• Buying opportunities amid pullback
• Addressing investor concerns
• Top picks: UOL, CIT and CAPL

Opportunities Amid Divergence Between Share Prices and Fundamentals

Singapore developers, using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark, registered negative total returns of 4.8% YTD, underperforming the STI (-2.5%) but outperforming the S-REITs sector (-6.7%). Given our continued positive view on the outlook of Singapore developers, we believe the divergence between their share price performances and fundamentals presents buying opportunities.

In this report, we seek to address some concerns which may have contributed to the share price declines, although broader macro issues such as escalating trade tensions would also have impacted investor sentiment.

Potential Government Cooling Measures?

We believe one of the market’s key concerns revolves around higher risks of tightening measures by the Singapore government given the vibrant ‘animal spirits’ seen on the ground. While it is difficult to predict whether further government measures would be introduced, we note that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q17. Hence, further data points may be needed before the next course of action is taken, in our view.

In addition, the HDB resale price index is still on a downtrend. With more than 80% of Singapore’s resident population living in HDB flats, any potential tightening measures would have to be very carefully calibrated by the government, in our view.

Supply Concerns Valid, But Likely Manageable at This Juncture

Another issue stems from potential oversupply concerns. According to data from URA, there are 44,261 units in the supply pipeline (including ECs), as at 31 Mar 2018. There is also a potential pipeline supply of 20,100 units (including ECs) from Government Land Sales (GLS) sites and awarded en-bloc sale sites pending planning approval.

Notwithstanding this expected increase in supply, we note that a significant proportion of this potential pipeline will only come on-stream from 2021.

Furthermore, although the total number of unsold inventory increased to 25.3k in 1Q18 from 20.8k in 4Q17, 74% of these units have yet to obtain the pre-requisites for sale; the level of unsold inventory is also below the long-term average of 32.4k.

Primary Unit Sales Expected to Gain Traction Ahead

5M18 primary units (excluding ECs) sales came in at 3,480 units, or a decline of 39% YoY, but May sales recovered 7.9% YoY. While we ease our private sales transaction volume projection for 2018 to 10k-12k (previously 12k-15k) based on the current run-rate, this still implies a backend loaded year.

We also raise our Singapore residential price growth forecast to 8%-12% from 3%-8%. Maintain OVERWEIGHT on the Singapore residential sector. We move UOL Group Limited [BUY, FV: S$10.63] to the front of our top picks list, followed by City Developments Limited [BUY, FV: S$15.78], and CapitaLand Limited [BUY, FV: S$4.26].

Source: OCBC Research - 26 Jun 2018