In its second inter-meeting move this year, the Monetary Authority of Singapore (MAS) further tightened the exchange rate policy by re-centring up the official SGD NEER policy band by an estimated 170bps. MAS also upgraded both its 2022 headline and core CPI forecasts to 5%–6% and 3%– 4% respectively, up from 4.5%–5.5% and 2.5%–3.5% previously. MAS core inflation is tipped to rise above 4% and is still expected to ease in 4Q2022, notes OCBC Investment Research.
Sora (Singapore overnight rate average), the local policy rate rose to a two-year high of more than 1.91% on July 13, ahead of the MAS announcement. As a result, mortgages are likely to cost more.
On July 12, Bank of America (BoA) downgraded City Developments and UOL Group, the two largest listed local developers with significant residential land bank and units for sale in Singapore. In addition to more expensive mortgages, BoA sees the risk of more property curbs in 2H2022. Year to date, residential property prices have been on a tear.
The Urban Redevelopment Authority’s (URA) flash estimate of the price index for private residential property for 2Q2022 rose 3.2% y-o-y. JLL attributes this to a surge in launches in 2Q2022 and an undersupply in the market. “An estimated 1,637 new private homes were launched for sale in April and May, far exceeding the 613 units launched in 1Q2022. The undersupply in the market also contributed to the price increases as the 14,087 units of uncompleted private residential units unsold as at 1Q2022 is a record low,” says a JLL research note.
“There is a trend towards more optimistic pricing of new launches and higher asking prices in the resale market due to the undersupply caused by the low inventory of unsold units. This has contributed to the stronger than expected overall price increase of 3.2% in 2Q22, based on flash estimates,” says Ong Teck Hui, Senior Director of Research & Consultancy at JLL.
“However, going forward, this trend may be mitigated by the rapid increase in interest rates, which is expected to lead to buyers becoming more cautious. As overly optimistic pricing at new launches could run the risk of slower sales takeup, the momentum of 2Q2022’s price increases may not be sustainable,” he adds.
BoA also believes that these prices are not sustainable, and CDL is vulnerable to both lower average selling prices, and higher mortgage rates. ”We see CDL as most exposed to housing headwinds with 25% of its gross asset value (GAV) and over 50% of earnings coming from the sector. Management has done a good job in deleveraging its balance sheet through non-core sales, but we think the pace could slow as rates continue to rise. A recovery in hotels is a bright spot, though risk comes from a global macro slowdown,” BoA says, downgrading its price target from $8.15 to $7.45.
The second stock that is most exposed to the residential property sector in Singapore is UOL, with 21% of GAV and 30% of earnings from the sector. However, this is offset by strong recurring income and a low net gearing ratio of 33%, BoA points out. Still, BoA has downgraded UOL’s price target from $8.05 to $7.70.
Technically though, CDL’s ($7.52) share price has fallen from a rebound high and is likely to find support as it approaches $7.30.
UOL ($7.17) has fallen from the top of a sideways range near $7.40. Interestingly, its moving averages are showing strength and could support prices at $7.10.