On 16 November, Singapore announced a 60% increase of private home sold by developers in October as compared to the previous month. However, October 2015 sales were 30% lower as compared to sales in October 2014. Macquarie Equities Research (MER) released a research report on 20 November stating that 2016 will be a challenging year for the property market in Singapore. More excepts found below….
 
 
 
A challenging year in 2016
2016 will be a challenging year for the Singapore property market. Impending large supply will see available stock rise by 4-11% across all sectors. Yet, all demand indicators, such as industrial pre-committed rates, hiring intentions and business expectations surveys and GDP growth, point to weak net absorption. The situation is further exacerbated with a gradual rising rate scenario.
 
The physical and stock market have somewhat priced in the bleak outlook. Rents have declined at an accelerated pace in 3Q15 and SG property indices (FSTREI and FSTREH) have corrected by 13-14% over the last 6 months.
 
SG Developers over SREITs
MER’s strategy for 2016 is to hide in deep-value, reasonably-geared developers, with little domestic exposure. CapitaLand and GLP plays into China’s consumption theme with strong retail sales in
October and record Singles Day sales reaffirming MER’s optimism.
 
MER is cautious on Singapore REITs given that debt-fuelled distribution per unit (DPU) growth of 5% (through acquisitions) in 2016 will taper off to 1.4% and yet the sector yield spread is still trading close to the historical average 4%. MER will continue to stay defensive with Retail and REITs with long weighted average lease expiry (WALE) and low gearing.
 
Refreshing MER’s sector occupancy/rent forecasts, MER ranks its sector preference:
 
Retail: Escaping the haze. Oversupply risk is the least here and high mall occupancy should hold at ~98% (retail space/capita by 2018E is still low). MER is confident that mall operators (CapitaLand Mall Trust and Mapletree Commercial Trust) will continue to execute well in 2016 (rent reversion consistently higher than industry).
 
Industrial: Paving the way for growth. Demand for higher-value industrial space (Business Parks and Hi-Specs) will be structurally supported by Singapore’s drive towards a “value-creating” economy. MER prefers Mapletree Industrial Trust as debt headroom (~S$350m) supports redevelopment opportunities.
 
Residential: A standstill, who will blink first? The supply situation has worsened in 2015 as policy makers, developers and investors with vacant homes are unwilling to budge (cooling measures remain and peak-to-trough: -7.5%). Rising SIBOR will tip the scale and MER sees -10% to residential prices in 2016.
 
Office: A 2011-14 déjà vu? The S/D situation in 2016 is worse than the previous cycle in 2011. That said, MER sees value emerging in CapitaLand Commercial Trust (long WALE – 4 years and low gearing – 30%).
 
Three structural positive themes to watch in 2016
Amidst the pessimistic outlook, MER sees silver linings on the horizon. Faster than expected population growth (>1.5%/yr), transition towards value creating industries (<5years) and ratification of Trans-Pacific Partnership (<2years) are key structural positives that we will be looking out for in 2016. MER upgrades AREIT, MCT and MINT to Outperform. Downgrade KREIT to Neutral.