Developers poised to gain from launches

Some analysts feel that buyers will accept higher prices, going by the strong take-up in some new launches last year where unit values were higher than at comparable projects.
Some analysts feel that buyers will accept higher prices, going by the strong take-up in some new launches last year where unit values were higher than at comparable projects.ST PHOTO: ALPHONSUS CHERN

Those that built up land bank before price spike well placed to benefit: Analysts

Property developers thrived on the share market last year but now the pressure is on to back up the optimism with some solid sales figures.

Analysts are pointing to firms that are able to unleash a raft of new launches to ride the market upswing, particularly those companies that built up their land bank before the spike in site prices.

The sector itself is in good health. The FTSE Straits Times Real Estate Holding and Development Index jumped 26.8 per cent last year.

JPMorgan property analyst Brandon Lee foresees a re-rating of some property stocks this year after last year's 30 to 40 per cent jump in share prices.

He said the risk of an immediate profit-taking is low as the property market is still in the early stages of what could potentially be a three-year upswing.

Mr Lee's analysis of major land tenders last year suggests that prices must rise by at least 6 to 13 per cent over the next one to two years for developers to reap a pre-tax profit margin of 5 to 10 per cent.

A study by Jefferies Singapore equity analyst Krishna Guha on collective sale and (government land sales) GLS sites found that break-even prices are at an average 40 per cent premium to current residential prices in the vicinity.

  • 3-7%

  • The expected rise in property prices this year, according to RHB Research Institute's property and Reits analyst Vijay Natarajan.

Though views vary from one analyst to another, what is clear is that there is a bigger margin of safety for developers that bought land earlier at lower prices, given the uncertainty over whether buyers will bite at higher prices.

Mr Vijay Natarajan, RHB Research Institute's property and Reits analyst, noted that developers have paid a hefty price amid intense competition for land lately.

He expects a 3 to 7 per cent rise in property prices this year.

But developers still have to build, sell and complete a project within five years or else pay additional buyer's stamp duty (ABSD) on the land cost with interest. And banks are already tightening some home loan packages, which reduces affordability for buyers.

The overly optimistic land bids will limit developers' profit margins and raise the risk of more supply-side cooling measures from the Government, Mr Natarajan said.

"For developers who have acquired land bank recently, the price upside will depend on how fast the market recovers, their marketing strategy and timing of their launch," he added.

Some analysts feel buyers will accept higher prices, going by the strong take-up in some new launches last year where unit values were higher than at comparable projects.

"We believe households are well positioned to withstand a rising interest rate environment into 2018," Credit Suisse property analysts said in a note this month.

Maybank Kim Eng analyst Derrick Heng agreed, noting that the recent rise in rates is manageable.

The rate increase should not come as a surprise and home buyers have already been "stress-tested" to a normalised rate of 3.5 per cent under the total debt servicing ratio framework introduced in June 2013, he said.

City Developments (CDL) and UOL Group are seen by most analysts as among the best large-cap proxies to ride the impending market ascent given their sizeable residential land bank and decent exposure to the local office sector, which is also on the mend.

JPMorgan's Mr Lee noted that CDL's potential acquisition of the remaining 35 per cent stake in Millennium & Copthorne Hotels and UOL Group's potential purchase of the remaining stake it does not own in United Industrial Corporation could deliver operational synergies and more capital recycling opportunities.

DBS Group Research's top picks include Frasers Centrepoint and small-cap Roxy-Pacific, which has land-banked ahead of its peers with seven freehold residential projects here that are ready to launch this year.

Roxy-Pacific has also beefed up its income stream with the acquisition of four new commercial buildings in Australia and New Zealand and one hotel in Japan.

RHB's Mr Natarajan favours the small-mid cap space where stocks are still trading at relatively higher discounts of 30 to 50 per cent with Apac Reality the top pick.

"We expect transaction numbers to remain strong irrespective of price movements as developers are bound by ABSD timelines to launch and sell their units.

"For large-cap stocks, a re-rating could come if the property prices start increasing better than what market expectation is.

"In my view, if property prices climb more than 5 per cent, there should be another rally in large-cap developers."

A version of this article appeared in the print edition of The Straits Times on January 22, 2018, with the headline 'Developers poised to gain from launches'. Print Edition | Subscribe