Sector Overview

The Property Sector in our Singapore  coverage consists of Property  developers/holding  companies,  engaged  in businesses  of  property  development,  trading, ownership/management and services.

Policy: TDSR & beyond

In 1H2014, we may see the government further refining the property  cooling  measures.  Since  the  onset  of  the  first round in September 2009, the government has steadfastly pushed  out  waves  of  property  cooling  measures  over  the past  4  years.  To  date,  this  translated  to  a  rough  6.25 months  interval  between  each  round.  The  longest  interval between  two  cooling  measures  was  about  11  months  and that  the  most  recent  policy,  which  saw  the  introduction  of Total  Debt  Service  Ratio,  was  introduced  in  June  2013. Given the Singapore Government’s consistent track record, its  well  established  policy  formulation/review  process  and the  current  market  conditions,  we  are  expecting  further revisions/additions to the policies, sooner rather than later.

The price of private residential units has not corrected to our forecasted  levels.  We  draw  this  conclusion  by  comparing the  yields  between  the  other  real  estate  sub-sectors. Current residential rental yields stands at 1.8%-2.7%. This represents a huge deviation from other real estate classes which  are  enjoying  substantially  higher  returns,  at  5.1%-7.3%.  Residential  sector  should  experience  a  further  pullback in capital values.

The  government  has  expressed  its  intention  to  see sustainable growth in residential prices beyond the horizon. However,  anecdotal  evidence  and  in-house  estimates shows  that  the  house  price-to-income  ratio  is  c.35x  as compared  to  8x-22x  for  developed  countries.  We  do  not expect full reversion of this ratio to Singapore’s historic long term  average  of  c.26x-29x.  However,  the  residential segment is currently undergoing fundamental changes, and we  believe  occupant-buyers  will  behave  more  rationally  in the midst of a shaky longer term residential outlook.

In  our  opinion,  the  Government  will  be  incremental  in  its approach  toward  residential  segment  from  here  onwards. As  more  fine-tuning  property  cooling  measures  is introduced, the various players are increasingly being kept “in-line”. Previous rounds of property cooling measures had taken  out  the  sources  of  financing,  the  sellers,  and  the potential  buyers  (both  local  and  foreign).  The  most  recent policy  starts  to  string  up  the  various  policies  by  enforcing more  stringent  adherence  to  the  rules.  With  the  players much  weakened,  the  outlook  looking  increasingly unappetizing, the market will await further insights from the government before any signs of recovery will be in sight.

Market Fundamentals – Housing Supply Overhang

Over the next 3 years, it would be an oversupply situation within the Singapore residential segment. Inclusive of both public  and  private  sectors,  we  project  the  physical completion of 168,200 residential units from 2014 to 2016 (please  refer  to  figure  2).  In  contrast,  we  look  into  the underlying  ‘real’  demand  that  stems  from  population growth.  We  estimate  that  the  increase  in  population  will provide take-up of c. 71,400 residential units. Beside the local  government  intervention  in  the  aforementioned portion, the oversupply situation will be a major factor in the gloomy outlook for residential.

What are some factors  that could  potentially  change  the grim outlook for residential segment?

1.  The mass market continues the trend of having lesser individuals  per  residential  units.  Currently,  based  on  the total  residents  and  the  total  residential  units,  the  ratio stands  at  an  estimated  4.07  individuals  per  unit.  We  do acknowledge  that  this  ratio  is  exhibiting  a  downwards trend. However, for the market to absorb the upcoming 3-yr supply, we would need this ratio to lower a further 7%, at  3.78  individual  per  unit.  We  do  foresee  residents continuing to favor having fewer individuals under a single roof.  Nonetheless,  with  the  aging  population  and  the affordability  issues,  the  ratio  should  not  decrease  much further.  Within  these  3  years,  this  factor  will  not substantially negate the oversupply effects.

2.  Investment  capital  influx.  Under  current  conditions, there would be an excess of close to 100,000 residential units.  Initially,  we  analyzed  the  demand  stemming  from the occupant-buyers, with neglecting potential absorption from  investment  capital.  While  opportunistic  investmentbuyers could possibly still pick up residential units in the market,  most  investors  would  steer  clear  in  the  midst  of unattractive  rental  yields,  policy  risks  and  a  likely oversupply situation.

Major players’ comments on residential market:

• CDL – expect residential prices to correct further
• Capitaland  –  expects  prices  and  sales  volume  to moderate  from  measures  but  long  term  prospect  are  intact. Remain optimistic.
• Keppel  Land  –  remain  cautious.  Highly  selective  of sites/projects going forward.

Impact on Singapore Developers

Amongst  the  “big-3”  developers,  City  Development Limited (CDL) has the greatest exposure to the Singapore residential  market,  with  40-45%  of  their  Gross  Asset Value  (GAV)  accruing  to  this  sector.  The  company’s heavy  bet  on  this  sector  previously,  saw  the  company amassing  a  huge  land  bank  in  Singapore,  estimated  to yield  more  than  12,000  residential  units  in  total.  In contrast, Keppel Land and Capital Land have only 10%  -14% of their GAV allotted to Singapore residential sector. Any further deterioration on  the policy front or the supply situation will  be  a  major  factor  in  the price  movement  of CDL, in the short term. Management has turn prudent and is seeking to diversify into other sectors and geographic areas. We look forward to seeing CDL’s ability to secure value accretive projects.

Interest rates and effects

While  the  broad  market  has  long  accepted  that  interest rates will increase eventually, the price movement of real estate related stocks prices has not been fully factored in the  interest  rates  effects.  Qualitatively,  an  increase  in interest  rates  implies  a  higher  discount  rate,  utilized towards forecasted cash flow returns. This will lower the valuations  of  assets.  While  it  awaits  the  imminent  QE tapering,  the  market  will  continue  to  grapple  with  the change in outlook of interest rates, we expect to see some weakness  in  real  estate  companies  with  a  large  asset base.

Does this mean, we should all avoid every counter with a large  fixed  asset?  No,  the  more  prudent  real  estate companies have taken up fixed rate bonds over the next 2-3  years.  In  addition,  Real  estate  stocks  valuations  are currently  at  its  historic  low.  We  should  focus  on companies  that  have  strong  growth  impetus,  either organically  or  through  acquisitions.  The  increase  in intrinsic  valuations  through  increasing  value  accretive purchases  or  through  asset  enhancement  initiatives  can possibly  negate  the  downward  effects  of  increased interest rates.

Why Retail?

We continue to favor companies that are exposed to the retail and hospitality sub-sectors.

Retail

Rental rates are expected to grow at c.5% pa as there is strong  demand  for  retail  space.  International  brands continue to seek entry/expansion into local retail scene as they continue to view the consumer base favorably. This can  be  evidenced  by  the  recent  Bedok  Mall,  which opened on 3 rd December 2013. The shopping mall is fully leased and includes popular brands like UNIQLO, Cotton On,  FairPrice  Finest  and  Charles  &  Keith.  Another CapitaMallAsia’s  shopping  mall,  Westgate,  will  open  in late  4Q13/early  1Q14.  Upcoming  retail  malls  in  2014 should  see  strong  pre-commitment  levels  and  command higher rental rates.

In  2014,  existing  retail  landlord  will  continue  to  actively reinvent their mall through constant revising of tenant mix and  embarking  on  asset  enhancement  initiatives.  Retail yields  have  proven  to  be  highly  resilient,  supported  by strong  macroeconomic  fundamentals.  Island  wide  retail occupancy will likely remain above 90%.

Hospitality

While  a  large  supply  of  new  hotel  rooms  is  expected  in 2014,  majority  of  the  supply  will  be  clustered  within  the midscale  hotels.  The  luxury  hotel  segment  is  relatively unaffected  and  should  see  current  high  room  rates sustaining throughout 2014. The same cannot be said for the midscale hotel. While competition stiffens, the new or newly  refurbished  ones  should  stand  out.  In  2014,  we anticipate a higher number of mid-scale hotels embarking on asset enhancement initiatives (AEIs), in an attempt to reinvent/reposition the hotel. The increase in total number of room nights will be slightly mitigated by the retiring of existing  stock,  for  AEIs.  We  expect  islandwide  available room nights to see an 8.2% increase in 2014.

Amara Holdings

We  continue  to  favor  Amara  Holdings  as  the  market continues  to  deeply  undervalue  the  company’s  assets. While  there  are  concerns  that  the  recent  Carlton  Hotel opening beside Amara Singapore (flagship hotel) will post strong  competition,  we  continue  to  believe  that  the  new hotel  will  start  to  bring  about  greater  activities  in  the vicinity and improve the overall attractiveness of hotels in the core-CBD area. This bodes well for Amara Holdings. Additionally, the completion of its Bangkok hotel and onschedule construction of its Shanghai mixed development, will  provide  impetus  for  the  market  to  realize  the company’s fair value. Thus, we have a BUY call on Amara Holdings, with Fair Value at S$0.74.

Comments on China residential

• Residential prices are continuing to trend upwards
• Tier  1  cities:  Governments  are  still  issuing  property cooling  measures.  Price  growth  are still  positive,  but slowing down.
• Tier  2  cities:  Governments  are  seemingly  starting  to be active on the policy front, with the aim of avoiding a housing price hike.
• Urbanization is still the main theme of the day, driving the  increase  in  residential  prices.  Developers  are speeding up development of their land bank in China.
• Investment  capital  is  still  a  net  inflow  for  the  real estate sector of the economy.

Source: PhillipCapital Research - 16 Dec 2013