Singapore Property: More (land)-bank for buck
- Recent market indicators point toward a property market recovery in 2017
- Property prices could rise from 2018 onwards; unsold inventory is at 16-year low
- Limited commercial sites and the gradual turnaround in office sector has prompted robust bids
- While we do not envision a change in current policies, a faster-than-projected rise in prices…
- …could result in the government raising the number of land sites in 2018
The time has come. Recent market indicators point toward a property market inflection in 2017 and an eventual rise in property prices from 2018 onwards. 1H17 total property sales have increased 46% y-o-y and if the sales momentum continues, volumes will reach a five-year peak. In our analysis, we found that 94% of home buyers in 1H17 are Singaporean households. A wildcard to a further acceleration in price is when the wave of buying from foreigners return, especially for homes in the Core Central region.
Supporting a rise in the property price – unsold inventories are at 16-year lows at 29k units. When compared against current transaction levels, we found that market absorption rate (ratio of unsold units and new sales) stands at 2.1x and it is the tightest in the suburb (Outside Central region). Even if we were to include the more than 3,000 unlaunched new units from the recent government land sales (GLS) and en-blocs, we believe the market can absorb them easily.
Assuming developers achieve a 10% profit margin on their projects, that could translate to an internal rate of return (IRR) of 9% but returns could be as high as 40% if pre-sales do well. As such, we expect developers to come out in force to bid for residential land and expect prices to continue inching higher in 2H17.
Limited commercial sites and the gradual turnaround in office sector has prompted robust bits for commercial sites and transactions of Grade A office buildings at compressed yields, pushing returns closer to 3.0% level, one of the tightest we have seen in recent times. This supports our thesis that office REITs (which are trading at a P/NAV of 0.8x-0.9x) are cheap and trading below replacement costs. Expectations of robust bids for upcoming commercial GLS will reiterate our belief that office REITs (such as CapitaLand Commercial Trust and Keppel REIT offer good value for investors.
Demand for property is typically driven by buyers’ perception of job security and income growth. At this moment, our economist projects the Singapore economy to still grow steadily in 2018, while unemployment rate has turned the corner.
While do not envision a change in current policy stance by the government, a faster-than-projected rise in property prices could result in the government raising the number of land sites in 2018 and thus taper some of the enthusiasm seen in the land tenders.
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