Outlook for Singapore property expected to improve in 2019

SINGAPORE property prices and rents will rise in 2019, in our view, and we expect depressed stock valuations to narrow the gap with healthy property fundamentals, particularly for developers.


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Housing market: Growth to resume

Growth in private home prices stalled in the second half of 2018, after new cooling measures were announced in July. In 2019, we forecast home prices to grow 5 per cent - a return to a rising trend, underpinned by healthy demand and improving supply.

Contrary to popular opinion, we believe the Singapore housing market is not oversupplied. Unsold units in the pipeline rose sharply in 2018 driven by new condo plans coming out of en bloc sales announced over the preceding one to two years. This increase is likely to be short-lived, as en bloc sales of condos have fallen from an average of more than S$1 billion a month to virtually zero since July last year.

Furthermore, we see fewer land acquisitions from Government Land Sales (GLS), as less land is being released for residential development. The slower inflows to saleable inventory will be outpaced by outflows from housing sales this year, in our view, meaning unsold inventory levels are likely to get tighter.

Housing demand, on the other hand, appears far from exhausted. In 2019, we see a tripling in potential demand from HDB flat owners eligible to upgrade to condos after meeting their five-year Minimum Occupation Period (MOP) requirements. Mostly insulated from higher Additional Buyer Stamp Duties (ABSD), around 30,000 HDB flat owners will become eligible per year over 2019 to 2022, we estimate, three times the run rate of the past decade. HDB upgraders make up half of all private homes sold by developers, and are the biggest contributor to housing demand.

In addition, the bulk of nearly S$20 billion in en bloc payouts to displaced homeowners from deals announced over 2017 to 2018 have yet to be deployed back into the property market. Most of the proceeds will likely be paid out only this year, which could significantly boost the S$10 billion-sales-per-year condo market.

Meanwhile, Singapore GDP growth remains stable while household earnings and cash levels have reached unprecedented highs. Mortgage rates are rising, but we think it will do little to derail the ongoing housing recovery. Home prices can continue to grow even as mortgage rates continue to rise, as they did in four of the last five rate hike cycles.

Commercial property: Growth to continue

We expect office rents to post a second year of double digit growth in 2019, as vacancies tighten amid a tight supply outlook and healthy demand. We expect annual additions to Singapore office stock to halve to one million square feet in 2019 and 2020, from two million in the preceding three years. Demand on the other hand appears to be well supported by the expansion plans of tech companies, as well as co-working operators that offer flexible workspaces. In aggregate, the amount of space taken up by flexible offices could rise 20 per cent in 2019 or around 600,000 square feet, according to Colliers.

Mall rents rose one per cent in 2018 after falling for three years, and 2019 could see another year of mild growth. The supply outlook appears benign as the pipeline is largely already accounted for by tenant pre-commitments. However, competition from online retail platforms, whose share of retail sales rose steadily through 2018, will likely limit the pace of rent increases.

Hotel revenues per available room (RevPAR) started recovering in 2018 after a five-year decline, which we think will continue in 2019, albeit at a slower pace. Supply is limited - we expect additions to available hotel room nights to fall to just one per cent this year from 3 per cent in 2018.

Demand is likely to slow as well. 2019 will lack the biennial Meetings, Incentives, Conventions and Exhibitions (MICE) events that were held in 2018, which could weigh on the corporate guest segment. Furthermore, our China transport analysts expect a fall in outbound tourism growth from China, now Singapore's largest source market for visitor arrivals.

Industrial rents will likely inflect in 2019. Rental declines stopped in the middle of 2018, and we believe rents will swing back into mild growth this year. Limited supply in the pipeline could mean landlords will raise rents. On the demand side of the equation, Reit managers we spoke with mentioned that leasing interest has improved, especially for the logistics space. Industrial tenants held back expansion plans in 2018 in light of global trade tensions, but any de-escalation of tensions could further boost demand.

Property stocks: Valuations to catch up with fundamentals

Singapore is our most preferred country exposure with our Asean property coverage. In particular, we think developers offer more compelling valuations relative to what we see as healthy property fundamentals. Trading at nearly decade low discounts to RNAV, our covered property developer stocks appear to be pricing in a housing recession, which we think will not materialise.