THE GOVERNMENT'S MEASURES to curb property speculation sent shares of city-state’s biggest developers down the most in 11 months today.

The Straits Times Real Estate Index fell 0.3% at the close, with three stocks falling for every two that gained. CapitaLand, Southeast Asia’s biggest developer, fell 3.4% to $3.71, while City Developments, the second largest, declined 4.6% to $12.16, both retreating by the most since Feb 22.

The new cooling measures include extending the holding period of sellers stamp duty (SSD) from the current three years to four. The SSD has also been raised to 16%, 12%, 8% and 4% for properties that are bought after Jan 14 and sold within the first to fourth years respectively. This is payable regardless of whether the property is eventually sold at a gain or a loss. Also, unlike capital gains tax where sellers are taxed on their gains, the SSD is taxed on the full consideration of the property sold. This measure is therefore a significant deterrent for short-term speculators, research house Macquarie surmises.

Meanwhile, the loan-to-value (LTV) limit on housing loans for property purchasers who are not individuals will also be lowered to 50% while the LTV for individuals with one or more housing loans at the time of purchase will be lowered to 60%. The measures also take effect from Jan 14.

“The move, after the recent tightening in Aug 2010, is again targeted at dampening demand, while waiting for the supply side mechanism (increased public and private supply) to take effect,” write analysts from DBS Vickers in a Jan 14 note to investors.

UNIT SALES TO FALL
DBS expects the government’s latest moves to impact sentiment and trading activity in the property sector just as property stocks had made some positive progress in recent weeks. “We expect immediate drop in volume transactions,” the brokerage notes. “Hence, we believe primary sales projected for this year could tilt towards the lower end of our 10,000-12,000 units estimate,” says the research house.

Consequently, property stocks are expected to react negatively, particularly those with a higher exposure to the mass-market segment such as CityDev, with 29% of its gross asset value (GAV) exposed to the mass-market, as well as Wing Tai Holdings and Fraser and Neave, which have 15% and 5% of GAV in the low-end segment respectively.

Macquarie is also expecting a fall in unit transaction volume going forward. “We have already expected volumes to fall to 12,000 units this year from the historical high of more than 16,000 units sold last year,” it writes in a Jan 14 note to investors. “Our estimate for property prices is for a 7% rise this year. With these new measures, we suspect overall prices will be affected if the expected transaction volume decline is more protracted this round, which may force some developers to consider lowering selling price expectation to move their inventory.”

The one saving grace for local mass-market developers is their low level of gearing at about 36% which provides financial flexibility, Macquarie says. It believes Allgreen Properties will most likely be affected, given its high exposure to the Singapore residential market.

Meanwhile, Paul Lian of Goldman Sachs is expecting better returns from the luxury market, which it believes will be better insulated from the recent cooling policies. Lian favours UOL Group given the stock’s low exposure to the residential segment and good earnings visibility from unbilled sales. In the REIT sector, Lian’s top pick is CapitaCommercial Trust.

GO FOR OFFICE PLAYS
For better gains in the property market, Brandon Lee of DMG & Partners is recommending stocks in the office sector. “We expect the healthy GDP growth and positive employment (particularly business and finance services) market to drive office demand,” he writes in his report. “Capital values will further expand, helped by improving appetites for office properties amidst a backdrop of low interest rate environment and rising rentals.”

This year, Lee is expecting a 12% y-o-y rise in Grade A properties to $2,750 psf, while Grade A rents should rise 20% from last year to $12 psf. Meanwhile, prime capital values should rise 3% to $2,150 psf, while prime rents will edge up slight to $9 psf, he believes.

Lee’s top picks in the office sector are Overseas Union Enterprise and Singapore Land, with valuations of $4.20 apiece and $9.50 apiece, respectively. Meanwhile, he has downgraded Keppel Land to neutral based on valuations, believing the stock offers limited upside from current levels.