Property Market Update.

This is a detailed analysis of yesterday's URA figures compiled by CIMB-GK (see here):

PPI of 178pts close to peak levels in 1996.

The URA released its 1Q08 flash estimate for the residential property price index (PPI) yesterday. Overall prices rose 4.2 qoq, from 170.8pts in 4Q07 to 178pts in 1Q08. PPI of 178pts is just 1.8% off the previous peak of 181.4pts in 2Q96.


Decent growth in all sub-sectors with the mass market leading the way this time.

Price growth captured in the 1Q08 flash data sprung up some decent numbers. According to the URA, residential prices in the core central region (CCR) and rest of central region (RCR) grew 4.4% qoq and 3.9% qoq respectively in 1Q08. Prices outside the central region, which has consistently lagged prime regions before 2Q07, was the outperformer this time, posting a 4.8% growth qoq, representing the highest among all sub-segments.

While overall PPI appears to be approaching peak, we estimate that prices in the mass markets are still well below the previous peak of 1996. We see further upside potential in asset prices to come from this segment this year.



However, low transaction volume paints a less bullish picture.

Based on URA statistics, we estimate that less than 350 new projects were sold in the first ten weeks of the new year. At this level, it is likely that transaction volumes for 1Q08 will fail to exceed the 890 units sold in 4Q97 during the last Asian Financial Crisis. This is a stark contrast to the positive tone depicted by the URA numbers for the quarter.

Given unsubstantial new sales, we believe the price growth registered in the sector were largely due to higher benchmark prices achieved for a few selected projects – hardly an indication of strength within the sector. Price growth from OCR could also have come from a better than expected resale market.

New projects that saw decent sale volumes in the quarter in the prime locations were Marina Collection in Sentosa (15 units sold, ASPS$2,728psf), Wilkie Studio (44 units sold, S$1,540psf) and Zenith (45 units sold, ASP S$1,662psf), while projects such as Reflections at Keppel Bay (1 unit sold, S$2,400psf), Hilltops (1 unit sold, S$3,818psf) and Martin Place Residences (2 units sold, ASP S$1,832ps) saw lacklustre sales.

Outside the central region, notable projects that achieved good ASPs include Botannia (6 units sold, ASP S$821psf), Waterfront Waves (38 units, S$797psf) and The PARC Condo (2 units sold, ASP S$1,044psf).


Anecdotal evidence points to a weaker 2Q08.

So far, news flow in the sector continues to negative for the sector. The recent pull-out of the bulk purchase for Goodwood Residence from the Kuwait based fund coupled with the lower than expected ASP of S$2,650psf (as opposed to S$3,200psf previously achieved) for Grange Infinite to AXA Asset Management seem to indicate lower institutional appetite for Singapore residential properties.

We believe the lower asking price for the Pinetree Condo enbloc of S$1,700psf v.s S$2,100psf previously in July 07, also reflects cautiousness among the developers. The recent benchmark bid of S$350psf achieved for the state land in Yishun from MCL Land (Not Rated) does not signal confidence returning in our view given significantly lower bids tendered by other competing developers.

With many of the developers expected to defer new project launches indefinitely, we see transaction volumes in 2Q08 depicting a similar trend as the last. Potential of further benchmark prices achieved will likely come from fringe-mid tier locations, albeit selective projects, in our view. We maintain our price forecast of 10- 12% for this segment in 2008.

For the prime location properties, we expect growth to remain flattish from hereon, maintaining our estimate of 5-10%.

Valuation and recommendation

Look for developers with margins buffer and RNAV resilience.

While smaller cap developers with highly leveraged balance sheets are usually fawned upon in a market downturn, we believe valuations for some of these stocks under our coverage are starting to provide good risk-reward propositions.

We maintain our Outperform call on BukitSemb (BS SP, S$9, Outperform) and HoBee (HOBEE SP, S$0.96, Outperform) for its low cost land bank and undemanding valuations respectively. While, a correction in asset prices appears to be in the cards, current valuations for HoBee imply a more than 40% price decline, which we deem to be too pessimistic. Trading at 62% discount to our end-CY08 RNAV estimate, we see limited downside from here for the stock.

Valuations for Allgreen (AG SP, S$1.24, Underperform), CityDev (CIT SP, S$11.56, Neutral) and UOL (UOL SP, S$3.83, Neutral) are not compelling at the moment and look to accumulate at more attractive levels. We continue to look for signs of improving sentiments as the re-rating catalyst for the sector. Maintain Underweight.