This year is expected to be a quiet one for the real estate sector, according to RHB Group Research analyst Vijay Natarajan. This is due to dual headwinds – recent implementation of stringent cooling measures and an increasingly hawkish stance on interest rates by the central banks – dampening the outlook of the sector.
However strong market fundamentals such as an improving job market, strong household balance sheets, and low inventory levels should provide a buffer.
To recap, the Singapore government on Dec 15 announced a 10th round of stringent cooling measures since 2010 which include: Raising the additional buyer’s stamp duty (ABSD) by 5-10 percentage points (ppt) from the second property onwards; tightening the total debt servicing ratio threshold (TDSR) and loan-to-value (LTV); as well as increasing housing land supply.
The measures have since taken wind out of the sails in the property market, with only one major launch seen – Perfect Ten in Bukit Timah which saw muted sales (12 out of 230 units) during the launch weekend, despite offering a 5% discount on units.
“Looking forward, we believe the government could look at implementing a ‘wealth tax’ for high-value property sales, to further curb speculative/investment demand and increase revenue,” says Natarajan.
Based on preliminary estimates, developers sold slightly over 13,000 units last year, representing a 30% y-o-y increase – the highest volumes since 2013. Transaction volumes in private and Housing Development Board (HDB) resale markets, too, have set a new benchmark in 2021 post-Global Financial Crisis, buoyed by a confluence of low interest rates and the economic recovery.
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“For 2022, we expect primary sales volumes to plunge by 30-40% to 8,000-10,000 units, on the back of a smaller launch pipeline and cooling measures. Private and HDB resale volumes should be less impacted, with a 10-30% decline anticipated,” says Natarajan.
Furthermore, the analyst predicts that price changes could range from -2% to +2% this year.
Private home prices rose steeper than estimated, up 10.6% y-o-y for 2021 (highest since 2010’s 18% y-o-y growth) and are at record highs, with a strong 5% surge in 4Q2021 prompting the cooling measures, according to Natarajan.
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While headwinds remain for 2022 in terms of sharp interest rate hikes, the market remains well-supported by improving unemployment numbers, low inventory levels and strong balance sheets.
“With Singapore’s high vaccination rate, we also believe that we are at the tail-end of any pandemic-related risks for the economy. Among the sub-segments, we expect mass market to continue to outperform in terms of price growth (+2-5%), followed by mid-tier and high-end,” he adds.
Although this year might be a muted one for the real estate industry, Natarajan believes that developers’ earnings risk are mitigated by healthy presales and investment income. Strong sales in 2021 led to healthy unbilled sales for developers, which will be progressively recognised in 4Q2021 and 2022. Most developers also have a high proportion of recurring income (50-80%) from investment properties, which should rebound. The rebound in economic growth and stabilisation of cap rates also means that there will be limited write-downs or impairments.
Within the sector, Natarajan’s preferred pick is City Development, which he has a “buy” call on with a target price of $9.00.
The group’s focus has rightly shifted back to Singapore after a couple of overseas missteps, with the acquisition of two residential sites (50% stakes) – Northumberland Road and Tengah EC in 1H2021.
In addition, the group has been making active efforts to hive off some of its older capex-intensive hospitality assets – including Millennium Hilton Seoul, which it sold recently for $1.26 billion. The company is expected to channel the proceeds of its redevelopment of Fuji Xerox Towers and Central mall properties.
“We are upbeat on the recent transactions. These, along with a potential recovery in the hospitality sector, should put the stock back in investors’ radars this year. Its valuation is fairly cheap – the stock is trading closer to -1SD levels from its long-term average in terms of book value and RNAV,” says Natarajan.
Shares in City Developments closed at $7.10 on Jan 17.
