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Latest curbs could see developers lower prices up to 10%

Analysts' downgrade of stock ratings include drop in selling prices

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Developers may trim prices of new launches by as much as 10 per cent from their earlier indications in response to the latest round of property cooling measures, with high-end homes likely to see bigger adjustments, analysts say.

Singapore

DEVELOPERS may trim prices of new launches by as much as 10 per cent from their earlier indications in response to the latest round of property cooling measures, with high-end homes likely to see bigger adjustments, analysts say.

In downgrading their stock ratings across several developers, some have started pricing in a 5-10 per cent reduction in average selling prices (ASP) in their forecasts, though they note that it is too early for any developer to consider writedowns on their projects yet.

Maybank Kim Eng property analyst Derrick Heng, who has priced in a 5-10 per cent ASP reduction in his projections, said: "While we expect a moderation in EBIT (earnings before interest and tax) margins to single digits for most projects, we do not see any developer losing money."

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DBS Bank analyst Derek Tan felt that developers would have to revise their prices by at least 5 per cent, if not more, to account for both the higher additional buyer's stamp duty (ABSD) and the lower loan-to-value (LTV) limits.

Potential write-offs to land values on developers' balance sheets is not a near-term risk for now, but "could emerge a couple of years later if sales momentum falters", said Mr Tan.

For now, DBS Group Research has cut its primary home sales forecast for this year by 25-30 per cent to 9,000-10,000 units, as investors are likely to stay out of the market post-cooling measures.

Deutsche Bank also trimmed its estimates on developers' ASPs by 5-7 per cent and transaction volumes by 10-30 per cent to 10,000-13,000 units for 2018 and 2019 in a recent report.

Lowered ASP forecasts for upcoming launches is one thing. Whether there will be a real drop from current transacted prices - which would be reflected in the official price index tracking all private residential transactions - is another thing.

Most property consultants do not see that happening yet, though they have narrowed their growth forecasts for the price index to 8-12 per cent this year, from the previous 8-20 per cent. Prices have already risen 7.4 per cent in the first two quarters this year.

However, consultants are less sanguine on sale volumes, with current estimates in the range of 6,000-9,000 units, from the previous 8,000-12,600 units.

Developers sold some 3,434 private homes in the first five months of this year, after selling 10,566 units for the whole of last year. Experts had earlier predicted higher sales in the months thereafter with more launches scheduled for the second-half of the year.

But in a surprise move to cool the residential market, the government raised the ABSD rates for most categories of buyers - except for Singaporeans and permanent residents buying their first residential property. It also tightened the loan-to-value limits for all housing loans granted by financial institutions, with effect from July 6.

The tough measures affect almost all categories of buyers; even Singaporean first-timers have to fork out 25 per cent more in cash due to the reduced amounts they can borrow.

So far, there have not been huge discounts from developers yet, though "price discounts" of 3-7 per cent from earlier price lists have been touted for certain projects.

OrangeTee & Tie research head Christine Sun felt that this trend may continue as many developers have deep pockets and strong holding power. JLL national research director Ong Teck Hui posits the ASPs for mass-market new launches will be "2-5 per cent less aggressive than originally intended", with the adjustments likely higher for high-end homes.

Some developers, who declined to be named, felt that trimming prices by 5-10 per cent would be plausible for projects with sufficient margin buffers, but not for those on land bought at costlier rates.

Savills Singapore senior director Alan Cheong said: "Given that the cost of production is high due to the land cost element, there is little room for many to manoeuvre on the selling price front. Hence, any adjustments will at best be marginal or nothing at all."

Concurring, Alice Tan, Knight Frank director for residential project marketing, noted that the margin buffer for developers to trim ASPs will get narrower for upcoming launches where land prices are higher, and amid a climate of rising interest rates.

Tricia Song, who heads research at Colliers International Singapore, said for already launched projects, they are unlikely to show a downward trend in actual transacted prices.

Among listed developers, City Developments Ltd (CDL) and Oxley Holdings are most exposed to the Singapore residential market, each with over 3,000 unsold units in launched projects and landbank.

Based on effective stakes, CDL remains most exposed with over 2,600 units left in its residential inventory here; Oxley has over 1,900 units; and UOL Group has over 2,000.

Going by gross development value (GDV), CDL probably still ranks the highest due to its higher-end projects. Based on DBS' estimates, the total unsold inventory (launched and unlaunched projects) could be worth up to S$6 billion.

"City Developments could delay launches, and adopt a wait-and-see stance given that it has the firepower to ride out the headwinds.

"However, margins for projects at Handy Road, Sumang Walk and the former Amber Park could be affected," said DBS Bank analysts Rachel Tan and Derek Tan in a recent note.

Equity analysts have wasted no time in the past two weeks downgrading their ratings on developers on account of their Singapore residential exposure.

Maybank Kim Eng changed its call on Oxley Holdings, Bukit Sembawang Estates, CDL and GuocoLand to "hold" from "buy" with lowered target stock prices to factor in bigger trading discounts to adjusted RNAV (revalued net asset value).

DBS Group Research downgraded its ratings for CDL, Roxy-Pacific, Chip Eng Seng and agency business APAC Realty to "fully-valued" from "buy", and cut its rating on UOL Group from "buy" to "hold".

Maybank's Mr Heng said: "We lower our RNAV for developers by 0.2-4.8 per cent and net profits by up to 16 per cent. We make the biggest cut to Bukit Sembawang's RNAV, reflecting its pure residential exposure. Earnings for Oxley Holdings have been cut the most with its elevated financial leverage magnifying the impact on its bottom line."

Over the years, however, Singapore-listed developers have become highly diversified by geography and asset class. For CDL, which does not disclose GDV of projects, its Singapore residential exposure is estimated to be 23.9 per cent of total RNAV based on Deutsche's estimate, and 37.8 per cent based on DBS' estimate.

Oxley's disclosures last week showed that its asset value exposure to the Singapore residential market makes up 20.6 per cent of total outstanding gross development value of projects globally.

Notwithstanding the tightening of cooling measures, Oxley is still expecting 12-19 per cent net margins for its upcoming launches, after adjusting its price expectations for certain projects.

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