UOBKH's Adrian Loh prefers property stocks with less exposure to the Singapore market with government land sales doubling in 2022.
UOB Kay Hian analyst Adrian Loh has maintained his “overweight” rating for the property sector in Singapore, with public and private property prices remaining strong in Singapore in 2022.
However, with the Singapore government doubling government land sales (GLS) in 2022 compared to 2021, potentially injecting significant levels of supply in the near to medium term, and the increase of planned private residential units, Loh prefers property stocks with less exposure to the Singapore market.
Loh notes in his report dated Sep 19 that higher interest rates have resulted in a real estate downturn in other developed markets — it remains to be seen if Singapore will follow suit. “Since the onset of higher interest rates in early-2022, countries such as Australia, Canada and New Zealand and regions in Western Europe have seen signs of sharper cooling,” he says.
“Consumers with relatively new floating rate loans at extremely low rates, or those with maturing fixed-rate loans, are especially vulnerable,” the analyst adds.
Meanwhile, HDB prices have remained firm, rising 0.4% m-o-m in August, a 0.7% m-o-m increase from July, which made this the 26th straight month of price increase.
More importantly, according to Loh, HDB prices have risen 10.8% y-o-y due to the lengthy process of Build-to-Order (BTO) flats, rising private property prices and worries over further interest rate hikes. “Headline-grabbing” million-dollar HDB resale flats have been more prevalent, with 240 of these transactions ytd compared to only two in 2012, he points out.
On Sept 21, the US Federal Reserve increased interest rates by 75 basis points (bps) for the third consecutive
Given the continued strength in Singapore property prices, Loh believes that the Singapore government is trying to increase supply into the market as GLS have more than doubled compared to last year, exceeding the strong land sale numbers seen in 2017 and 2018.
On top of this, planned private residential units have been gradually increasing. Since the Covid-19-related trough of around 10,400 in 3Q2020, planned private residential and executive
condominium units in the pipeline have increased by over 65%, albeit off a low base, to nearly 17,200 as at end-2Q2022, Loh notes.
While new launches for private residential units totalled about 7,200 in 2022, this is expected to materially increase to nearly 17,400 in 2023.
Recent transactions for private properties show that Singaporeans continue to favour property investments, especially new projects. Loh has picked out Amo Residences and Sky Eden — both 99-year leaseholds — as notable projects that have sold well during their respective launches.
Guocoland’s Lentor Modern, an integrated mixed-use development, sold 84% of its units at launch on Sep 17 and 18 at prices ranging from $1,850 to $2,500 psf. “Such pricing for new launches have been impressive with pricing on a psf basis for these new apartments equaling or even exceeding that of luxury resale apartments in Sentosa,” explains Loh.
He points out that 2022 will be a “back-end loaded year” for project launches, with 50% of scheduled launches taking place in 4Q2022. “We note that only five of the 30 new launches in 2022 are in the Core Central Region (CCR) with 10 in the Outside Central Region (OCR) and 15 in the Rest of Central Region (RCR),” writes the analyst.
With relatively fewer OCR projects, prices have seen increased bidding with high levels of interest, translating into pricing strength for projects such as Amo Residences, Sky Eden and Lentor Modern, adds Loh.
Says Loh: “Coupled with ex en bloc-related projects, it would appear that there is a substantial amount of supply that could enter the market in the near- to medium-term. In 2Q2022, Singapore’s private property price index increased 3.5% q-o-q, the second-largest rise since 1Q2018, and we question whether such increases can continue in the face of higher supply entering the market.”
Loh’s risks to the property sector include the Singapore Government introducing cooling measures and higher interest rates due to global macroeconomic conditions. His catalysts include Singapore continuing to be viewed as a “safe haven” for foreign investors despite the high level of property taxes and inflation remaining high and sustaining demand for property, which is often seen as a hedge against inflation.
Top picks within the sector
Stocks under UOB Kay Hian coverage in the property sector are CapitaLand Investment (CLI), City Developments, Centurion Corp and Propnex, with target prices (TPs) of $4.28, $9.87, $0.45 and $2.07 respectively, and all currently have “buy” recommendations from the brokerage.
Loh’s preferred stock remains CLI as it is not exposed to the Singapore residential segment. While CLI’s 1HFY2022 results ended June were slightly weaker than expected due to delays in its capital-recycling program in China, he expects a “decent level” of catch-up in 2HFY2022 coupled with continued strong performance from its lodging segment, Loh says.
He adds that Propnex appears to be the best way to play the continued strong Singapore residential performance while CDL’s sales performance at its Tengah Garden Walk EC will be closely watched.
As at 10.58am, shares in CLI, City Dev, Centurion and Propnex were trading at $3.62, $8.14, $0.39 and $1.55 respectively.