Asian Insights SparX Singapore Property Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Aug 2017 More (Land)-Bank for Buck STI : 3,329.52 • Property prices to rise 6%-10% in 2 years as volumes approaches 5-year peaks Analyst Derek TAN +65 6682 3716 Mervin SONG CFA +65 6682 3715 • Land tenders in residential and commercial [email protected] [email protected] sites could fetch up to S$14bn in 2H17. Rachel TAN +65 6682 3713 Singapore Research Team • Catalysts abound for developers (UOL, City [email protected] [email protected] Dev) and Office REITs (K-REIT and CCT) Singapore market to see increased capital allocations. The time has come. With the Singapore property market entering the end of a period of over-supply amidst a stable operating environment, we STOCKS PICKS envision that developers to allocate more capital into Singapore and 12-mth see the residential and office as prime beneficiaries of these trends. Price Mkt Cap Target Price Performance (%) Residential market to see a 6%-10% rise in prices by 2019. We S$ US$m S$ 3 mth 12 mth Rating see multiple catalyst for residential prices to head higher in the next City Developments 11.26 7,556 12.63 4.4 32.3 BUY 2 years. We believe a sustained rise in sales volume post a strong CapitaLand 3.69 11,565 4.33 (1.9) 16.4 BUY 47% rebound in sales in 1H17 will set the stage for developers UOL Group 7.89 4,734 8.73 9.0 36.7 BUY raising prices. In addition, unsold inventories are at 16-year low at Frasers 1.3 27.1 1.93 4,128 2.30 BUY 29k units with market absorption rate (ratio of unsold units and Centrepoint Ltd new sales) at multiyear low of 2.1x. A wildcard to further rebound in CapitaLand 5.9 14.3 1.72 3,816 1.85 BUY volumes and prices is when the wave of foreigner purchases returns Commercial Trust (c.6% of volumes in 1H17), especially for homes in the Core Central Keppel REIT 1.16 2,858 1.23 9.4 8.9 BUY region. Closing price as of 31 Jul 2017 Winner-takes all, S$14bn in gross development value (GDV) up for grabs with over S$1.4bnof profits could be reaped. Source: DBS Bank, Bloomberg Finance L.P. Developers should turn optimistic in their pricing strategy and see plum sites for sale in the 2H17 GLS and we expect developers to come out in force to bid for residential land and expect prices to continue inching higher in 2H17. Limited commercial sites will mean robust bids and reiterate our belief that office REITs (CCT and K- REIT) are trading below replacement costs. Assuming all sites are triggered, we estimate that the GDV for 2H17 GLS is estimated at S$14bn and a potential S$1.4bn in profits can be reaped. Catalyst abound for developers. We see strong correlations with volumes and prices to drive developer price higher going forward and see a target 1.0x P/NAV multiple as fair in the current upcycle. Top picks are UOL, City Dev. ASIAN INSIGHTS VICKERS SECURITIES ed: JLC/ sa:JC, PY Page 1 Asian Insights SparX Singapore Property The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents Investment Summary 3 Sustainable sales volume growth to lead recovery in prices 2017 sales momentum to hit 5-year highs 4 Wild card: Prices will rise further when foreign interest returns 7 Unsold inventory at its lowest since 2001 Market absorption at multi-year lows 10 Increase in new supply can be absorbed if sales velocity is maintained 13 Land-Banking: Going all out to win5 Developers pricing in rising prices in tenders 16 Strong pre-sales can greatly improve returns 18 Office: At the cusp of a multi-year recovery Office sector: Demand to remain robust 25 Office sector: Demand for physical real estate to continue 28 Critical factors: Volumes and prices drive developers’ prices Volumes and price correlate strongly to developer prices 30 Company Guide CapitaLand 35 CapitaLand Commercial Trust 47 City Developments 56 Frasers Centrepoint Ltd 64 Keppel REIT 74 UOL Group 83 ASIAN INSIGHTS VICKERS SECURITIES PagePage 2 2 Asian Insights SparX Singapore Property Investment Summary Property prices could rise 6-10% in two years as volumes Office sector to continue seeing strong capital allocations as approach five-year peaks. The time has come. Recent market the sector operating environment turns up in 2018. Limited indicators point toward a property market inflection in 2017 commercial sites and the gradual turnaround in office sector and an eventual rise in property prices from 2018 onwards. has prompted robust bits for commercial sites and transactions 1H17 total property sales have increased 46% y-o-y and if the of Grade A office buildings at compressed yields, pushing sales momentum continues, volumes will reach a five-year returns closer to 3.0% level, one of the tightest we have seen peak. In our analysis, we found that 94% of home buyers in in recent times. This supports our thesis that office REITs 1H17 are Singaporean households. A wildcard to a further (which are trading at a P/NAV of 0.8x-0.9x) are cheap and acceleration in price is when the wave of buying from trading below replacement costs. Expectations of robust bids foreigners return, especially for homes in the Core Central for upcoming commercial GLS will reiterate our belief that region. office REITs (CCT and K-REIT) offer good value for investors. Market absorption rate at multi-year lows. Supporting a rise in Catalyst abound for developers. We see strong correlations the property price – unsold inventories are at 16-year lows at with volumes and prices to drive developer price higher going 29k units. When compared against current transaction levels, forward and see a target 1.0x P/NAV multiple as fair in the we found that market absorption rate (ratio of unsold units current upcycle. Top picks are UOL, City Dev. and new sales) stands at 2.1x and it is the tightest in the suburb (Outside Central region). Even if we were to include the Key Risk. more than 3k unlaunched new units from the recent government land sales (GLS) and en blocs, we believe the Economic environment turn down. Demand for property is market can absorb them easily. typically driven by buyers’ perception of job security and income growth. At this moment, our economist projects the Winner takes all – S$14bn in gross development value (GDV) Singapore economy to still grow steadily in 2018, while up for grabs with a potential to reap more than S$1.4bn in unemployment rate has turned the corner. profits . Assuming developers achieve a 10% profit margin on their projects, that could translate to an internal rate of return Will government tighten? While do not envision a change in (IRR) of 9% but returns could be as high as 40% if pre-sales do current policy stance by the government, a faster than well. As such, we expect developers to come out in force to projected rise in property prices, could result in government bid for residential land and expect prices to continue inching raising the number of land sites in 2018 and thus taper some higher in 2H17. of the enthusiasm seen in the land tenders. Developers trading at historical mean but could re-rate higher (X) Discount 2.20 0.40 2.00 0.20 1.80 - 1.60 (0.20) 1.40 (0.40) 1.20 (0.60) 1.03 x 1.00 (0.80) 0.90 x 0.87 x 0.80 (1.00) 0.77 x 0.60 (1.20) 0.40 (1.40) 3Q08 1Q13 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Discount to RNAV P/NAV P/NAV (mean) P/NAV (+1 SD) P/NAV (-1 SD) Source: DBS Bank, Bloomberg Finance L.P. ASIAN INSIGHTS VICKERS SECURITIES PagePage 3 3 Asian Insights SparX Singapore Property Sustainable sales volume growth to lead recovery in prices 2017 sales volumes projected to hit five-year highs. The lift in Sales from new launches make up only 23% of primary sales, sentiment following the government’s move to relax property implies strong sales momentum in unsold inventories. Despite measures at the beginning of the year led to strong sales the numerous headlines about strong sales of new launches, volume in 1H17, up 46% y-o-y. If the sales momentum holds, sales from new launches in 1H17 only comprised 23% of annualised 2017 total sales (primary and secondary) could primary sales vs the peak of 72% in 2011 and 2008. This reach 29k units, which would be the highest since volumes means that the strong sales momentum was from previous peaked in 2012. It has surpassed the historical average of 22k launches (figure 5). units and is 68% of the historical high of 42k units recorded in 2012 (figure 1). The sales volume was largely led by primary Better sales volume yet to translate into a recovery in property sales (1H17: +52% y-o-y).