Over the course of the previous year, the share market was booming with lots of successful property developers who are now faced with the issue of supporting their newfound optimism with good sales figure in the wake of recent pressure.
According to researchers, there are a few corporations capable of releasing a number of innovative projects to gain from the upsurge in market, especially those firms that amassed a lot of landed properties prior to the rise in site values.
Owing to the 26.8% increase in the FTSE Straits Times Real Estate Holding and Development Index last year, it is correct to say the industry is quite healthy.
Following the 30 to 40% spike in price of shares last year, Brandon Lee, a property analyst at JPMorgan predicts a re-rating of a good number of property stocks for the New Year.
He added that based on what could ultimately turn out to be the early stages of a 3-year upsurge in the property market, the threat of rushed profit-taking remains small.
According to his analysis last year on key land tenders, Mr. Lee forecasts the need for prices to spike by 6 to 13% within the coming 1-2 years in order for developers to gain about 5-10% pre-tax profit margin.
Krishna Guha, an analyst with Jefferies Singapore equity conducted a research on collective sale as well as on (government land sales) GLS sites and discovered that the prices to break-even are currently at about 40% premium to existing housing prices within the area.
Regardless of the difference in views among analysts, it is quite obvious that developers who increased their land bank at cheaper prices earlier have a larger margin of safety; owing to the improbability on if investors will buy at increased prices.
As found by Mr. Vijay Natarajan, a property and Reits analyst at RHB Research Institute; due to the extreme struggle for land of late, the price developers have been made to pay is quite substantial. He anticipates a 3-7% spike in this year’s property prices.
Nonetheless, the numbers of years developers have to erect, complete projects and sell them is still five years or they risk paying additional buyer’s stamp duty (ABSD) on the price of the land with interest. Banks also, have begun shrinking a few home loan offers, thereby lowering buyers’ ability to afford properties.
Mr. Natarajan added that the largely increased land bids will reduce the profit margins of developers and subsequently increase the threat of increased supply-side reduction processes from the Government.
“Developers who bought lands of recent will have their profit margins decided by how quickly the market improves, the launch timing and marketing tactic” he said.
According to a good number of analysts, buyers will pay the increased prices, based on the solid upsurge of a few recent launches this past year where there were higher unit values than at other similar projects.
According to this month’s report by property analysts at Credit Suisse “We consider households to be rightly situated to resist an upsurge in interest rate going into 2018”.
Derrick Heng, an analyst at Maybank Kim Eng agrees with them, pointing out that the current spike in rates can be easily managed.
“The total debt servicing ratio framework started in June of 2013 with a regular rate of 3.5% has already “stress-tested” property buyers and as such the spike in rate shouldn’t catch them unawares”, he added.
Analysts consider UOL Groups and City Developments (CDL) to be some of the most ideal large-cap proxies to weather the imminent market rise owing to the immense size of their land bank and considerable experience with the local office industry, which happens to also be on the rise.
Mr. Lee from JPMorgan additionally states that the acquisition of the outstanding stake in United Industrial Corporation by UOL Group which it previously didn’t own and the possible acquisition of the Millennium & Copthorne Hotels outstanding 35% by CDL could probably provide operational collaborations as well as increased capital-recycling prospects.
Small-cap Roxy-Pacific, owning land bank more than its competitors in addition to 7 freehold residential projects ready to be released this year and Frasers Centrepoint are some of DBS Group Research’s best picks.
Buying a hotel in Japan with four recent commercial buildings in Australia as well as New Zealand shows Roxy-Pacific increasing its income avenues.
Mr. Natarajan from RHB prefers small-mid cap space having stocks tradable at moderately increased discounts of around 30-50% with the best pick being Apac Reality.
“With developers having to launch and sell units due to the ABSD timelines, we anticipate the number of transactions to stay solid regardless of the price fluctuations”.
“There could be a re-rating for large-cap stocks in the event that property prices begin to spike beyond what was expected of the market.”
“I believe that should property prices rise beyond 5%, large-cap developers should witness another rally.”
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