
“With recent data showing a resilient property market by price and volume, we expect the Government to stay cautious and not to relax any cooling measures at this juncture,” says Natarajan, who forecasts that any relaxation ahead is likely to be data driven, such as if the Government sees property prices or market conditions deviating sharply, as compared to economic fundamentals.
Compared to past crises, the Government seems that it is now on much better policy footing to steer the market on the back of nine rounds of cooling measures.
“In the unlikely case of property prices continuing to rise, we also do not rule out potential additional tightening measures which could come in the form of further tightening of loan-to-value ratios. We also anticipate possible tweaks on the public housing front instead in terms of land lease tenures and use of Central Provident Fund savings to purchase homes,” says Natarajan.
Meanwhile, real estate activity has picked up pace since the reopening of the economy in June, with real estate agencies reporting brisk sales across many show flats.
The analyst predicts that June private home sales to reach about 1,000 units, double that of from May volumes and about 20% higher than June 2019. Similarly, Housing & Development Board (HDB) resale volumes also showed a near sevenfold jump in June, which shows a strong pent-up demand.
On a q-o-q basis, Urban Redevelopment Authority (URA) data has shown private residential prices falling 1.1% q-o-q, compared to -1% in 1Q20.
“The limited price fall in 2Q is due to market-supportive factors highlighted above and developers adopting a wait-and-watch strategy, in our view,” says Natarajan.
Another key difference limiting the price fall is development margins, which largely remain squeezed at 5-15%, compared to 20-30% pre-GFC. This is due to higher land cost paid amid increased competition. Construction costs are also expected to rise on higher manpower costs, further limiting margins.
“With most planned new launches in 1H seen to come onstream in the next few months, we expect more completion and developers to offer more soft discounts to attract buyers. Overall, we see a 5-10% property price correction and a 30-40% decline in private residential volumes for 2020,” adds Natarajan.
Within the real estate sector, Natarajan has CapitaLand as his top “buy” pick with a target price of $4.00.
