Opportunity to buy Singapore developers opens up on share price-fundamentals divergence

SINGAPORE (June 27): The divergence between the share price performances of Singapore developers and their actual business fundamentals has presented buying opportunities for investors, says OCBC Investment Research, who continues to hold a positive view on the outlook of the local property market. Using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark, Singapore developers registered negative total returns of 4.8% year-to-date. This underperformed the benchmark Straits Times Index which is down 2.5% but outperformed the S-REITs sector which is down a bigger 6.7%. In a Wednesday report, lead analyst Andy Wong says concerns such as potential government cooling measures and supply concerns may have contributed to the share price declines, although broader macro issues such as escalating trade tensions would also have impacted investor sentiment. Wong believes one of the market’s key concerns revolves around higher risks of tightening measures by the Singapore government given the vibrant potential buyer interest seen in showrooms. While it is difficult to predict whether further government measures would be introduced, he notes that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q17. 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,” adds Wong. On the supply side, there are 44,261 units in the pipeline (including ECs) as at March 31 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. However, Wong says a significant proportion of this potential pipeline will only come on-stream from 2021. Furthermore, although the total number of unsold inventory increased to 25,300 in 1Q18 from 20,800 in 4Q17, 74% of these units have yet to obtain the pre-requisites for sale and the level of unsold inventory is also below the long-term average of 32,400. Looking ahead, Wong says sales of primary unit sales are expected to gain traction. In 5M18,  sales of primary units (excluding ECs) sales came in at 3,480 units, or a decline of 39% y-o-y, but May sales recovered 7.9% y-o-y. While we ease our private sales transaction volume projection for 2018 to 10,000-12,000 from previously 12,000-15,000 based on the current run-rate, this still implies a backend loaded year. Wong is also raising its Singapore residential price growth forecast to 8%-12% from 3%-8%. Maintain “overweight” on the Singapore residential sector. OCBC has UOL Groupas top buy with $10.63 fair value followed by City Developments with $15.78 fair value and CapitaLand with $4.26 fair value.

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