Property developers are expected to see a “negative knee-jerk reaction” in their share prices following the latest round of <a href="https://www.theedgesingapore.com/news/property/government-introduces-new-round-property-cooling-measures-absd-foreign-buyers-doubles" target="_blank">property cooling measures</a> say the analysts from DBS Group Research, OCBC Investment Research (OIR) and Citi Research.

The Singapore government had introduced yet another round of property cooling measures – barely six months after the last round in September 2022 – in the middle of the night on April 26, surprising market watchers.

With effect from April 27, Singapore citizens will have to pay an additional buyer’s stamp duty (ABSD) of 20% on their second residential property, up three percentage points from 17%. Singaporeans will also have to pay a higher ABSD of 30% for their third and subsequent property, up from the previous rate of 25%. In addition, the ABSD for foreign buyers was doubled to 60%.

At a media doorstop on April 27, Minister for National Development Desmond Lee says the move seeks to prioritise the “strong local demand for owner occupation” with many Singaporeans buying their first property. He adds that the government still continues “to see Singaporeans upgrading, selling off their first property in order to get the resources to buy the second property”.

‘Profitable’ to buy into the dip of developers’ share prices

However, looking back at the historical data, the DBS team notes that it could be a “profitable trade” to buy into the dip.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/capital/brokers-calls/cdl-uol-could-be-most-adversely-affected-new-property-cooling-measures-among?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>CDL, UOL could be most adversely affected by new property cooling measures among developers: CGS-CIMB</a>

The muted impact is possibly attributed to the fact that developers are already trading at attractive valuations, the team adds.

At present, the Singapore Developer Index (FSTREH Index) is trading at a multi-year low in terms of P/NAV perspective (despite having performed well year-to-date or ytd), at close to 0.7x.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/property/government-introduces-new-round-property-cooling-measures-absd-foreign-buyers-doubles?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Government introduces new round of property cooling measures; ABSD for foreign buyers doubles to 60%</a>

“This level is at close to 10-year low and below levels where we saw support in prices over the last two cooling measures in 2013 and 2018. This means that any drop is unlikely to be sustained, in our view,” says the DBS team.

The OIR team notes that the share prices of CDL and UOL fell by 2.7% and 0.8% respectively, the day after a round of ABSD hikes were announced in December 2021.

The team at Citi Research also note that shares in CDL and UOL could fall by a few percentage points, but before recovering in a month, based on data from the cooling measures in December 2021.

CDL downgraded with reduced target price as pace of tightening a ‘surprise’: CLSA

Following the latest set of measures, CLSA analyst Yew Kiang Wong has downgraded his recommendation on CDL to “sell” from “buy” with a much-reduced target price of $6.68 from $9.86 previously.

The downgrade factors in CDL’s exposure to Singapore’s residential segment at 21% of its FY2023 revised net asset value (RNAV), which is the highest among the property counters under CLSA’s coverage.

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

In his April 27 report, Yew has furthered lowered his price assumptions for the residential sector. Now, he expects prices to contract by another 3% in 2024, in contrast to his previous view where prices will stabilise then. Yew has previously forecasted prices to contract by 5% in 2023.

“The Singapore government has effectively put the final nail in the coffin for the residential segment, in our view,” he writes.

On the back of the lowered price assumptions, Yew’s estimates for CDL’s RNAV is lowered to $12.15, down from $12.30 previously. “We have also widened our discount to RNAV assumption from 20% previously to 45% now,” he says.

“Historically, CDL has traded at a 40% - 50% discount to RNAV during periods of aggressive tightening by the government,” he adds.

That said, the timing of the measures was “not totally unexpected” to Yew given that the latest flash estimates suggest that the growth in prices for residential properties were “running at a rate ahead of the government’s comfort zone”.

“The latest <a href="https://www.edgeprop.sg/property-news/private-home-price-growth-rebounds-32-1q2023-ura-flash-estimates" target="_blank">flash estimates</a> for 1Q2023 data suggest prices rose 3.2% q-o-q and 11.3% y-o-y, which is tracking ahead of income growth and hence affordability, an indicator used by the government,” says Yew.

Yet, the announcement still came as a surprise considering that the government used to take more time for the effect of their measures to kick in before implementing a successive round, he adds.

“According to the government, the measures in December 2021 and September 2022 had some moderating effect but clearly were not sufficient to rein in excessive price growth,” he says, adding that the latest round is expected to affect around 10% of the buyers in Singapore, based on the transaction profile in 2022.

This suggests that 90% of the market are upgraders or first-time buyers, Yew notes.

On the 60% ABSD imposed on foreigners, Yew notes that the rate is likely to be the highest in the world.

Moves were ‘harsh’, especially for foreign buyers: OCBC

Carmen Lee, the head of OIR, notes that the latest moves were “quite harsh”, especially for foreign buyers, although she notes that the consistent increase in Singapore property prices “just cannot go on”.

“I think properties in the $6 million and higher categories will be particularly hit as these are the types of properties that foreigners go for here. The mass market home buying by Singaporeans and permanent residents will be largely unaffected,” she notes.

On the move, the OIR team sees that developers are likely to turn more cautious on land tenders given the still-hefty penalties that they will incur if they are not able to complete the housing development and sell all units of housing accommodation in the development within five years from the acquisition date. As such, the growth of land prices may become more tempered.

In 2023, the OIR team forecasts prices in private residences to come in at a range of -3% to 1%, unchanged from before, following the new set of hikes. However, they have lowered their expectations for private new home transaction volumes. Now, the team sees that volumes will range between 6,000 to 6,800, down from 7,000 to 8,000 units during the year.

At the same time, they see the sell-through rates as likely to drop as they believe developers would be reluctant to reduce their asking prices too significantly given high land and construction costs.

“Developers may also delay their launches to 2024 and this would also have an adverse impact on sales volumes. The continued increase in mortgage rates could also dampen demand,” writes the team.

“Meanwhile, as prospective homebuyers may now adopt a wait-and-see approach in light of the latest tightening measures, we believe this could provide a boost to the rental market,” it adds.

As at 4.47pm, shares in CDL and UOL are trading 5.6% and 4.45% lower at $6.91 and $6.87 respectively. Shares in FPL are trading flat at 88 cents while shares in CLI are trading 0.26% down at $3.88.

CLSA downgrades CDL to 'sell'; analysts see 'negative knee jerk reaction' in developers' share prices

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