Singapore Property - Recovering Housing Market

Research report dated January 15, 2018

POSITIVE

Unchanged

Property Developers

Source: Maybank Kim Eng

Exposure to residential market (% of valuation)

Source: Companies, Maybank Kim Eng

More upside to home sales in 2018; Stay POSITIVE

Latest data from the URA suggests that developers sold c.10,700 private homes in 2017 (+34% YoY). We see more upside in 2018 as households displaced in the enbloc process seek out replacement homes. While the recent uptick in mortgage rates is a dampener to property demand, our updated data points showed that affordability indicators remain healthy. Maintain POSITIVE on developer stocks in 2018 as Singapore’s property market continues its cyclical upturn. UOL and CityDev continue to be the best large-cap proxies. For investors with lower liquidity thresholds, we see compelling valuation in the mid-cap space with GuocoLand and Bukit Sembawang as our preferred stocks.

Households displaced in the enbloc market to drive incremental demand

Developers sold 431 private homes in the month of December. This brings total new home sales to c.10,700 units for 2017 (+34% YoY). With buoyant home buying sentiment and an improving economic outlook, we see upside in 2018 and expect developers to sell 12,000 units this year with the 3,000+ households displaced in the enbloc market last year driving incremental demand.

Potential catalyst from new launches

Consultancy and media reports suggest that 28 projects with almost 13,000 units could be launched in 2018. We believe strong sales and potential price hikes seen at these new launches is a potential catalyst to watch for developers under coverage. CityDev is due to launch luxury condominiums - New Futura and South Beach Residences – and a mass market project on Tampines Ave 10. UOL will launch mid-range condominiums at 45 Amber Road and the redevelopment of Raintree Gardens. The launch of luxury condominium - 8 Saint Thomas - and landed homes – Nim Collection and Luxus Hills – by Bukit Sembawang could reverse a trend of falling earnings over the past six years.

Recent uptick in mortgage rates manageable

With the 3MSIBOR moving up to 1.50% at the end of 2017, mortgage rates for SIBOR-pegged loans have effectively risen by 50bps YoY to about 2.5%. This translates into a manageable 7% YoY increase in monthly mortgage servicing for a 30Y SGD1m loan. While the rate hike is a dampener to property demand, we believe it is widely anticipated and should not come as a surprise. Furthermore, home buyers have already been stress-tested to a normalised rate of 3.5% under the TDSR framework introduced in June 2013. We refresh our database to reflect updated mortgage rates and home prices in 4Q17. While mortgage servicing has deteriorated to 17.2% from 16.1% in 4Q16, it remains in line with its 10-year average. Even after the recent pick-up in home prices, we estimate healthy home price-to-income ratio of 4.5x for mass-market private homes. Overall, affordability of homes in Singapore is not excessive.

Fig 1: Preliminary estimates for new home sales of 10,700 units in 2017 (+34% YoY). Expecting 12,000 units in 2018E.

Source: URA, Maybank Kim Eng estimates

Fig 2: Potential new launches in 2018

Source: Companies, The Edge Property, The Business Times, Maybank Kim Eng estimates

Fig 3: Recent spike in short term rates has raised mortgage cost by about 50bps over the past year…

Source: MAS, Bloomberg

Fig 4: …however, it remains low relative to history.

Source: MAS, Bloomberg

Fig 5: Mortgage servicing ratio deteriorated with higher mortgage rates, but remains in line with 10Y average

Assuming a 1.0% spread over 3M SIBOR, LTV of 80% for a 30-year loan.
Source: URA, Singstats, Bloomberg, Maybank Kim Eng estimates

Fig 6: Home price-to-income ratio healthy at 4.5x

Comparing a median 1,000 sf OCR home to 3rd decile of household income.
Source: URA, Singstats, Bloomberg, Maybank Kim Eng estimates

Fig 7: Monthly cost of servicing a SGD1m mortgage
SGD3,951 pm at a mortgage rate of about 2.5% in 4Q17

Source: Maybank Kim Eng

Fig 8: Change in mortgage servicing
A 50bps rate hike translates into a 7% or SGD255 increase per month

Source: Maybank Kim Eng

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