DC revisions within expectations. Earlier this week, the Ministry of National Development announced its bi-annual revision of development charges (DC) rates effective for the next six months (Sep11-Feb12). In percentage terms, the rates increased the most for Industrial/Warehousing (Group D - 31%) and Commercial (Group A - 22%). The Residential groups (B1, B2) increased at a similar pace as the last revision. Overall, we believe the market would be neutral to this event. The rates increases were within expectations given the broad uptrend over the last six months in industrial and commercial property rentals (URA multiple-user factory rental index +13%; CBRE prime office +6%) and capital values (URA multiple-user factories price index +15%; CBRE prime office +11%).
Expect lower DC increases ahead. We judge that the incremental impact of these rates increases in itself would be relatively low for developers. But, coupled with current macro uncertainties and expected inflection points in residential prices and office rentals ahead, this could further push developers towards a cautious stance. This would also make it increasingly difficult for en-bloc deals to be accretive and could likely dampen the already slow enbloc scene. Going forward, however, we expect the rate of DC increases for the commercial and residential sector to decelerate as selling prices, rentals and capital values soften with macro headwinds.
Zooming into the numbers. We saw the highest DC rates increases in Industrial/Warehousing use with an average of 31% and in Commercial use with an average of 22%. In particular, the DC rates for Group A in Sector 101 (Paya Lebar Central: Paya Lebar/Eunos /Macpherson Road) had increased as much as 32%. For the remaining groups - Group B1 (Landed Residential), Group B2 (Non-landed Residential) and Group C (Hotel/Hospital) - the DC rates increased by an average of 17%, 12% and 7%, respectively. Also of note is that the DC rate increase were as high as 39% in Sector 57 (Serangoon Road / Whampoa / Bendemeer Road) for Group B2 (Non-landed Residential) use.
BUY UOL. Our preferred pick in the Singapore property sector continues to be UOL due to its limited residential exposure and the potential to pick up land-bank as the acquisition environment cools down further. We have a BUY on UOL with a fair value estimate of S$5.57 (at 20% discount to RNAV).
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