Property Sector

4Q flash estimates for property prices. The URA released the flash estimates of the price index of private residential property for the fourth quarter (4Q) of 2008 on 2 January 2009. Based on the estimates, prices fell by 5.7% in 4Q compared with a drop of 2.4% in 3Q. This is the second consecutive quarterly drop in residential property prices and is in line with our expectations. We believe that property prices will continue to decline for 2009.

Prices of non-landed private residential properties decreased by 6.3% in Core Central Region, 5.5% in Rest of Central Region and 4.7% in Outside Central Region. The fall is the largest in the Core Central Region, which would consist of homes in the luxury segment. This is followed by Rest of Central Region, which is the mid-end segment, and Outside Central Region, which is the mass market segment. Wealthy locals and foreigners have been cautious in buying high-end homes due to the negative impact from the global financial crisis. The drop is less for the mass-market as prices have not risen as sharply as high-end homes. Moreover, there is some support from HDB flat prices, which have risen to an all-time high.

Due to the slowdown in the global economy and decreasing purchasing power of property buyers, we are expecting high-end, mid-end and mass-market home prices to decrease by 20% to 25%, 15% to 20% and 10% to 15% respectively for 2009.
At the same time, HDB published the flash estimate for the public housing resale price index for 4Q 2008. The index rose by 1.5 percent to 139.5. This is much lower than the 4.2% increase in 3Q 2008. The HDB market remains strong due to demand from young married couples as well as permanent residents who are buying their own flats due to the rise in rental costs. In fact, the strong demand for HDB homes can be seen from the large number of applications, which can amount to two or three times, for the limited number of new HDB flats.

In summary, we anticipate that private residential property prices will continue to fall in 2009. Recovery will take place after we have seen signs of recovery in the global economy.

Deterioration in the Singapore economy. On 2 January 2009, the government released the advance estimates for the Singapore economy in 2008. For the fourth quarter of 2008, gross domestic product (GDP) contracted by 2.6 percent in real terms over the same period in 2008. In fact, real GDP decreased by 12.5 percent compared to the third quarter on a seasonally adjusted, annualized quarter-onquarter basis. For the whole of 2008, GDP grew by only 1.5 percent compared to 7.7 percent in 2007.

The slowdown in the economy was mainly caused by the contraction of 3.7 percent by the manufacturing sector. Meanwhile, the services and construction sectors reported decreases in the growth rates to 5.3 percent and 17.3 percent respectively.
The weak economy is due to the sharp slowdown in global demand, trade & investments.

At the same time, the government cut its estimates and expects GDP in 2009 to be between –2.0 percent and 1.0 percent. This was lower than its November 2008 forecast of –1.0 percent and 2.0 percent.

Moreover, we expect retrenchments and wage cuts to continue to take place for the early part of this year as companies slash costs to ensure their survival during the slowing economy. With the weakness in the economy and the increase in unemployment, property buyers are likely to remain cautious. We maintain our bearish outlook for sales volume and prices in 2009.

Deferred Payment Scheme (DPS). Under the DPS, buyers can purchase uncompleted residential properties by paying 10 to 20 percent downpayment to the developer. The remaining 80 to 90 percent of the purchase price has to be paid only when the temporary occupation permits of the properties are issued. This scheme was introduced in October 1997 and withdrawn in October 2007. Given the fall in property prices, we are concerned about buyers who have purchased properties under the DPS.
There were 10,450 units under the DPS as at 30 November 2008. Of these units, 4,560 units (43.6 percent) were expected to be completed in 2009, 2,540 (24.3 percent) in 2010 and 1,934 (18.5 percent) in 2011. We will first focus on the 4,560 units in 2009. As construction of private properties normally take about three years, it is most likely that the 4,560 units were bought at 2006 prices. In 2006, the URA residential property price index went up by 9.8 percent. The 2,540 units to be completed in 2010 would have been bought at 2007 prices, when the URA price index went up by a hefty 28.1 percent. We believe that those who bought at 2006 prices will still be able to make a small, if any, profit when completion occurs in 2009. However, those who bought in 2007 and later will encounter losses as the prices had risen by huge amounts and price correction would take place in 2009.

Furthermore, banks are tightening credit and buyers may have difficulties securing loans. Therefore buyers, who are unable to obtain loans, may have to sell their properties at lower prices in the open market or forfeit their downpayments and return the properties to the developers. The developers would have to sell their properties at much lower prices to entice buyers as the downturn in the property market continues. This supply of properties from the DPS will add further pressure to the falling property prices.

Response from the government. Due to the economic uncertainties, in December 2008, the government announced that no new sites will be added to the Government Land Sales (GLS) Programme for the first half (1H) of 2009. Moreover, it has reduced the supply of commercial space and will not have new supply of private residential units from government agencies, outside the GLS Programme, for We feel that the measures are timely as the response to the GLS Programme has been poor for 2008. This will not add to the supply of land in the market and further depress prices. At the same time, we note that our property prices have not risen to the correspondingly high levels that are prevalent in the United States.

Price to book graph. In our last report in October 2008, we plotted a graph of price to book ratio of four major property companies, City Development, Keppel Land, CapitaLand and Allgreen.

We note that the troughs may have been reached in 2008 as the stock prices reflect the price to book ratios of 0.3 to 1.3 for the four companies. We believe that the stock prices would have taken into account the property price corrections in 2009.
Based on the graph above, there is potential for stock prices to recover as the price to book ratios can reach higher levels during periods of recovery.

Our call for the sector as a whole. The property stocks have fallen drastically in 2008 as investors anticipate a gloomy outlook for the property market in 2008 and 2009. The release of the 1Q 2009 URA property price index confirmed our weak expectations for property prices. We expect property prices to drop further in 2009 due to the weak global economy. Property prices will rise after the recovery of the economy, which is expected to be in 2010.

Furthermore, property stocks have continued to trade at sharp discounts to both their net tangible asset values and realisable net asset values (RNAVs). We felt that valuations are looking attractive after the huge falls. Investors, who adopt a longterm view, can hold the stocks for capital gains. Overall, we maintain the neutral view on the property sector.

Stocks that we cover. We have listed the current recommendations for the stocks under our coverage. We will be reviewing the target prices for the stocks when the companies report their financial results in February 2009.

Property Companies Recommendation

Ho Bee 0.395
Target price 2.08

SC Global 0.555
Target price 3.03

Sing Holdings 0.185
Target price 0.92