Property Sector Review

Singapore Property Sector

SECTOR REVIEW

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Vacant real(i)ty

We believe the Singapore residential property sector could see a bursting of a bubble that has been created from exuberant expectations and liquidity over the past two years. With a potential economic slowdown that may last through 2009, and historically high supply looming, we turn more negative on this cyclical sector, which has seen price declines of 40% and stocks trading at up to 70% discounts to RNAVs in previous down-cycles.

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Housing prices have started falling

Though declines are still not widespread due to trickling transactions and developers resistance, secondary transactions reflected prices of like-for-like units down 5-25% frompeak. Our previous zero growth assumption seems to be too optimistic. We now expect physical prices to correct as much as 30% from end-2007 levels over 2008 and 2009, with the high end the most vulnerable. As prices of some properties have doubled or tripled over the past two years, even with a 30% correction, prices would still be at least 40% higher than early-2006 levels for most prime properties.

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Prices could come off 40%

While developers in general have better balance sheets and thus better holding power than during the last cycle, and the environment still looks supportive with negative real rates, still-high rents and the positive vibe stemming from various factors (e.g., F1 race, Integrated Resorts, 2010 Youth Olympics), we believe that these high prices are unsustainable amid the worsening global economy. We believe a price correction will be triggered by:

1) withdrawal of the liquidity that drove up prices over the past two years (en bloc, Deferred Payment Scheme, foreign capital);

2) dumping by marginal speculators who have no means to hold and need to pay up this year and next;

3) potential price cuts by small developers with high gearing that are under pressure to increase cash flow; 4) rising vacancies with rising supply;

4) deterioration of the local employment situation. Singapore is one of the most vulnerable economies to a G3 slowdown, and if foreigner influx slows substantially, new demand may not be able to absorb supply at current price levels. We have revisited our housing supply-demand model, bearing in mind that not all supply pipeline will come through due to construction bottlenecks. It still suggests that the vacancy rate may rise from the current 5-6% to 9.8-19% in our base and worst cases. This could trigger rent and price declines of more than 40%, based on historical trends, in our opinion.

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Source - Credit Suisse