Is property set for a quantum leap?

We believe that most real estate subsectors in Singapore have turned the corner on the back of improving demand-supply dynamics and 2018 could turn out to be a banner year for developers as well as RE...
Group Research15 Dec 2017
  • The Singapore property market is at the start of a multi-year upturn
  • Developers to continue re-rating as “expectations” are turned into “reality”
  • Singapore REITs – climbing over the interest rate worry as growth momentum sets in
  • Cyclicals will do well as positive market sentiment drives valuations higher
Photo credit: AFP Photo

We remain bulls in the Singapore property market as we believe that most real estate subsectors have turned the corner on the back of improving demand-supply dynamics. Supporting a more buoyant outlook for landlords (REITs) and developers are abating supply risk, which will drive prices and rentals higher as the year goes by. Leading the recovery is the residential sector (price increase of 3-5% in 2017), followed by office and hospitality sectors where improving demand-supply dynamics will drive spot rents/RevPAR higher. Selected industrial (warehouse and business parks) will also see better operating prospects.

With S$22.3bn of new sites in the bag, developers will have to deliver on market expectations that the strong rebound in transaction volumes will continue in 2018, translating into strong take-up rates for upcoming new launches. We believe further re-rating will be stock-specific and developers with a robust line-up of new launches will be better-positioned to ride this market upswing. Our picks are City Dev, UOL, and FCL. We also initiate coverage on mid-cap developer Roxy-Pacific, given that management has landbanked ahead of peers with most projects coming to market in 2018.

Valuations are likely to be supported by investors’ expectations of a return to growth in DPU profiles of S-REITs. We project S-REITs to deliver a FY18-19F DPU CAGR of 2.0%, up from a -1.0% drop in FY17F. As such, we expect yield spreads (vs 10-year bonds to compress further from 3.8% towards 3.0% (in line with its + 1 SD range). Valuations are also supportive of acquisitions and we expect REITs to remain active on that front and thus, tap the market opportunistically.

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