SINGAPORE (Apr 10): RHB is maintaining its “overweight” call on Singapore’s real estate sector while expecting developers to be more selective in their en bloc bids going forward, with preferences for relatively smaller and well-located sites.
In a Tuesday report, analyst Vijay Natarajan says the current residential cycle could be nearing is peak, and therefore likely to slow down by the second half of the year. This comes on observations of a steady build-up in the supply pipeline, rising land costs, a tighter policy framework and the sufficient restocking of landbank.
Noting that 20 en bloc sites have been sold in the year to date (YTD) compared to the 28 sites sold last year, he believes “developers’ fatigue” is now slowly setting in despite a fairly active en bloc market.
“Our channel checks show that developers have become very selective, as increasing supply pipeline with en bloc is likely to add 15-20,000 units, land price expectations still remain lofty (10- 30% higher), and many developers have sufficiently restocked their landbanks,” shares Natarajan.
“Developers are also keeping an eye on the sites that would be made available in the 2H18 government land sales programme (to be released in June). While we expect the overall en bloc value to surpass that of last year’s, we expect the market to peak by 2Q-3Q18. The fatigue is starting to be reflected in the premium developers have paid over the reserve price, which has halved to 5% this year when compared to 10% in 2017.”
That being said, APAC Realty is Natarajan’s top “buy” pick with a target price of $1.35, as he anticipates the stock to benefit from robust transaction volumes, supported by continued en bloc demand and GDP growth.
CapitaLand, rated “buy” with a target price of $4.20, has been highlighted as his top pick in the big-cap space as a laggard play. Natarajan also likes the stock for its management’s efforts to actively address market concerns by rationalising its China portfolio, boosting ROEs through an asset-light approach and actively recycling its capital on higher-yielding assets.
City Developments (CDL) is also expected to benefit from its strategic landbanking and an improving outlook for its hospitality portfolio. The stock has been rated “buy” with a price target of $12.88.
In all, RHB is expecting residential prices to rebound by 5-10% this year as the near-term market remains well supported with ample liquidity from en bloc sales, a lower unemployment rate and higher GDP growth.
The research house nonetheless remains cautious on the longer-term outlook and sustainability of steep price increases as key long-term factors – such as tighter immigration policies and declining HDB resale flat prices – remain weak, in its view.
“The possibility of faster rate hikes and a volatile global macroeconomic environment also pose a threat to smooth recovery,” adds Natarajan.
As at 10.27am, shares in APAC Realty, CapitaLand and CDL are trading at $1.18, $3.61 and $12.75, respectively.