Take a high position. We believe 2013 will turn out to be a better year for high-end developers. The ability to move completed inventory will be good news to them, as the profits can be recognized immediately. We raise our target prices for Wing Tai (maintain BUY; TP: SGD2.10) and Ho Bee (upgrade from HOLD to BUY; TP: SGD1.79) as we ascribe a narrower 40% RNAV discount to account for their potential re-rating.

Not all doom and gloom. The introduction of the Additional Buyer’s Stamp Duty (ABSD) in December last year sent the high-end market into a stalemate. Recently, new home sales in the Core Central Region have shown initial signs of renewed interest, with 403 units sold in 2Q12, compared with 129 units in the previous quarter.

High-end segment piquing interest. We believe the market has grown to accept the ABSD as part of transaction costs. We expect buying interest to resume, albeit not to pre-GFC levels, as the investment climate in Singapore remains favourable, and the lack of alternative destinations in the region which offer such high-quality luxury products, especially on freehold tenure.

Prices could diverge again. We expect any quantitative easing to be supportive of the high-end segment in Singapore, causing the current price premium over the mass market segment to increase again, as the oncoming supply in the suburban areas exerts downward pressure on mass market condo prices. We forecast high-end prices to hold firm in 2013, but the mass market segment to correct by 10% by end-2013.

A race against time? Under the RPA, foreign developers (which include listed ones) must complete construction of their residential projects within five years of acquiring the site, and sell all the units within two years from obtaining Temporary Occupation Permit (TOP). Sites on Sentosa Cove are exempted from these requirements. This has been a source of overhang on the high-end developers’ share prices over the past nine months.

RPA requirements less punitive than generally believed. The penalty for non-compliance is either a) the forfeiture of the bankers’ guarantee amounting to 10% of the land cost, or b) the payment of an extension premium, which is pegged at 8%, 16% and 24% of the land cost for each subsequent year beyond the two-year period which the developer fails to sell all its units, pro-rated based on the proportion of unsold units. As land cost accounts for just ~50% of total costs for most of these projects, our analysis shows that the impact on developers’ margins are actually quite manageable.

Singapore remains alluring

What does the future hold for high-end property? We believe that the effects of the ABSD have started to wane as investors come to accept that it is part of transaction costs. In fact, on the back of further concerted quantitative easing across the world, the value of prime properties could hold up better than the other segments or other asset classes, with the potential of further price appreciation when the global economy eventually picks up growth momentum.

We therefore anticipate international interest for luxury properties in Singapore to gradually return. Singapore remains a choice locale for property investments, especially when the Singapore dollar looks set to remain strong, the political situation stable and prices are still relatively attractive compared with Hong Kong, where prices at The Peak average around SGD5,000-6,000 psf. Furthermore, Singapore is one of the few places in the region where one can invest directly in high-quality freehold non-landed luxury property.

This has been echoed by a recent survey conducted by the American Chamber of Commerce in Singapore and the US Chamber of Commerce, where 356 top executives from US companies in ASEAN countries were polled. In summary, 75% of the respondents expressed their wish to extend their tenure in Singapore, citing personal security, Singapore’s infrastructure, stable government and attractive tax framework as the main attractions. In addition, 75% of US companies stated that they regularly receive staff requests to relocate to Singapore on an employment pass, up from 60% in 2011.

Mainland Chinese buyers had accounted for as much as 11% of the transactions in the Core Central Region (CCR) before the introduction of the ABSD, after which it declined to about 4% in 2Q12. With Hong Kong seemingly trying to limit foreign home ownership particularly from Mainland China, we see the possibility of renewed interest in Singapore properties from Mainland Chinese buyers.

What is the fuss about the RPA?

Timeframe to develop and sell. Under the Residential Property Act (RPA), foreign developers (which include listed developers) must complete construction of their residential developments within five years of acquiring the site, and sell all the units within two years from obtaining Temporary Occupation Permit (TOP). Sites on Sentosa Cove are given special exemption from these requirements so as to attract foreign investments.

Penalty is not overly punitive. The penalty for non-compliance is either a) the forfeiture of the bankers’ guarantee amounting to 10% of the land cost, or b) the payment of an extension premium, which is pegged at 8%, 16% and 24% of the land cost for the first, second and subsequent year after the two-year period which the developer fails to sell all its units, pro-rated based on the proportion of unsold units.

Buffered by cheap land cost. We selected six luxury developments and tried to model the potential impact the RPA penalties may have on their respective profit margins. The projects we selected include Wing Tai’s Helios Residences, Le Nouvel Ardmore and Nouvel 18, SC Global’s The Marq and Hilltops and Wheelock Properties’ Scotts Square.

In our study, we are assuming no new sale from now till the expiry of the two-year grace period with four possible scenarios. In Case 1, we assume the developer foregoes its Banker’s Guarantee, which is a full 10% of the land cost. In Cases 2-4, we modeled situations where the remaining units are sold in equal proportion over one additional year, over two years and over three years respectively.

From this simple analysis, it is evident that in most cases, the effective breakeven cost for each project would be increased by not more than 10%, especially if the projects do not take more than another two more years to be sold-out. This is largely due to the fact that compared with the market prices of SGD3,000 psf or more for the completed product, the breakeven costs are actually relatively low, mainly due to the low land costs. Nouvel 18 appears to be most at risk, but even then, our ASP assumption of SGD3,150 psf may be an underestimate.

Source: Maybank Kim Eng Research - 11 Sept 2012