Developer stocks to rally on back of massive property price cuts in 2015

Expect a 15% price correction next year.

Developers will be the first to blink in their drawn-out battle with policymakers and prospective homebuyers. According to Nomura, developers are likely to roll out massive price cuts next year, which will cause developer stocks to rally.

While most developers are still adopting a wait-and-see approach, this strategy is going to change as 80% of uncompleted inventory in the Outside Central Region is subject to the Additional Buyer’s Stamp Duty (ABSD) rule and the clock is ticking for these developers.

Nomura also says that developers know that a more meaningful home price correction is the only way to encourage the government to re-think its existing housing policy.

According to Nomura, “Our estimates suggest there is still margin for developers to lower prices in most cases. Excluding prime luxury projects, we estimate developers under our coverage can offer a total of c. 6,300 units in the primary market in 2015F and the average price to land cost is c. 2.8x for these projects. We have factored in a price correction of 15% in our base case NAV estimates.”

Nomura further added that “If developers were to lower prices in 2015F, we believe sales-related newsflow would be positive for projects with an average price point of SGD2mn/unit or lower and average price to land cost of 1.5x or above. Among the developers we cover, CIT and UOL have the highest inventory in such projects, at over 2,300 units and 1,800 units, respectively.