Sixth round of cooling measures. We had previously suggested that more property cooling measures by the Singapore government cannot be ruled out completely. True enough, the government has now stepped in to tighten rules on mortgage lending, a month after Ben Bernanke introduced “QE Infinity”. We believe this could nudge mass market property prices towards a 10% correction by end-2013, and we reaffirm CapitaMalls Asia and Wing Tai as our top BUYs.

MAS tightens residential mortgage tenure. The Monetary Authority of Singapore (MAS) has capped all new residential property loans at 35 years wef 6 October 2012. For loans to individuals, if the tenure exceeds 30 years or if the loan period extends beyond the retirement age of 65, the loan-to-value (LTV) will be capped at 40% if the borrower already has one or more outstanding residential mortgage, and 60% if he has none.

Marginal buyers likely to be weeded out. Our sensitivity analysis shows that for a SGD1 million loan, the monthly mortgage payment increases by nearly 13% to SGD3,451 on a base case interest rate of 1.5% p.a. when the loan tenure is reduced from 35 years to 30 years. We believe that marginal buyers will increasingly be forced out of the market if they deem the increase in monthly payments excessive, or if they do not have enough cash on hand for the higher downpayments should they insist on taking loans exceeding 30 years, or beyond the retirement age.

Tipping mass market segment closer to a correction. Since the mass market segment has more marginal buyers/investors, we expect the latest measures to tip the segment closer to a 10% correction by end-2013. However, in the short term, we see mass market demand still largely being supported by the tight labour market. On the other hand, we expect the measures to have little or no impact on the highend segment. This is because the wealthy buyers tend not to be too highly-geared in the first place, and they can stomach the marginal increase in monthly payments.

Stick with CMA and Wing Tai. We view the latest round of cooling measures as necessary to remind both potential homebuyers and financial institutions of the importance of financial prudence in the continued low interest rate environment. Raising the LTV and reducing the loan tenure are the next best alternatives to raising mortgage lending rates directly. We reiterate CMA (TP:SGD2.09) as our overall top pick for its retail property exposure, and Wing Tai (TP:SGD2.10) our preferred mid-cap pick for its high-end residential exposure.

Source: Maybank Kim Eng Research - 9 Oct 2012