Winning GLS tenders 7% below average selling price

Developers building in price dips. Developers' enthusiasm for residential sites in the government land sales program appears to be waning. Recent GLS tenders imply breakeven prices that are some way below market prices, suggesting that developers are expecting significant price dips ahead. We analyzed residential GLS sales over the last 12 months and found that developers began to build in heavier discounts into their tenders after May 11.

Breakeven ASP >20% below market levels. Our analysis shows that, over the last year, the average winning tender for a 99-year GLS condominium site would translate into a breakeven ASP that is around 7% below market levels at tender close. We think this is reasonable - given an annual property price appreciation of 5%, a breakeven ASP at 7% below market would yield an expected 12-17% profit when a developer launches sales in a year or two.

Interestingly, we found that the discount between breakeven and market ASPs had began to spike after May this year. For the Buangkok Dr tender, the breakeven ASP of S$780 psf was estimated to be 14% below transactions at the Quartz. We saw discounts continue to widen for the Flora Dr and West Coast Link sites. By 30 Jun, the discount was around 26% for the Choa Chu Kang GLS site.

Expectations could be partly self-fulfilling. In our view, developer expectations could be partly self-fulfilling. Primary sale prices typically exhibit downward stickiness because optimistic developers acquiring land at demanding valuations would hold their prices during periods of low demand, given sufficiently strong balance sheets.

Hence, market observers sometimes cite a "buy high, sell high" dynamic, which can occur over the short to midterm. However, developers expecting a weaker market ahead would guard against excessive acquisition costs and hence have increased flexibility to lower prices, facilitating demand-led downward price adjustment.

UOL to gain in this environment. We believe that UOL is in a prime position to benefit fro uncertain prices and softening acquisition environment. First, it has limited residential exposure with most of its landbank sold. Moreover, given management's track record of accretive acquisitions, we think UOL will find increased opportunities to replenish its land-bank in a softening acquisition environment. Maintain BUY at a fair value of $5.57 (at 20% discount to RNAV).