What is the news?
The Singapore government announced that it is raising the additional buyer’s stamp duty (ABSD) and tightening the loan-to-valuation (LTV) limits for residential property purchases in a bid to cool the local property market and keep prices in-line with economic fundamentals.
With the exception of ABSD rates which will remain unchanged for Singaporeans and PRs buying their first residential property, ABSD rates for all other individuals including foreigners have been increased by 5 percentage points, and 10 percentage points for entities. An additional non-remittable ABSD of 5 percentage points has also been imposed on developers. Meanwhile, LTV limits will be tightened by 5 percentage points for all housing loans granted by financial institutions, excluding loans granted by HDB (Refer to Appendix).
What do we think?
Fresh set of cooling measures came as a surprise, but we view it as short term pain for longer term gain. Punitive measures this time should cause major slowdown in home price increase – we do not foresee further cooling measures. We had previously assumed further price upside potential of c.20% before substantial risks of government intervention. Prices at that level would have then brought us back to 2010/2013 affordability ratios based on median home prices/household incomes. And those were 2 years where the government 1) started cooling measures and 2) dished out the more stringent TDSR cooling measure (Fig 3), which would have signalled government’s slight unease at those affordability levels. Recall that the previous round of “cooling measures” this year came in February when the government increased top marginal buyers stamp duty from 3% to 4% for residential properties worth above S$1mn. As this round of measure is more punitive vs the February measures, we expect it to have its intended impact of moderating the pace of price growth and do not foresee further cooling measures. The government’s prudent measures for price increases to be better moderated and gradual would be positive for a more sustainable property housing market upcycle. Home prices have grown 7.4% in the first two quarters from end 2017. We now expect flat price movements until end 2018 vs 10% for full year previously.
Property price increases have been backed by income growth which has outpaced home price increases since 2010. Home prices could still grow 20% before we hit previous peak affordability levels seen in 2013. Household income have grown at a CAGR of c.5% since we recovered post GFC from 2010, outpacing the growth of residential home prices of c.2.5%. This has been the fundamental factor behind the 9% increase in private property price index since 3Q17, along with improved sentiment. Going by the affordability metric of median home prices over household income, prices could still potentially rise 20% before we hit the peak “expensive” levels in the previous decade, last seen in 2013.
Property transaction volumes to be negatively impacted in short term as buyers digest new taxes and increased liquidity requirements. Jan-May total transaction volumes came in at 11,006 units, a 5.7% decrease YoY. While we initially expected volumes to pick up in 2H18 driven by higher primary sales with increased launches, the fresh set of cooling measures will no doubt negatively impact buyer sentiment, volumes and prices in the short run. We have accordingly adjusted our assumed selling prices (ASPs) downwards by an average 7% for select projects under our coverage.
En bloc frenzy to slow due to additional 5% non-remittable ABSD for developers. A slower en bloc frenzy could have the effect of slowing incremental supply. Nonetheless, supply in the pipeline of 52k units remain near one of the lowest levels over the last decade, vs the high of 96k in 2013.
Developers who bought land earlier at lower prices will have greater flexibility to adjust prices, which is even more crucial at current juncture. Amongst the developers under our coverage, we have not priced in redevelopment surplus for launches further out due to the higher uncertainties involved. For counters under our coverage, projects at risk of more compressed margins due to higher land prices would include CAPL’s Pearl Bank and City Dev’s Amber Park, West Coast Vale, and Handy Road sites.
Property Counters under our coverage which are affected
CapitaLand (CAPL SP, Maintain Accumulate, Target price unchanged at $4.19)
CapitaLand’s existing Singapore residential inventory as at FY17 end has been largely sold. The only addition to land bank in 2018 has been the Pearl Bank en bloc in February for S$1,515psf. We have not factored in any redevelopment surplus for Pearl Bank in our target price. We continue to like CAPL for its stable base of recurring income.
City Developments (CIT SP, Maintain Accumulate, Target price reduced from $13.40 to $12.60)
We have not factored in redevelopment surpluses for later-dated launches Amber Park, West Coast Vale, Handy Road and Sumang Walk due to higher uncertainties involved. Our ASPs for remaining inventory and near term launches stay unchanged due to our previous conservative estimates, including South Beach (S$4k psf) and The Tapestry (S$1,350psf). However, due to the change in government stance towards a more tightening nature and CDL’s heavy exposure to Singapore residential segment, we increase our discount to RNAV from 15%-20% which could reduce target price to S$12.60.
Chip Eng Seng (CHIP SP, Maintain Buy, Target price reduced from $1.21 to S$1.15)
We adjust our ASPs for Park Colonial down to S$1,750psf from S$1,900psf, to better reflect selling prices at actual launch last night. We have not factored in any surplus from redevelopment of Changi Garden. Our target price will potentially be reduced to S$1.15 from S$1.21 with the above ASP cut.
Ho Bee Land (HOBEE SP, Maintain Accumulate, Target price maintained at $2.98)
Ho Bee’s main exposures to Singapore residential are the three Sentosa condominiums for which we have assumed conservative ASPs of S$1,500psf. Our assumptions and target price remain unchanged.
Maintain Overweight on Singapore Property Sector. Further cooling measures from here would be key risks for a downgrade. We remain positive on the sector based on 1) Better affordability ratios now vs peak levels in 2013 despite the past 4Q of price increases due to income growth outpacing home price increase since post GFC. 2) Supply still low – outstanding supply in pipeline of 52k units still one of lowest levels in last decade, vs high of 96k in 2013. 3) Demand to be still supported by household formation rates due to our demographic structure and en bloc liquidity from displaced owners.