Singapore Property: Will you buy a house with me? (NEUTRAL)

Singaporeans seeking marriage homes with HDB purchases are rejoicing. The long waited hike in income ceiling from S$8,000 to S$10,000 (and for ECs from S$10,000 to S$12,000) for qualification of HDB purchase has been confirmed. HDB will keep up with the momentum in BTO launches moving forward c.25,000 units next year. There are signs of easing in property price increases and primary sales by developers are down -6.4% YoY to 7,755 units in 1H11, and a potential siphon of underlying housing demand from the private mass market housing segment to HDB lies in wait. We believe supply side policies are the main moderating tool for residential prices moving forward. We nonetheless stress test our RNAVs and see any share price weakness attributed to expectations of property price weakness overdone. We maintain our NEUTRAL call on the sector and our preferred picks are CapitaLand and OUE.

Policy key to Singapore residential prices. For the Singapore property sector with more than

80% of housing in the public HDB segment, apart from market demand we believe policy is a

main driver of long run residential real estate prices. We revisited the past periods of residential price movements and highlight that secular price trends for private real estate prices in Singapore accentuate from major policy changes eg. i) the strong run up in residential prices in the 80s due liberalization of CPF policies, ii) the sharp correction following anti-speculation measures in 1996 and iii) withdrawal of deferred payment scheme in 2007.

Expect near term price stickiness …. with the current low interest rate environment, positive carry on rental properties and near term supply deficiency. Based on a tepid

population/household formation growth scenario attributed to more stringent immigration policies, we expect a more balanced demand supply scenario in FY14/15 coinciding with a 6-7 year property cycle.

…. but policy moves to moderate prices in the medium term. Moving forward, i) following the

January cooling measures which will dampen speculative buying, ii) gradual impact from supply side policies, and iii) the recent hike in income ceiling is likely to siphon demand from the mass market segment to the HDB segment and moderate residential property prices, we believe with recent policy moves developers and home buyers are likely to adopt a more cautious attitude towards land-banking/home purchases leading to price/volume softening.

Correction overdone, nonetheless maintain NEUTRAL on sector with lack of upside

catalysts. After factoring in -25% in residential ASPs and -30% in office capital values, we find the share price correction from negative headwinds and expectations of downside in physical property prices overdone. While we concede a lack of near term catalysts, we believe deep value is embedded in the sector for longer term holdings at current levels. Our preferred picks are CapitaLand and OUE, which are trading at steep discounts to distressed RNAVs.