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Analysts identify CDL as their top picks amid the strong new launch sales momentum in Singapore’s residential sector

Chloe Lim
Chloe Lim9/12/2022 04:53 PM GMT+08  • 8 min read
Analysts identify CDL as their top picks amid the strong new launch sales momentum in Singapore’s residential sector
DBS analysts have also pegged GuocoLand, which is behind projects such as Lentor Modern, as one of their top sector picks. Photo: GuocoLand
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Analysts are positive on Singapore’s residential sector in view of strong new launch sales momentum year-to-date (ytd) with take up rates at around 83% during launch weekends compared to 43%-64% in the past two years.

The Singapore residential market is gearing up for two launches in September – Sky Eden @ Bedok by Frasers Property and Lentor Modern by GuocoLand – which DBS Group Research analysts Derek Tan, Rachel Tan and Tabitha Foo will be watching closely.

“While overall primary sales momentum in 8M2022 has dropped by 45% y-o-y to [around] 5,700 units, average pricing has remained firm despite ongoing weakening macro data points and higher mortgage rates,” write the analysts. “The strong sales momentum will likely result in a further squeeze in supply and drive average pricing higher in 2H2022, albeit at a more modest pace.”

Sky Eden @ Bedok and Lentor Modern are two projects in the outside central region (OCR) that will be looking to test the market with indicative pricing of around $2,000 per sq ft onwards, which would set a new benchmark.

“The 158-unit Sky Eden @ Bedok seems likely to see strong buyer reception given its location within an established town centre in Bedok and being the first launch in the location in 10 years,” say the analysts.

“Guocoland will continue to transform neighbourhoods with the launch of 605-unit Lentor Modern, bringing its trademark luxury positioning to the OCR region,” they add. “The project’s amenities with improved connectivity to the central business district (CBD) with the gradual opening of Thomson-East Coast Line (TEL) makes it attractive.”

See also: Yangzijiang Financial 'deeply undervalued' but CGS-CIMB sees headwinds, cuts TP

The analysts estimate that Guocoland will see an approximate 1.0%-1.2% accretion to its revised net asset value (RNAV) for every $100 per sq ft above our projected approximate $2000 per sq ft for the project.

To this end, the analysts’ top picks within the Singapore residential sector are City Developments (CDL) and Guocoland, where developers are trading at an average P/NAV of 0.55x, which is close to -2 s.d. of its historical trading range. “While concerns of a residential slowdown given macro uncertainties are valid, strong pre-sales would shield NAVs/RNAVs from downgrades in our view,” write the analysts. “In fact, strong commercial and hospitality portfolios are key drivers to earnings and NAV upgrades in 2HFY2022.”

The analysts at DBS have given “buy” calls to CDL, GuocoLand, Ho Bee Land and Wing Tai with target prices of $10.50, $2.30, $3.80 and $2.05 respectively.

See also: CGS-CIMB lowers target price on Sats after WFS funding plan revealed

RHB remains ‘neutral’ on sector, but lifts full year pricing forecast to 4%-6%

Meanwhile, RHB Group Research analyst Vijay Natarajan has kept his “neutral” rating on the sector even as Singapore residential prices rose by 4.2% in the 1H2022, which stood higher than expected.

Like his peers at DBS, CDL remains the analyst’s top pick due to its valuations.

The analyst, who visited the Lentor Modern show flat recently, has noted that the strong take-up and record pricing seen in new launches were driven by the following unique factors which do not exactly reflect the overall sentiment.

“Firstly, the lack of new launches in the locality (AMO Residences, Sky [email protected]) and proximity to MRT station and good schools; secondly, developers targeting affordability by compressing unit sizes to keep most units’ overall quantum in the $1.5 million - $2.5 million range; and low interest payments during the initial construction stages of project, making buyers less sensitive to sharp rising rates,” says the analyst.

However, Natarajan does note that supply increases should ease pricing pressure by 4QFY2022. “Another key reason driving strong sales in new launches has been the limited unsold private residential units in the market resulting in limited choices,” explains the analyst. “However, this is changing as 2Q2022 saw a slight build up in unsold inventory to 17,506 units, after declining for 11 consecutive quarters.”

The confirmed list of residential supply (for 2H2022) is also increased by 26% h-o-h to 3,505 units. In addition, nine projects, worth $1.8 billion have transacted via en-bloc transactions y-t-d which should add over 2,000 units to the pipeline in 2023.

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To this end, the analyst is estimating the sector’s price growth to moderate to “flattish” levels in the 2H2022.

“Our show flat visits indicate demand for new launches remains strong backed by unique factors and lack of supply, yet we began to observe weakness in secondary markets due to a mismatch of pricing expectations,” says Natarajan.

Rising interest rates and economic slowdown are also expected to further dampen sentiment with a likelihood of additional policy tweaks, according to the analyst.

Private resale volume fell 23% y-o-y in 1HFY2022 as per data from the Urban Redevelopment Authority. Data from the Singapore Real Estate Exchange also points to a further 31% y-o-y slowdown in July. “Based on our channel checks with agents there, there was a notable increase in sales completion period due to pricing mismatches with buyers turning more price sensitive due to rising interest rates,” says Natarajan.

A similar trend is also seen in the Housing Development Board (HDB) resale market where August and y-t-d volumes fell 7% and 16% y-o-y.

In a less likely scenario of property prices rising another 5% in 2H2022, the analyst expects authorities to intervene with additional cooling measures. “This could take the form of revising up medium term interest rate assumptions for calculating borrowers’ total debt servicing ratio to 4%-4.5% instead of the current 3.5% and further lowering loan to value ratios,” he explains. “The objective of such measures is to protect buyers from getting wrong footed in a rising interest rate environment and safeguard financial institutions.”

On the back of the higher-than-expected increase in property prices in the 1H2022, Natarajan has upped his full year pricing forecast to 4%-6% (from -2% to 2%). In 2023, the analyst anticipates prices to range from -2% to 2% (from 1% to 3%). “Our 2022 volume assumptions remain unchanged at 8,000-9000 units (30%-40% y-o-y decline) for the primary market and anticipate a 10%-20% decline in the secondary market.”

Within the property sector, Natarajan has given APAC Realty a “neutral” call with a target price of 75 cents. He has given CDL a “buy” call with a target price of $9.75.

Investors ‘increasingly expecting new cooling measures in the near-term due to strong residential performance: Citi

Citibank Research analyst Brandon Lee has also chosen CDL as his top pick with a target price of $10.29. Lee’s target price is set at a 25% discount to its RNAV of $14.06.

In his note, Lee observed that Sky [email protected] marked the start of a busy next few months for primary launches, seeing an estimated 12-15 projects with around 2,500-3,800 units after a quiet August whereby none were released due to Hungry Ghost Festival. Its 75% take-up however– 3rd-highest among 12 projects launched ytd– underlined the strength of Singapore's residential sector, especially the mass-market segment which derives its demand from genuine homebuyers (including HDB upgraders), says the analyst.

He adds that the last major project launched within the vicinity of the development was the 99-year leasehold Bedok Residences at the interchange in December 2011. Units at the latter recently transacted at $1,600-$1,700 per sq ft.

“We believe the healthy take-up bodes well for two upcoming mass-market launches– 605-unit Lentor Modern and 268-unit Sceneca Residence which is a five-minute drive from Sky [email protected]) and could lead to heightened demand for three upcoming mass-market government land tender sites (in Lentor and Bukit Batok) on Sept 13,” says Lee.

Some downside risks Lee anticipates include weak take-up for residential launches, the introduction of additional cooling measures and a sharp economic slowdown, which would result in lower residential selling prices.

In his report, Lee also warns that investors are increasingly expecting to see new cooling measures in the near-term given the strong residential performance.

Developers, whose shares have risen some 2% ytd, have outperformed Singapore REITs (S-REITs), whose shares have collectively fallen 7% in the same period thanks to rising interest rates and strong residential performance, he points out.

“At this point, while we are of the view that it is still early for incremental cooling measures (last introduced in December 2021) due to flattish land prices, lackluster en-bloc market and weak overall primary volumes, we think [the] outcome of three upcoming events,” he writes.

The events mentioned are the magnitude of rate pass-through to SGD mortgage rate (current three-month SORA of 1.7% (+150 basis points ytd) which implies all-in cost of 2.5%-2.7% vs. 3.5% employed for calculation of Total Debt Servicing Ratio) from a potential interest rate increase. Citi is forecasting a 75 basis point hike at the next Fed meeting on Sept 21.

The level of competition in terms of the number of bidders and price for the three upcoming government land tender sites on Sept 13 is yet another event that was highlighted by Lee.

Finally, the pace of the private residential property price index (PPI) change in the 3Q2022, which is expected to be released on Oct 3, is another event to look out for.

“In 2Q2022, the PPI change was +3.5% and it has risen 18.9% since bottoming in 1Q2020 could provide more tangible colour on policy direction,” Lee writes.

As at 4.48pm, shares in CDL are trading at 7 cents up or 0.83% higher at $8.49 while shares in GuocoLand are trading at 1 cent up or 0.56% higher at $1.79.

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