Property prices expected to rebound 3-7% so which stocks should do well?

By PC Lee / The Edge Singapore | January 12, 2018 11:20 AM SGT
SINGAPORE (Jan 12): RHB expects property prices to rebound by 3-7% in 2018, driven by an improving job market, strong surge in the en-bloc market and falling inventory levels.
However, a soft rental market, rising interest rates, intense competition in land sales, and risk of additional policy measures could derail a smooth recovery in the residential market.
"We upgrade the sector to Overweight from Neutral with CapitaLand and APAC Realty as our top picks," says Vijay Natarajan in a Friday report.
Signs of bottoming in the price market are emerging, with the Urban Redevelopment Authority’s (URA) residential price index turning +1% y-o-y in 2017 based on flash estimates, after a 3.1% decline in 2016. While property prices are currently 11% below the 3Q13 peak, they remain 44% higher than the global financial crisis (GFC) trough of 2Q09.
In 2017, about 26 residential en bloc deals were completed, with a total value of $8.5 billion. That is more than double the $3.3 billion en bloc deals completed over the previous five years, making it the second highest total transaction value achieved after the 2007 peak of $11.4 billion from 164 deals.
Natarajan says strong surge in en-bloc deals was fuelled by factors such as falling inventory levels, strong developer balance sheets, competition from overseas developers, and low interest rates.
While the surge in en bloc deals has boosted property liquidity and evoked optimism for strong price recovery, the sites could add 10,000-14,000 units to the supply pipeline over the next three years, which may cap price increases.
In addition, intense competition for en-bloc deals has driven land prices higher. Bids are factoring in a 10-40% appreciation in property prices assuming developers achieve their typical profit margin of 10-15%.
"While we do expect prices to rise, we believe the bids are overly optimistic and could limit profit margins of developers despite the expected price increase," says Natarajan.
In Nov 2017, the Monetary Authority of Singapore (MAS) sounded a note of caution on the property market, saying that recent market developments such as the en-bloc rage and rising land prices could affect market stability.
"We believe the Government is closely monitoring the situation and could possibly implement additional supply-side measures – these may include an additional layer of stringent approvals for the en-bloc process, limiting bonus GFA allowances, and increasing government land supply for 2H18," says the analyst.
With residential stocks rallying by...