Wednesday, April 22, 2009

Singapore Property - Underweight by CIMB

New home sales have been rising of late, but mostly still in mass-market projects with buying led by HDB upgraders. On the back of strong showing in this segment, some developers are starting to release prime-location properties. Some of the properties released in the past week were The Verdure on Holland, Bellerive on Keng Chin Road, Farrell Residences (preview) and Illuminaire on Devonshire. We visited these showflats and observed the following.

Small is the new big. Illuminaire on Devonshire (ASP S$1,700psf), The Mercury (ASP S$1,150psf) and RV Suites at Shanghai Road (ASP S$1,200psf) are the notable upper mid-end projects that have sold very well. Almost all the units have been taken up. However, these strong sales should be read with caution, in our view. Units are small, ranging from 400 to 800sf. As such, total outlay for buyers is low despite psf prices that are still far from fire-sale levels. These projects are also smaller developments with fewer than 100 units per development. We believe that one should not deduce that prices in prime districts have stabilised as transactions of these sorts are unlikely to be representative of the current health of the overall sector. Our visits to other prime launches with bigger unit sizes yield similar conclusions. We estimate that over 25-30% of The Verdure on Holland (ASP S$1,350psf, BukitSemb) and The Bellerive (ASP S$1,300psf, Sing Holdings) may have been sold over the weekend. However, most of the units sold are smaller, below 1,100sf. Demand for and commitment to bigger-ticket items remains very tentative. We believe that the bulk of the demand in recent launches in prime districts came from investors rather than home-owners, which begs the question how long the property buying can last in the mid-high-end market.

Prices lowered to sell, but will buyers bite? We observe that prices for recently released developments in prime districts have been reduced by 25-30% vs. neighbouring projects. The Verdure was officially launched at S$1,350psf, 30% below Botanika across the street while Bellerive is going for S$1,300psf, 28% below Madison Residences previewed in Nov 08. We note that the mood in showflats has improved from 2H08, with some buying at these price points. The offering of the Interest Absorption Scheme (IAS) may have helped, lowering the near-term cash-flow burden for marginal investors/home-seekers. However, the sustainability of demand for high-end units remains far from certain, in our view. Many present at the showflats appear to be still adopting a wait-and-see attitude in view of the supply available in the system. If demand falls short of expectations, clearing prices for the high-end market could face further downside pressure.

Distinct lack of foreign flavour. Our conversations with property agents suggest that most of the potential buyers in the high-end market are now locals and/or local PRs. While there were still foreign buyers, mainly Indonesians and Malaysians, the numbers were a far cry from the levels of 2007-08. For some high-end projects then, foreign buyers to locals were as high as 70:30.

Fundamentals still uncertain. Evidence of price stabilisation in prime properties remains key to calling a sector bottom, something we are not seeing yet. We see a supply overhang and deflation still weighing on property fundamentals. We believe while there may be windows of opportunities for marginal developers to monetise their inventories at low-balled prices, it is still largely a buyers’ market with developers having very little pricing power. We believe physical prices are still biased on the downside with land-bank provisions and potential buyer defaults remaining downside risks for developers. We remain Underweight on the sector. Wheelock remains our preferred pick for its strong balance sheet (net cash), low inventory costs and attractive valuations (38% discount to RNAV against our target 20% discount).

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