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SI Research: City Developments – Turning Into A Falling Knife
City Developments (CDL), a powerhouse in Singapore’s property sector, saw around $1.7 billion being taken off its market capitalisation as its share price plunged over 17 percent to as low as $9.22 within the first few minutes of trading on 6 July 2018.
Meanwhile, investors who rode the upward movement in share price since $11.50 as at our previous coverage on 14 August 2017 would have been decently rewarded for cashing out as the developer’s shares traded around its 52-week high price of $13.52 in March 2018.
Cooling Measures, Again
While CDL’s shares have taken a severe beating, it is not the only victim as almost every other counter in Singapore’s property sector saw their share price move in the same direction.
The heavy selldown in property stocks was a reaction towards a surprise move by the Singapore government to “cool the property market and keep prices in line with economic fundamentals”.
On 5 July 2018, the government announced new cooling measures which involved adjustments to the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits on residential property purchases.
Although the ABSD rates for Singaporeans and permanent residents buying their first residential property remain at zero percent and five percent respectively, those buying their second or subsequent home will face a five percentage point increase from seven percent to 12 percent.
Apart from the change in ABSD, LTV limits have been adjusted by five percentage points for private housing loans granted by banks. As a result, home buyers will now need to fork out a down payment of 25 percent of the purchase price, which is a substantial increase from the previous 20 percent for most borrowers. For a million dollar property, the increase would result in an additional $50,000 down payment and another $50,000 in stamp duty for those seeking to buy an additional property.
Double Whammy For Developers
It is without a doubt that demand for private residential property will slow down as property investors factor in the revised rates. New home buyers could also face a delay in the purchase of their first home as they might need to save up longer for the higher down payment. According to Colliers International, new private home sales, excluding executive condominiums, is expected to come in at 8,500 to 9,000 units this year, 15 to 20 percent lower than the 10,566 units sold last year.
Developers have also ended up in the crosshair as the ABSD rate for entities will go up by 10 percentage points to 25 percent and developers purchasing residential properties for housing development will face an additional non-remittable ABSD of five percent.
While developers would not be overly concerned with the 25 percent ABSD as they could apply for a remission should they be able to sell off all the units before the five-year deadline, the non-remittable component will result in a significant impact on their projected returns.
Impact On CDL
As one of the top-selling private property developers in Singapore, the impact on CDL is significant. Although the group has expanded its property development business into China, the United Kingdom, Japan and Australia, its exposure to the Singapore market remains large. In FY17, CDL sold 1,171 apartments and recorded $1.9 billion of sales value in Singapore. Currently, approximately 30 percent of the group’s land bank is in Singapore.
Following the aggressive acquisition of land by developers at record-breaking prices, it is now a concern whether developers will be able to fetch decent selling prices for these property launches after the recent round of cooling measures.
Not to forget, developers are also at risk of hefty penalties under the Residential Property Act’s Qualifying Certificate rules. Under the regulation all developers with non-Singaporean shareholders or directors are required to obtain the Temporary Occupation Permit (TOP) for their housing developments within five years and to sell all units within two years from the date of TOP.
CDL has previously avoided paying penalties for the freehold residential development, Nouvel 18, through its Profit Participation Securities (PPS) platform and could possibly do the same for its future unsold developments, should there be adequate demand from investors.
Valuation
Based on CDL’s current share price of $9.73 and net asset value per share of $10.71, the developer’s shares are valued at a price-to-book (P/B) ratio of 0.9 times, down from around 1.1 times in August last year.
The lower share price and valuations, however, do not imply that CDL is not investment-worthy. However, given the weak sentiments towards the sector, investors who wish to add property stocks to their portfolio might be better off with CDL’s peer, CapitaLand, which has its shares valued at a lower P/B of 0.7 times, while offering a dividend yield of four percent.
Moreover, CapitaLand has a wider earnings base compared to CDL hence the impact of the new cooling measures would have less impact on the former.
While it is notable that the main difference between the two developers is that CDL does not take into account revaluation of its investment properties, the significance of such revaluation remains to be seen.
