Published January 14, 2009

Harder knock seen for property prices

Citigroup, Goldman downgrade most of real estate stocks covered to 'sell'

By ARTHUR SIM

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EXPECTING the 'worst recession in Singapore's history', Citigroup now believes that property prices could fall even lower than forecast so far.

Office sector: Citigroup now expects prime Grade A office rents to fall by another 60 per cent over the next two years, up from its earlier forecast of 50 per cent

It also recommends a 'sell' for property stocks covered (save one), saying that while these have recovered 30 per cent from 2008 lows, 'the current rally is not sustainable'.

Citigroup recommends a 'buy' for Allgreen, saying that it offers a relatively high yield of about 6.5 per cent.

Goldman Sachs has also downgraded property stocks covered to 'sell' (save one - although a different one).

It said: 'With developers remaining reluctant to take losses to clear inventory and an environment where NAV expansion will likely be difficult, there is little room for multiples to expand - implying that stocks could be range-bound for most of 2009.'

Goldman Sachs believes, however, that CapitaLand is more likely than its peers to generate NAV growth in the next three years, given its diversified business model and capacity to benefit from the current market environment.

In the high-end segment, Citigroup says that properties such as Ardmore Park have seen price corrections of about 35 per cent from a year ago but still reckons prices could fall by another 30-40 per cent this year to reach 2003 and 1998 levels. This would imply a 55-60 per cent decline from the peak in 2007.

Similarly for the mid-tier segment, Citigroup believes a further price decline of around 35 per cent is possible, amounting to a 45 per cent decline from 2007 levels, while the mass-market segment could fall by another 10-15 per cent.

Its forecasts represent declines of around 10 percentage points lower than the most pessimistic forecasts to date.

But this is on the back of the worse-than-expected economic data which has prompted Citigroup to revise growth estimates with the GDP now forecast to contract by 2.8 per cent this year, surpassing the Asian financial crisis (-1.4 per cent) and the 2001 tech recession (-2.4 per cent).

Of greater concern to Citigroup analyst Wendy Koh is the possibility of more distress sales due to the deferred payment scheme (DPS).

Compounded by falling property values and banks offering loans at lower loan-to-valuation ratios, Ms Koh says: 'This could potentially add further woes to the already weak residential market. Developers might have to consider offering top-up loans to such buyers.'

In its analysis of recently revealed DPS numbers, Phillip Securities Research said that of the 4,560 units expected to be completed this year, it is most likely that the units were bought at the lower 2006 prices. As such, these buyers will still be able to make a small profit, if any.

However, of the 2,540 DPS units to be completed in 2010, most would have been bought at the higher 2007 prices, when the URA price index went up by a hefty 28.1 per cent.

'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,' it added.

Not spared either is the office sector. Citigroup's Ms Koh says: 'Pre-commitments aside, new supply coming on-stream in the next 12-18 months are unlikely to secure any tenants.'

Citigroup now expects prime Grade A office rents to fall by another 60 per cent over the next two years, up from its earlier forecast of 50 per cent.

And this only if net space given up in 2009 is about 50,000 square feet.

If this figure is higher, Citigroup believes islandwide occupancy could test the historic low of $4.50 per square foot.