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DBS explains what higher interest rates spell for banks and developers CDL, UOL, Guocoland

Jovi Ho
Jovi Ho • 6 min read
DBS explains what higher interest rates spell for banks and developers CDL, UOL, Guocoland
Households could potentially face $1,000 per month higher mortgage payments on the new rates once loans are refinanced.
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Are Singapore’s banking and property markets unscathed from higher rates? DBS Group Research analysts say property prices are set to moderate amid higher interest rates and tighter lending limits, but a significant drop is unlikely.

“We see a slowdown in prices of the Singapore property market to a tune of +1% to -3% in 2023. Given rising interest rates and economic uncertainty, home buyers are likely to turn cautious with Singapore’s strong household balance sheet preventing a significant drop in property prices,” write DBS analysts Derek Tan, Lim Rui Wen, Tabitha Foo and Rachel Tan in an Oct 31 note.

With a positive outlook, City Developments (CDL), UOL Group and Guocoland Limited all earn “buy” calls from DBS analysts.

Guocoland has the most upside according to DBS analysts, with a target price of $2.30 compared to its Oct 27 closing price of $1.53. “Launch and take-up of Lentor Modern is positive given limited new launches in 2022, which will form a foundation for other Lentor residential projects,” says DBS.

Guocoland’s management has guided for a shift to a deeper focus on recurring rental income, and some 60% of assets are now investment properties, they add. “Rents for CBD Grade A offices continue to look robust on low new supply; Guoco Tower and Guoco Midtown, although not in the CBD, are commanding similar prices.”

The analysts also have target prices of $10.50 and $8.40 on CDL and UOL Group respectively.

See also: Analysts show concern on Food Empire's margins in FY2024 and beyond

CDL will be looking to launch projects selectively in 2H2022 with Tengah EC next to hit the market in 4Q2022. Gains from the en bloc sale of Tanglin Shopping Centre and Golden Mile will also be booked in 2H2022.

UOL Group’s AMO Residence is the best-selling project year-to-date, with 98% sold. UOL will be timing to launch Watten Estate en bloc in 2H2022, adds DBS.

Meanwhile, Wing Tai Holdings earns a “buy” call from DBS with a target price of $2.05, despite a neutral outlook. “Look out for the redevelopment of Lakeside Apartments en bloc project by FY2024, which will position the group in the future growth of Jurong Lake District. The group is on the lookout for more land banking opportunities, which would catalyse upside to its revalued net asset value (RNAV).”

See also: Brokers’ Digest: ComfortDelGro, Frasers Property, Bumitama Agri, Paragon REIT, Cromwell European REIT, Memiontec, CSE

$1,000 higher monthly mortgage payments

DBS believes the most recent property cooling measures will likely moderate the price uptrend momentum in the property market.

Introduced in September, the measures are mainly aimed at reducing households’ ability to take on more debt or increase their upfront cash down payment, and should be effective at cooling prices given rising interest rates and economic uncertainty.

Are households overstretching themselves? DBS believes dual-income households have increased over the years, raising household incomes and purchasing power.

According to data published by SingStat back in 2020, the proportion of married couples with dual incomes has increased to 52.5% in 2020 from 47.1% in 2010.

Dual-income households have a median combined monthly income of $11,101, which is higher than that of single-income households. Single-income households with only the husband employed had a median income of $5,070, as compared with single-income households with only the wife employed with a median income of $3,213.

Higher interest rates will rein in affordability as mortgage rates cross 4%, write DBS analysts. “On our estimates, every 1% rise in interest rates on a $1 million loan with a 30-year tenure will see a $500 rise in monthly mortgage obligation.”

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DBS economists expect the Singapore Overnight Rate Average (SORA) to increase to 3.5% in 2023. This implies that households could potentially face $1,000 per month higher mortgage payments on the new rates once loans are refinanced. “Buyers intending to purchase or refinance their loans may consider a fixed-rate mortgage to improve visibility on expenses,” add the analysts.

Households are set to tighten their belts to cope with higher mortgage repayments, say DBS analysts. “We believe households are likely to tighten expenses amid rising inflation to cope with heftier mortgage repayments, with many of the new sales in recent years being for own stay or upgrader demand.”

What should homeowners do?

A fixed rate property loan will provide certainty to mortgage commitment in the near future, writes DBS. “With the Fed expected to continue raising rates till 1Q2023, interest rates in Singapore are widely expected to continue to be on an upward trajectory and therefore, SORA will continue to climb at least in the near term.”

Banks are offering fixed-rate home loans at around 3.1% to provide some stability and certainty to mortgage payments, and it may make sense for homeowners to stick to a fixed rate loan in the near term, subject to their own financial circumstances, say DBS analysts.

“Buying a property is a long-term commitment, and it is important that homeowners also look at their own financial commitments before purchasing a new property,” they add.

What does this mean for banks?

Singapore banks continue to have sizeable exposure to the property market, says DBS, going from 20%-26% of Singapore banks loan books in 2019 to 26%-29% as of 2Q22, even as the absolute loan book quantum continues to grow.

On top of that, lending to REITs or other private vehicles may be captured under “financial institutions, investment and holding companies”. Hence, DBS estimates that approximately 44%-50% of Singapore banks’ loan books are exposed to Singapore properties.

Outstanding mortgages will continue to grow amid a buoyant property market, albeit at a slower rate, says DBS. “Outstanding mortgages in the banking system grew 5% y-o-y as of August on a buoyant property market. With a more cautious macroeconomic environment ahead, we believe mortgage origination will slow, though existing mortgages for new and uncompleted developments would continue to be drawn down for the next few years.”

Unemployment is a bigger driver of declining property prices and mortgage non-performing loans (NPLs), write DBS analysts. “In a bear-case scenario, we do not rule out a possible 10%-15% retreat in the property price index (PPI). We believe valuations will continue to draw support from good provisions’ buffers built up during the pandemic, as well as more than 5% dividend yields for UOB and OCBC.”

As at 9.35am, shares in Guocoland are trading 1 cent higher, or 0.64% up, at $1.56; while shares in UOL are trading 11 cents higher, or 1.78% up, at $6.30; and shares in City Developments are trading 13 cents higher, or 1.70% up, at $7.76.

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