UOB Kay Hian analyst Adrian Loh has maintained “overweight” on the Singapore property sector even as the Singapore government introduced three new cooling measures in the late hours of Dec 15.
Loh’s buoyant recommendation on the sector underlies his belief that the market will adjust to the new normal in 2022, “backed up by firm economic fundamentals”.
He adds that the UOB Global Economics & Markets Research team has estimated that Singapore GDP’s will grow by 3.5% y-o-y in 2022 after “a solid post-Covid-19 rebound of 6.5% y-o-y GDP growth in 2021”.
“Despite the relatively high base in 2021, growth in 2022 should be underpinned by the export and manufacturing sectors, which will benefit from the expected recovery of Singapore’s key trading partners as they bolster their vaccination efforts into 2022,” he writes in a Dec 17 report.
An unexpected move
That said, the move, which was aimed at dampening the property market, was unexpected to Loh.
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The new measures, which included higher additional buyers’ stamp duty (ABSD) rates, a tightening of the total debt servicing ratio (TDSR) and reduced loan-to-value (LTV) for HDB granted loans, were “not the Christmas present the property market expected”, he says.
“We were surprised at the extent of the measures given that they affect a very broad swathe of the market, as well as the timing since recent data has arguably not shown that prices are ‘out of control’,” he writes in a Dec 17 report.
“The materially higher ABSD for second, third and subsequent properties for citizens and permanent residents (PRs), and higher ABSD for all foreigners, indicates that the government is trying to discourage property as an investment class for the foreseeable future,” he says.
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“We nevertheless note that the inventory of private residential property has declined 54% in the past two years and should this trajectory remain, prices are likely to remain firm,” he adds.
The tightening of the TDSR was expected, although the reduction in LTV was a surprise.
“The latter reduces the amount that potential homebuyers can borrow from the HDB and thus results in such buyers needing to increase the amount of cash or CPF contribution,” says Loh. “We had not anticipated this penalty being imposed on HDB buyers, with widespread media coverage about selected HDB apartments being sold for in excess of $1 million perhaps triggering this precautionary move to impose a level of prudency into the HDB market.”
The latest round of cooling measures may have also put a halt to the en-bloc trend, which was expected to continue into 2022.
“The increased ABSD from 25% to 35% increases the risk for developers assuming failure to sell all of their units in a development within a five-year time frame. As a result, smaller en-bloc projects with fewer units for sale may be more attractive to developers, while the larger en-bloc projects may face greater challenges attracting agency and developer interest,” notes Loh.
Property share prices should ‘stabilise’ in near term
Following the decline in property share prices on the SGX the morning after the measures were announced, Loh views that the downside to the current share prices should be “limited” as valuations for Singapore’s property developers and agencies were not stretched heading into these new measures.
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See also: Property counters on SGX see red as cooling measures kick in
“At the close of trading on Dec 16, City Developments (CDL) was trading at an FY2022 price-to-earnings ratio (P/E) of 15.1 times while Propnex was trading at an ex-cash FY2022 P/E of 9.5 times. CapitaLand Investments (CLI) was not affected by these measures,” he says.
To this end, Loh has kept his “buy” calls on CDL and PropNex with unchanged target prices of $8.50 and $2.17 respectively.
“In our view, CDL’s valuations appear inexpensive: its 2022 price-to-book ratio (P/B) of 0.7 times is more than 1.5 standard deviation below its five-year P/B average of 0.92 times while its 2022 P/E of 15.1 times is a 14% discount to the company’s past-five-year average of 17.5 times. At our target price of $8.50, CDL would trade at a 2022F P/B of 0.9 times which we view as fair,” he writes.
PropNex’s target price is based on a target P/E multiple of 12.6 times which is 2 standard deviation above the company’s historical P/E average of 6.8 times.
“We had not factored in any earnings from its en-bloc efforts in any case, and thus our estimates for 2021 and 2022 are unchanged. Given the company’s huge cash pile of $123.7 million as at end-3QFY2021, which equates to 33 cents per share, we note that [PropNex’s] ex-cash P/E is only 9.5 times which we view as inexpensive,” says Loh.
Loh has also given CLI a “buy” rating with a target price of $3.64.
Photo: Bloomberg
