● We hosted Mr. Donald Han, Managing Director of Chesterton Singapore for a luncheon with investors in Singapore. Chestertons is an entity of Chesterons Global, a real estate consultancy firm.
● Relaxing of measures could take place in 2H16, once prices have fallen ~15% from the peak in 3Q13, especially given rising rates. A reduction in ABSD & SSD is most likely. Prices are only likely to bottom in 2018, with mass-market under pressure most.
● Office rents could decline up to 15% till 2017, translating to low single-digit reversions of REITs in 2016 and some negative reversions in 2017. Retail rents could decline by 1-2%, but REITs should be better positioned given asset quality. Hospitality RevPARs continues to be under pressure, given the strong SGD impacting arrivals. Warehouse is the brightest spot in industrial.
● CDL is our top pick, with capital recycling initiatives a key nearterm catalyst to crystallise value, and valuations attractive at 0.75x P/B. Within REITs, we believe the retail sector will continue to be the most stable one, particularly in the suburban malls, while incoming supply is manageable. CMT & MCT – preferred picks.
Residential cooling measures could be eased in 2H16
Overall, the URA residential price index has fallen 8% from the peak in 3Q13. A ~15% decline in prices is likely to prompt an adjustment of cooling measures, given the small buffer before homeowners slip into negative equity (assuming an 80% LTV).
Property measures could be relaxed in 2H16, with rising interest rates acting as the "9th cooling measure". A reduction in ABSD is most likely, but a reduction in SSD could also materialise, should there be higher instances of mortgagee sales. TDSR is unlikely to be removed, however. Despite the easing of cooling measures and demand from PRs waiting to purchase, prices are only expected to bottom in 2018. New sales of 7,000 to 8,000 units are likely to be the new norm, with current unsold stock of ~24,000 units requiring three years to clear.
The mass market segment could see the fastest erosion in prices given:
(1) the bulk of private supply appears to be targeted at the OCR region and
(2) significant supply of HDB flats of up to 20,000 units in 2016, given the "Bidadari" effect; where strong demand was seen in the recent BTO launch (Bidadari 5 room flats saw 23x application rate).
Office rents expected to decline up to 15% till 2017
Office rents could decline 10% in 2016, and 5% in 2017 translating to low single-digit reversions of REITs in 2016 and some negative reversions in 2017. Additionally, pressure for landlords could come from tenants looking to restructure leases mid-way through their leases for a lower rent but longer period.
There has been a growth in demand from the social media/tech sector which don’t necessarily need to be based in the CBD but rents below S$10 psf/per month could incentivise them to remain.
For the 4.8 mn sq ft of supply completing in 2016/17, the concern for new offices will be the lack of anchor tenant demand (i.e., tenants looking for 3-4 floors of space), as most prospective tenants are looking at 10,000 to 20,000 sq ft areas.
Weak outlook for retail with market rents declining 1-2%
Strong supply and weak market will continue to push overall rents down 1-2% per annum. This still implies positive reversions of the REITs which should be better positioned given asset quality.
Malls which will undergo redevelopment (e.g., Suntec's Park Mall, CMT's Funan DigitaLife Mall) should provide some relief as other mall managers might look to bring over tenants.
Hospitality RevPARs will continue to be under pressure Hospitality is expected to remain under pressure as regional neighbours (visitors from South East Asia constituted 40% of total arrivals for 2014) find Singapore expensive. Visitor arrivals for 2015 might be in line with 2014's 15.1 mn at best, and RevPARs should remain under pressure in 2016. Mid-tier and economy class hotels face the largest headwinds as these tiers face the most incoming supply, and pressure from Airbnb.
Warehouse the brightest spot for industrial as the industry should benefit from growth in e-commerce, while supply remains more manageable. However, we believe the logistics REITs could face occupancy pressures in the near term from SUA conversions.
CDL, CMT our top picks
In our report Singapore Property Sector – Awaiting the silver bullet, we believe the stage is set for a pre-emptive re-calibration of cooling measures in 2H16, given persistent oversupply, speculative activity and foreign demand that have been curbed, while income growth has outpaced home prices. This would be a key re-rating catalyst for the sector. CDL is our top pick, with capital recycling initiatives a key nearterm catalyst to crystallise value, and valuations attractive at 0.75x P/B (-1.4 SD from the historical average). CDL is also best positioned for a turnaround in the Singapore residential market sentiment in 2016.
Within the REITs, we believe the retail sector will continue to be the most stable one particularly in the suburban malls, while incoming supply is manageable (link to report). Our preferred picks are CMT and MCT which trade at CY16 yields of 6.1% and 6.4%, respectively,~1 s.d. above historical average. (Read Report)
Read Related Report
1) CapitaLand Mall Trust - Redeveloping Funan by DBS Group Research, published on 10 December 2015
Source : Credit Suisse Asia Pacific Equity Research