Singapore | Real Estate

Asia Pacific Equity Research

SG RESIDENTIAL PROPERTY | OVERWEIGHT 26 Jun 2018 Sector Update

CHEAP JUST GOT CHEAPER   

Buying opportunities amid pullback Addressing investor concerns Top picks: UOL, CIT and CAPL

OVERWEIGHT (maintain) Analysts Andy Wong Teck Ching, CFA (Lead) ● +65 6818 4808 [email protected] Deborah Ong ● +65 6818 4807 [email protected] Joseph Ng ● +65 6818 4810

Opportunities amid divergence between share prices and fundamentals Singapore developers, using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark, registered negative total returns of 4.8% YTD, underperforming the STI (-2.5%) but outperforming the S-REITs sector (-6.7%). Given our continued positive view on the outlook of Singapore developers, we believe the divergence between their share price performances and fundamentals presents buying opportunities. In this report, we seek to address some concerns which may have contributed to the share price declines, although broader macro issues such as escalating trade tensions would also have impacted investor sentiment. Potential government cooling measures? We believe one of the market’s key concerns revolves around higher risks of tightening measures by the Singapore government given the vibrant ‘animal spirits’ seen on the ground. While it is difficult to predict whether further government measures would be introduced, we note that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q17. Hence, further data points may be needed before the next course of action is taken, in our view. In addition, the HDB resale price index is still on a downtrend. With more than 80% of Singapore’s resident population living in HDB flats, any potential tightening measures would have to be very carefully calibrated by the government, in our view. Supply concerns valid, but likely manageable at this juncture Another issue stems from potential oversupply concerns. According to data from URA, there are 44,261 units in the supply pipeline (including ECs), as at 31 Mar 2018. There is also a potential pipeline supply of 20,100 units (including ECs) from Government Land Sales (GLS) sites and awarded enbloc sale sites pending planning approval. Notwithstanding this expected increase in supply, we note that a significant proportion of this potential pipeline will only come on-stream from 2021. Furthermore, although the total number of unsold inventory increased to 25.3k in 1Q18 from 20.8k in 4Q17, 74% of these units have yet to obtain the pre-requisites for sale; the level of unsold inventory is also below the long-term average of 32.4k. Primary unit sales expected to gain traction ahead 5M18 primary units (excluding ECs) sales came in at 3,480 units, or a decline of 39% YoY, but May sales recovered 7.9% YoY. While we ease our private sales transaction volume projection for 2018 to 10k-12k (previously 12k-15k) based on the current run-rate, this still implies a backend loaded year. We also raise our Singapore residential price growth forecast to 8%12% from 3%-8%. Maintain OVERWEIGHT on the Singapore residential sector. We move UOL Group Limited [BUY, FV: S$10.63] to the front of our top picks list, followed by City Developments Limited [BUY, FV: S$15.78], and CapitaLand Limited [BUY, FV: S$4.26].

Please refer to important disclosures at the back of this document.

[email protected] Relative total return

1m

3m

Sector (%)

-5

-4

12m 0

STI-adjusted (%)

2

0

-5

Price performance chart

Sources: Bloomberg, OIR estimates

Stock coverage ratings BBRG Ticker Price Fair Value Rating CAPL SP

3.18

4.26

BUY

CIT SP

11.00

15.78

BUY

HPL SP

3.76

4.74

BUY

KSHH SP

0.65

0.98

BUY

OUE SP

1.53

2.28

BUY

ROXY SP

0.50

0.66

BUY

UOL SP

7.45

10.63

BUY

WP SP

1.61

2.34

BUY

WINGT SP

1.91

2.64

BUY

OCBC Investment Research Singapore Equities

Opportunities amid divergence between share prices and fundamentals Singapore developers, using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark, registered negative total returns of 4.8% YTD, underperforming the STI (-2.5%) but outperforming the S-REITs sector (-6.7%). Given our continued positive view on the outlook of Singapore developers, we believe the divergence between their share price performances and fundamentals presents buying opportunities. In this report, we seek to address some of the market’s concerns which may have contributed to the share price weakness, although broader macro issues such as escalating trade tensions would also have impacted investor sentiment. Exhibit 1: Developers’ share prices have underperformed the STI YTD; we see buying opportunities amid this pullback 8%

6% 4% 2%

0% -2% -4%

-6% -8% Dec 2017

Jan 2018

Feb 2018

Mar 2018 FSTREH

Apr 2018

May 2018

STI

Source: Bloomberg, OIR

Potential government cooling measures? From the start of the year till end-May, CapitaLand’s (CAPL SP) share price had outperformed its peers which have much higher Singapore land bank exposure. We believe this reflects the market’s concerns that there may be higher risks of tightening measures by the Singapore government given the vibrant ‘animal spirits’ seen on the ground. Since the start of Jun, CapitaLand’s share price underperformed and this has coincided with rising trade tensions between the U.S. and China. 41.8% of CapitaLand’s total FY17 EBIT was derived from China. While it is difficult to predict whether government measures would kick in, we note that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q17. Hence, further data points may be needed before the next course of action is taken, in our view. In addition, the HDB resale price index is still on a downtrend. With more than 80% of Singapore’s resident population living in HDB flats, any potential tightening measures would have to be very carefully calibrated by the government, in our view.

2

OCBC Investment Research Singapore Equities

Exhibit 2: URA Residential Price Index has bottomed out while HDB Resale Index is still on a downtrend 160 150 140 130 120 110 100 90 80

70

URA Residential Price Index

Mar 2018

Mar 2017

Mar 2016

Mar 2015

Mar 2014

Mar 2013

Mar 2012

Mar 2011

Mar 2010

Mar 2009

Mar 2008

Mar 2007

60

HDB Resale Index

Source: URA, HDB, OIR

Supply concerns valid, but likely manageable at this juncture Another issue stems from potential oversupply concerns. According to data from URA, there are 44,261 units in the supply pipeline (including ECs), as at 31 Mar 2018. There is also a potential pipeline supply of 20,100 units (including ECs) from Government Land Sales (GLS) sites and awarded en-bloc sale sites pending planning approval. Notwithstanding this expected increase in supply, we note that a significant proportion of this potential pipeline will only come on-stream from 2021. Furthermore, although the total number of unsold inventory increased to 25.3k in 1Q18 from 20.8k in 4Q17, 74% of these units have yet to obtain the pre-requisites for sale; the level of unsold inventory is also below the long-term average of 32.4k. With the number of resident households in Singapore growing by at least 2.0% per annum since 2013 to 2017 and the median household income from work increasing at a CAGR of 3.5% from S$7.87k in 2013 to S$9.02k in 2017, we believe this will put the market in a better position to absorb the upcoming supply.

Exhibit 3: Unsold inventory still below the long-term average level '000 50 43 40 40

39

38 39

38

36 34 34 34

33 33

35

33

34

34

39

38 37

35 35

36 34

31

32 32

Long-term average: 32.4

31 28

30

30

29 29 27 24 25 24 23

25

25 23

20

21

21 18

17 17

3Q17

40

44 44 44

1Q17

44

45

15

Uncompleted units unsold

Source: URA, OIR

3

Completed units unsold

1Q18

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

1Q09

3Q08

1Q08

3Q07

1Q07

3Q06

10

OCBC Investment Research Singapore Equities

Exhibit 4: Pipeline supply of private residential units and ECs, as at 31 Mar 2018 12,000 10,000 1,917

1,386

8,000 6,000

10,817

4,000

8,060

7,931

7,998

628

2,000

3,330

2,194

0

2Q-4Q2018

2019

2020

2021

Private Residential Units

2022

>2022

ECs

Source: URA, OIR

Primary unit sales expected to gain traction ahead 5M18 primary units (excluding ECs) sales came in at 3,480 units, or a decline of 39% YoY. However, May sales of 1,121 units alone represented healthy growth of 7.9% and 53.1% YoY and MoM, respectively. While we ease our private sales transaction volume projection to 10k-12k (previously 12k-15k) based on the current runrate, this still implies a backend loaded year. We also raise our Singapore residential price growth forecast to 8%-12% from 3%-8% after taking into account the firm demand on the ground.

Exhibit 5: Private residential units launched and sold monthly by developers excluding ECs '000 2.0

1.5 1.12

1.06

1.0

0.5

Apr 2018

Jan 2018

Oct 2017

Jul 2017

Apr 2017

Jan 2017

Oct 2016

Jul 2016

Apr 2016

Jan 2016

Oct 2015

Jul 2015

Apr 2015

Jan 2015

0.0

Private residential units sold by developers excluding ECs Private residential units launched by developers excluding ECs Source: URA, OIR

Demand still robust: developers hungry for land Demand factors remain largely robust, from both the perspective of land purchases by developers and demand for property by consumers. Judging from the bullish land bid prices for GLS sites and the collective sales market, we believe this reflects developers’ confidence in the

4

OCBC Investment Research Singapore Equities

market, especially bearing in mind the potential ABSD and QC extension charges if the units are not sold within a certain stipulated timeframe. YTD, we estimate that ~S$9.1b worth of en-bloc transactions have been announced, surpassing last year’s ~S$8.6b aggregate. Most developers have also sought to diversify the risks from rising land costs by submitting joint bids for projects, especially for the larger sites. Foreign developers have also jumped on the Singapore residential market bandwagon. To illustrate, Hong Kong based Shun Tak Holdings recently clinched the bids for two prime freehold redevelopment sites at 21 Orchard Boulevard and 14 & 14A Nassim Road. In its press release, Shun Tak highlighted that this was an important milestone for the Group to expand into healthy real estate markets. For the bid at 21 Orchard Boulevard, this represents the collective sale of Park House, with the purchase consideration of S$375.5m translating into a record S$2,910 psf ppr (based on maximum allowable GFA of ~129,035 sq ft and excluding the 10% bonus for balconies). Shun Tak intends to redevelop this site into a luxury residential development. Another example comes from the joint bids by New World Development, Far East Consortium International and SC Global Developments, the former two which are Hong Kong-listed, for the winning bid of S$2,377 psf ppr for a Cuscaden Road GLS. This was the highest bid ever submitted for a GLS tender.

Exhibit 6: En-bloc transactions announced YTD have already surpassed the whole of 2017 Acquisition

Original No.

Price (S$m)

of Units

Park West

840.9

432

Sing-Haiyi Gold (50% JV of Singhaiyi)

Jan 2018

Kismis View

102.8

43

JV between Roxy-Pacific and TE2 Dev elopment

Feb 2018

City Towers

401.9

77

Japura Dev elopment (v ehicle of Li Ka Shing)

Feb 2018

Pearl Bank Apartments

728.0

280

CapitaLand Limited

Feb 2018

Cairnhill Mansions

362.0

61

Low Keng Huat

Feb 2018

Riv ieria Point

72.0

36

Macly Point

Feb 2018

Brookv ale Park

530.0

160

Hoi Hup Sunway (JV of Hoi Hup Realty and Sunway Dev elopments)

Mar 2018

Hollandia

183.4

48

FEC Properties (Far East Consortium Int'l)

Mar 2018

Toho Mansion

120.4

32

Koh Brothers

Mar 2018

Eunos Mansion

220.0

107

Fragrance Group

Mar 2018

Goodluck Garden

610.0

210

Qingjian Group

Mar 2018

Katong Park Towers

345.0

118

Bukit Sembawang Estates

Mar 2018

Pacific Mansion

980.0

290

Guocoland (40%), Intrepid Inv estments (40%), Hong Realty (20%)

Mar 2018

Makeway View

168.0

32

Bukit Sembawang Estates

Mar 2018

Ampas Apartment

95.0

43

Oxley Holdings

Apr 2018

Cairnhill Heights

72.6

19

JV between Tiong Seng (60%) and Ocean Sky Int'l (40%)

Apr 2018

The Estoril

223.9

44

FEC Properties (Far East Consortium Int'l)

Apr 2018

Tulip Garden

906.9

164

JV between Yanlord and MCL Land

Apr 2018

Asia Gardens

343.0

84

Sustained Land-led consortium

Apr 2018

Dunearn Gardens

468.0

114

EL Dev elopment

May 2018

Peak Court

118.9

20

Tuan Sing Holdings (70%) and Rich Capital Holdings (30%)

May 2018

Chancery Court

401.8

144

Far East Organisation

May 2018

Chinatown Plaza

260.0

-

Jun 2018

Pomex Court

37.6

19

K16 Dev elopment

Jun 2018

Park House

375.5

60

Shun Tak Holdings

Jun 2018

Kemaman Point

143.9

89

Soilbuild Group Holdings

Date

Project Name

Jan 2018

TOTAL:

Winning Bidder

Property unit affiliated to RGE Pte Ltd

9,111.4

Source: URA REALIS, various newswires, OIR

5

OCBC Investment Research Singapore Equities

Demand still robust: healthy sales take-up for launches Sales launches this year have largely seen healthy take-up rates, in our view. Examples of projects which saw brisk sales on their first weekend of launches include Oxley Holding’s The Verandah Residences (76% of units launched were sold at an average S$1,815 psf), Rivercove Residences EC (80% of units launched were sold at an average S$965 psf), CSC Land’s Twin VEW (85% of units launched were sold at an average S$1,399 psf) and UOL Group’s Amber45 (80% of units launched were sold at an average S$2,200 psf). On the other hand, there was also lukewarm reception to some projects such as Oxley’s Affinity (sold 112 out of 300 units launched at an average S$1,575 psf) and Keppel Land and Wing Tai’s joint project, The Garden Residences (sold more than 60 units at an average ASP of S$1,660 psf). Perhaps this was attributed to the two projects’ close proximity and simultaneous launch timings, coupled with the quieter Jun period. Reiterate OVERWEIGHT on Singapore residential sector The FSTREH is currently trading at a blended forward P/B ratio of 0.62x. We view valuations as compelling as it comes in at 1.2 standard deviations below the 10-year average (0.79x). Maintain OVERWEIGHT on the Singapore residential sector. We move UOL Group Limited [BUY, FV: S$10.63] to the front of our top picks list, followed by City Developments Limited [BUY, FV: S$15.78], and CapitaLand Limited [BUY, FV: S$4.26]. UOL, CIT and CAPL are trading at attractive discounts of 44.0%, 33.8% and 36.5% to our RNAV forecasts, respectively.

Exhibit 7: Forward P/B ratio trend of FSTREH 1.2 1.1

1.0 0.9 0.8 0.7 0.6 0.5 0.4

0.3 Jun 2008

Jun 2009

Jun 2010

Jun 2011

Jun 2012

Jun 2013

Jun 2014

Jun 2015

Jun 2016

Forward P/B

10-year average = 0.8x

+1 SD = 0.9x

-1 SD = 0.6x

+2 SD = 1.1x

-2 SD = 0.5x

Source: Bloomberg, OIR

6

Jun 2017

Jun 2018

OCBC Investment Research Singapore Equities

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RATINGS AND RECOMMENDATIONS: - OIR’s technical comments and recommendations are short-term and trading oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIR’s BUY rating indicates a total expected return in excess of 10% based on the current price; a HOLD rating indicates total expected returns within +10% and -5%; a SELL rating indicates total expected returns less than -5%. - For companies with market capitalisation of S$150m and below, OIR’s BUY rating indicates a total expected return in excess of 30%; a HOLD rating indicates total expected returns within a +/-30% range; a SELL rating indicates total expected returns less than -30%.

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Important disclosures