While the Fed Fund rate is expected to stay at low levels until at least 2015, we expect increasing caution to set in as the overhang from government measures remains in play and the market grapple with an onerous pipeline of physical supply ahead. Over FY14, we forecast for mass-market residential prices to dip 5%-15% and for high-end residential prices to dip 0%-10%. In light of the subdued outlook for the domestic residential sector, we favor large-cap developers with strong balance sheets and diversified exposure across regional real estate markets. Our top picks in the space are CapitaLand, rated BUY with a fair value estimate of S$3.77 (30% RNAV disc.), and Keppel Land, rated BUY with a fair value estimate of S$4.09 (30% discount to RNAV).
Top picks: CapitaLand and Keppel Land
While the Fed Fund rate is expected to stay at low levels until at least 2015, we expect increasing caution to set in as the overhang from government measures remains in play and the market grapple with an onerous pipeline of physical supply coming ahead. Over FY14, we forecast for mass-market residential prices to dip 5%-15% and for high-end residential prices to dip 0%-10%. In light of the subdued outlook for the domestic residential sector, we favor large-cap developers with strong balance sheets and diversified exposure across regional real estate markets. Our top picks in the space are CapitaLand, rated BUY with a fair value estimate of S$3.77 (30% RNAV disc.), and Keppel Land, rated BUY with a fair value estimate of S$4.09 (30% discount to RNAV).
Physical oversupply situation lies ahead
One significant headwind for the residential sector lies in the large physical supply expected over FY14-16. Including HDB, DBSS and EC completions, we anticipate that 50.0k, 49.7k and 73.6k homes will come into the physical supply in FY14, FY15 and FY16, respectively. Assuming a 6.0m population target by 2020 from the latest Population White Paper, we forecast average population growth at ~86k individuals p.a. from 2014-20, which translates to an average incremental demand of ~29k physical homes per year. In our view, this mismatch points to a fairly clear physical oversupply situation ahead.
Three reasons why a crash is unlikely
That said, barring a macro crisis, we do not believe headline prices will correct excessively (>20%) in 2014. This is due to three reasons: 1) The direct impact of a physical oversupply (of homes which are already sold) is first on vacancy rates and subsequently on rental prices. While falling rents will pressure home prices, we do not see many home-owners force-selling into a softening market given that a negative rental carry is the norm in Singapore historically and that the average individual balance sheet remains fairly benign. 2) The level of unsold pipeline held by developers (which forms the primary supply) is currently at 36k units. This is lower than the 10-year historical average of 43k units and is not overly onerous. While developers will likely ease prices ahead to move inventory, a fire-sale situation is unlikely to ensue given relatively strong balance sheets. 3) Finally, we believe the data currently point to a fairly high price elasticity of demand. That is, significant numbers of buyers will come into the market at every incremental price dip. This is illustrated when CapitaLand introduced discounts at its 1715-unit d’Leedon in 1Q13 and subsequently saw 543 more units sold by 3Q13. Similarly, developers which set lower prices at recent new launches (Sky Vue at Bishan and Thomson Three at Bright Hill Dr.) saw firm performances, despite the Jul-13 TDSR measures.
While the Fed Fund rate is expected to stay at low levels until at least 2015, we expect increasing caution to set in as the overhang from government measures remains in play and the market grapple with an onerous pipeline of physical supply coming ahead. Over FY14, we forecast for mass-market residential prices to dip 5%-15% and for high-end residential prices to dip 0%-10%. In light of the subdued outlook for the domestic residential sector, we favor large-cap developers with strong balance sheets and diversified exposure across regional real estate markets. Our top picks in the space are CapitaLand, rated BUY with a fair value estimate of S$3.77 (30% RNAV disc.), and Keppel Land, rated BUY with a fair value estimate of S$4.09 (30% discount to RNAV).
Physical oversupply situation lies ahead
One significant headwind for the residential sector lies in the large physical supply expected over FY14-16. Including HDB, DBSS and EC completions, we anticipate that 50.0k, 49.7k and 73.6k homes will come into the physical supply in FY14, FY15 and FY16, respectively. Assuming a 6.0m population target by 2020 from the latest Population White Paper, we forecast average population growth at ~86k individuals p.a. from 2014-20, which translates to an average incremental demand of ~29k physical homes per year. In our view, this mismatch points to a fairly clear physical oversupply situation ahead.
Three reasons why a crash is unlikely
That said, barring a macro crisis, we do not believe headline prices will correct excessively (>20%) in 2014. This is due to three reasons: 1) The direct impact of a physical oversupply (of homes which are already sold) is first on vacancy rates and subsequently on rental prices. While falling rents will pressure home prices, we do not see many home-owners force-selling into a softening market given that a negative rental carry is the norm in Singapore historically and that the average individual balance sheet remains fairly benign. 2) The level of unsold pipeline held by developers (which forms the primary supply) is currently at 36k units. This is lower than the 10-year historical average of 43k units and is not overly onerous. While developers will likely ease prices ahead to move inventory, a fire-sale situation is unlikely to ensue given relatively strong balance sheets. 3) Finally, we believe the data currently point to a fairly high price elasticity of demand. That is, significant numbers of buyers will come into the market at every incremental price dip. This is illustrated when CapitaLand introduced discounts at its 1715-unit d’Leedon in 1Q13 and subsequently saw 543 more units sold by 3Q13. Similarly, developers which set lower prices at recent new launches (Sky Vue at Bishan and Thomson Three at Bright Hill Dr.) saw firm performances, despite the Jul-13 TDSR measures.
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