Singapore Property Sector

CIMB Research, June 30

THE Monetary Authority of Singapore (MAS) has introduced a total debt servicing ratio (TDSR) framework for all property loans granted by financial institutions (FIs) and refined certain rules on loan to value limits.

The key features are: 1) FIs to factor in total debt obligations when granting property loans, 2) a medium-term interest rate be applied to property loans (3.5 per cent for residential property), 3) property loans not exceed a TDSR of 60 per cent, 4) "guarantors" for a loan not meeting the TDSR threshold be brought in as co-borrowers and 5) FIs use the income-weighted average age in cases of joint borrowers.

While more marginal buyers will be removed from the equation and demand will continue to moderate, we believe that a housing collapse is unlikely for a few reasons.

Firstly, FIs have generally kept to a mortgage servicing ratio (MSR) limit of 30 to 40 per cent. Guidance from FIs is that average system MSR is about 28-30 per cent and while average TDSR will be higher, we believe this ratio is still substantially lower than 60 per cent.

Secondly, our ground checks suggest that while there have been some cases of loans being extended to "guarantors" to circumvent loan to value limits, this trend is not prevalent.

Thirdly, the average mortgage-income ratio for private residential properties (based on top income bracket quartile) remains strong at 25 per cent currently and 33 per cent on a normalised interest rate of 3.5 per cent, by our estimates. While there are still supply issues, we believe that the sector is in better financial health than in 2007-08.

We remain Overweight on the sector and see any knee-jerk reaction to the news as a buying opportunity. This latest move should not have an adverse effect on stock valuations.