SINGAPORE (Oct 6): JPMorgan is keeping its positive view of Singapore developers on valuations, the multi-year residential upcycle and RNAV-accretive land acquisitions.
Year to date, collective en bloc sales have quadrupled y-o-y to $5.2 billion across 25 deals with an 85% success rate. This provides clear evidence of another en bloc cycle in the making, which traditionally lasts at least three years, like in 2005-07 and 2010-12.
JPMorgan expects at least 80 more projects in the pipeline, after combining projects in varying parts of the en bloc process and previous failures.
In a Thursday report, lead analyst Brandon Lee says the current en bloc cycle is sustainable on record-low unsold near-term pipeline of 7,749 units or 0.6 time annual demand, perpetual fall in developers’ replenishment-to-sales ratio resulting in shrinkage of 34,000 units -- or three years of demand -- since 2000 as well as insufficient confirmed list sites from government tenders with low probability of reserve list sites being triggered.
“We expect immediate displacement demand from affected homeowners, who could also use the proceeds to partially fund their children’s first property. This should boost an already-buoyant market,” says Lee.
He also expects vacancy to improve 100bps to 7% by 2019-20 versus 8% in 2017-18, which should lead to better leasing environment alongside genuine rental improvement in 2018.
Lastly, JPMorgan expects higher selling prices from higher land prices, with its analysis of 26 major tenders YTD showing prices must increase at least 6-13% over the next few years to achieve 5-10% PBT margin.
JPMorgan says developers under its coverage -- CapitaLand, City Developments, UOL and Frasers Centrepoint Limited -- are in a dilemma as their landbanks are at low levels since 2007. Their share of awarded residential sites fell 10 percentage points to 16% in 2015-17. Unlike previous upcycles, they are also unable to draw from once-sizeable legacy landbanks.
“Coupled with the nascent upcycle, mediocre overseas performance and shareholders’ continued hunt for resi proxies, we expect listed developers to become more pro-active in en-blocs over the next 6-18 months,” says Lee.
JPMorgan’s top picks are City Developments and UOL with target prices of $13.50 and $9.15 respectively.
CityDev is trading at $11.41 or 1.15 times book value while UOL is trading at $8.20 or 0.8 time book.
