Singapore Property Sector
SECTOR REVIEW
Vacant real(i)ty
We believe the Singapore residential property sector could see a bursting
of a bubble that has been created from exuberant expectations and
liquidity over the past two years. With a potential economic slowdown that
may last through 2009, and historically high supply looming, we turn more
negative on this cyclical sector, which has seen price declines of 40% and
stocks trading at up to 70% discounts to RNAVs in previous down-cycles.
■  Housing prices have started falling. Secondary transactions already show
prices of like-for-like units down 5-25% from peak levels. Our previous zero
growth assumption seems to be too optimistic.
■  Prices could come off 40%. We believe further consolidation will be triggered
by: 1) withdrawal of the liquidity; 2) dumping by marginal speculators;
3) potential price cuts by small developers; 4) rising vacancies with rising
supply; 5) a deterioration of the local employment situation. In addition, low
rental yields and slowing capital inflows offer little buffer, and the strong
S$ erodes the attractiveness of Singapore properties. Our housing supplydemand
model suggests that vacancy rates may rise from the current 5-6% to
9.8-19% in our base and worst cases, prompting rent and price declines of
more than 40%, based on historical trends, in our opinion.
■  Bad news not fully in yet; downgrade sector to UNDERWEIGHT. We
have revised all RNAVs on base-case assumptions of average selling price
(ASP) declines of 30%, 20% and 10% in the high-end, mid-end and massmarket
segments from end-2007 levels, respectively. With the recent
20-30% rebound in stock prices, developers are now trading close to or
above RNAVs. We downgrade CDL to UNDERPERFORM, Keppel Land and
Allgreen to NEUTRAL, and we keep Wing Tai as UNDERPERFORM. We
upgrade CapitaLand to NEUTRAL, as it is defensive against Singaporespecific
headwinds. Our bear-case RNAVs assume a further 10 p.p. cut to
each segment’s ASP.
■  Switch to REITs. We advocate switching from riskier residential exposure to
S-REITs. Among them, we prefer the retail REITs for their more defensive
nature, in particular CapitaMall Trust and Frasers Centrepoint Trust.