The Singapore property market is starting to show signs of recovery, with en-bloc deals being thrown up almost weekly and an uptick in property price indexes.
What are some things equity and stock investors should watch out for going forward?
Maybank Kimg Eng has released a report detailing what they think of the property market. This post will digest what they produced.
The main theme is that opportunity can be found in share price weakness. This is driven by the following.
- Accretive land deals to drive revalued net asset value (RNAV) upgrades
- Home vacancies could fall on lower supply
- Leading to a recovery in rents
First off, a chart to show the nascent recovery in the market.
Opportunity in share price weakness
A 0.7% QoQ rebound in 3Q17’s URA PPI has marked a turning point in home prices and validated the bank’s positive view on the sector.
Even after a strong 30% rally, fundamentals in the market are likely to keep the sector positive.
Noting that the sector is in the early stages of a recovery, recent share-price weakness should be an opportunity to raise
In the next leg up, some things to watch out for include 1) RNAV
upgrades from accretive land deals; 2) lower home vacancies; and 3) a recovery in residential rents.
UOL and CityDev remain the preferred large cap stocks to ride on a rebound in Singapore’s property market.
In the mid-cap sector and for investors with lower liquidity thresholds, GuocoLand offers compelling relative value with improving fundamentals.
[Also read: Summary of Singapore’s property market in charts]
Accretive land deals to drive revalued NAV upgrades
Tenders for at least 13 residential sites are scheduled to close at year end.
This would equate to about 3,600 units being added to the pipeline.
Developers would relish the opportunity to add this to their stock and if prices hold up, earnings upgrades could follow.
With the bulk of the land located in the central part of the island, tender interest could indicate developers’ confidence in the high-end market.
A hot enbloc market presently gives developers the optionaly to acquire new sites, but the bank believes developers will be more selective and rational in their bids.
Winners of accretive land deals could be re-rated on the back of RNAV upgrades.
Home vacancies could fall on lower supply
A weak occupier market has kept investors cautious on the residential market.
Vacancy rates of private homes still hovered at 8.4% in 3Q17. However, fewer completions and an impending demolition of properties sold for redevelopment suggest they could fall in 2018.
Official statistics indicate that about 7,900 private homes will be completed in 2018 as shown in the following chart.
Assuming 3,000 get torn down for redevelopment, net supply would just be 4,900 units next year.
This is significantly lower than the average annual absorption of 13,200 units in the past five years.
So what happens if the absorption rate of 13,200 units is higher than the supply of 4,900 units in 2018?
Vacancy rates could potentially improve to 6.5% by end-2018.
[Also read: How to stay in a dual key condo for free]
Leading to a recovery in rents
Residential rents have fallen since a peak in 2013. Yet even with the decline, vacancy rates remain stubbornly high.
If vacancy rates improve, rents could start to recover.
The following chart shows the inverse movement between rents (red line) and vacancy rates (black line).
Vacancy rates are close to a Dec 2005 peak of 8.4%. Dec 2005 was the height of the previous en-bloc wave, and vacancy rates fell thereafter.
Could the same situation happen this time? I.e. vacancy rates start to come off and rents start recovering?
Maybank thinks that an improving economy and accelerated demolitions from the current enbloc fever could provide further upside to rents in the next two years.
En bloc market update
No post is complete without a refresher on how the en-bloc market has performed and a status update.
The following table shows the private land deals that have been concluded since the beginning of 2017 and the pipeline.
21 deals were concluded since the beginning of 2017. This will remove 2,800 units from the market. In exchange, about 11,600 units could be added in the medium term of 3-5 years.
There is presently 15 en-bloc deals on the market.
This could remove 1,350 units and in exchange, add 4,500 units.
Twenty properties are in the collective sale exploration phase.