Residential Property Market (OCBC)

Maintain Neutral
Previous Rating: Neutral

Closer look at the possible BTO ceiling hike

An estimated 2.3k-unit demand shift to BTO. Given a possible BTO income ceiling increase from $8k to 10k later this year, we take a closer look at the numbers involved and examine the impact on the HDB resale and private residential markets. From the 2010 census, we estimate 89k households (with at least one citizen) in the S$8-10k bracket. In our methodology, we work off the overall national average and break down the group by dwelling categories. We then estimate a potential demand of 13k units for BTO flats from the group, of which we assume 30% would buy BTO flats. In addition, we assume 5% of 19.5k new households formed annually from first-time marriages would fall into the S$8-10k income bracket and buy BTO flats as well. This results in a combined demand shift of 2.3k units to the BTO market on an annual basis.

Demand would shift from HDB resale market. We believe the majority of this 2.3k-unit demand would shift from the HDB resale market. The HDB resale market has an average of 31.8k transactions over the last four years and the impact of the income limit hike alone could reduce annual resale volume by 6-8%. Additionally, the increase in BTO supply to 26k units this year would put even more downward pressure on HDB resale volume and prices. Note that 2011 would be the first in the last six years where BTO supply would exceed household formation (first-time marriages).

Impact on pr ivate pr imary market l ikely smal ler. The impact of demand shifting away from the private primary market would likely be smaller. We examined 11,037 new sales with caveats lodged with the URA over the last twelve months and found 1,330 sales for units >80 sqm and <$1.2m to buyers with HDB addresses. These are private units most suited to upgraders/first-time buyers in the $8-10k income group, for which BTO flats can be substitutes. If 200 to 400 units of this 1,330-unit demand shifted to BTO, we could see a 2-5% drop in annual private primary sales. Note that BTO flats are not substitutes for shoebox units typically bought for rental and capital appreciation.

Maintain NEUTRAL on sector; BUY UOL. With the liquidity in the market and residential unit sales still expected to hold in FY11, we maintain our NEUTRAL rating for the residential property sector at this juncture. Our pick in this sector is UOL due to its limited residential exposure and the potential to pick up accret ive acquisi t ions in a sof ter market ahead. Maintain BUY on UOL with a fair value estimate of $5.57 (at 20% discount to RNAV).