Tightening measures and oversupply risks haunt Singapore home market

Developer stocks fell 4.8%, underperforming the Straits Times Index.

Singapore developers using the FTSE ST Real Estate Holding & Development Index (FSTREH) as a benchmark returned -4.8% YTD, underperforming the Straits Times Index (-2.5%) but outperforming the S-REITs sector (-6.7%), OCBC Investment Research noted.

What could be behind this? OCBC Investment Research analyst Andy Wong Teck Ching noted that the market has key concerns over higher risks of tightening measures by the Singapore government given the vibrant “animal spirits” seen on the ground.

“Whilst it is difficult to predict whether further government measures would be introduced, we note that the official URA private residential price index has only increased 5.5% from the recent trough in 2Q2017. Hence, further data points may be needed before the next course of action is taken, in our view,” Wong added.

Moreover, the HDB resale price index is still on a downtrend. “With more than 80% of Singapore’s resident population living in HDB flats, any potential tightening measures would have to be very carefully calibrated by the government,” the analyst said.

Another issue stems from potential oversupply concerns. There are currently 44,261 units in the supply pipeline (including executive condos), as at 31 March 2018. There is also a potential pipeline supply of 20,100 units from Government Land Sales (GLS) sites and awarded en bloc sale sites pending planning approval.

Wong noted that notwithstanding this expected increase in supply, a significant proportion of this potential pipeline will only come on-stream from 2021. “Furthermore, although the total number of unsold inventory increased to 25,300 in 1Q2018 from 20,800 in 4Q2017, 74% of these units have yet to obtain the pre-requisites for sale; the level of unsold inventory is also below the long-term average of 32,4000,” he argued.

Meanwhile, primary unit sales are expected to gain traction ahead as sales for the first five months of 2018 came in at 3,480 units, or a decline of 39% YoY, but May sales recovered 7.9% YoY.

“While we ease our private sales transaction volume projection for 2018 to 10,000-12,000 (previously 12,000-15,000) based on the current run-rate, this still implies a backend loaded year,” Wong said. OCBC Investment Research raised its Singapore residential price growth forecast from 3%-8% to 8%- 12%.