Head, OCBC Investment Research, OCBC Bank
After numerous quarters of decline, the URA’s 3rd Quarter 2017 flash estimate of the private residential property price index, which was released in early October, rebounded for the first time in four years – a key inflection point marking the end of the Singapore housing bear. The index increased 0.7 point from 136.6 points in 2nd Quarter 2017 to 137.3 points in 3rd Quarter 2017, representing an increase of 0.5 per cent compared with the 0.1 per cent decline in the previous quarter.
Besides the positive pick up in the URA index, the Singapore residential property market has seen renewed interest in en-bloc or collective sales transactions since May 2017. In late May, the en-bloc sales of Rio Casa for S$575m sparked off a series of other acquisition with several transactions priced at above S$700m, including Eunosville, Tampines Court, Amber Park, Normanton Park, etc. Since May, more than S$6 billion en-bloc transactions have been concluded.
Interestingly, the last time en-bloc transactions were at an all-time high was in 2007, about a decade ago, when S$11.5 billion worth of properties were transacted. Since then, en-bloc transactions have averaged S$1.1 billion per year from 2008-2016. At the current pace and with more property projects heading for the collective sales route, there is a good chance that en-bloc transactions for this year could head close to the historical high.
With the increase in en-bloc sales, this has raised the average selling prices of new launches in the past two months. We also note that based on recent en-bloc sales, the estimated breakeven prices for these projects have moved up, which will have a similar impact on future launch prices.
At OCBC Investment Research, we turned positive on the property at the beginning of the year and of the ten stock picks selected for the year, seven were in the property space and have all done well (please refer to our 2017 Strategy report for more details).
The seven property-related stocks have gained an average of 23 per cent year-to-date versus 16 per cent for the Straits Times Index for the same period and 15.4 per cent for the FTSE ST Real Estate Investment Trust Index and 22.7 per cent for the FTSE Real Estate Index.
The outperformance of the local property sector has also helped to narrow the discount to book value of the listed property companies. For example, UOL Group traded to as low as a price-book of 0.5 in June 2016 or an average of 0.7 in the last 10 years, but has since risen to about 0.86 currently. Reflective of this, UOL’s share price has already appreciated 48 per cent so far this year or up 69 per cent from the 2016 low of $5.26. This trend is similarly seen for most of the big-cap property stocks.
However, the smaller or less liquid property stocks are still trading at bigger discounts to book value. Based on information from Bloomberg, there are several property-related companies which are currently trading at less than 0.6 times book. The list included Wing Tai (0.5 times), Hong Fok (0.5 times), Tuan Sing (0.5 times), Ho Bee (0.6 times), etc.
We forecast for Singapore home prices to be overall flat in 2017 and to appreciate by 3 to 8 per cent in 2018, as the rental market begins to pick up and macro-economic conditions remain firm. Our picks in the sector include City Developments (BUY, fair value estimate of S$12.39), UOL Ltd (BUY, fair value estimate of S$9.01), Wing Tai (BUY, fair value estimate of S$2.37) and Wheelock Properties (BUY, fair value estimate of S$2.27).
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