Residential Supply Crunch To Get Worse, Says Citigroup

Sources : The Business Times July 24, 2007

Jobs growth, foreign worker inflow overwhelming available units

THE property supply crunch is likely to get worse despite government assurances that supply over the next few years is sufficient, Citigroup says in a report released yesterday.

The report comes just a week after the investment bank advocated a shift from property to bank stocks, amid what it termed 'policy uncertainty'.


Since mid-May the government has announced measures to tackle the surge in the property market - especially the rise in office rents. This has undermined the performance of property stocks, Citigroup said in a July20 report.

In yesterday's report, Citigroup analysts Chua Hak Bin and Lim Jit Soon say a supply crunch can be expected because the number of units completed from 2007 to 2010 will likely fall short of the Urban Redevelopment Authority's projection of 42,200.

'Completion rates have been consistently over-estimated in the past,' the analysts say. 'Units under construction provide better guidance and suggest a potential shortfall. Shortage of construction materials and workers implies that risk of delays has risen.'

Units under construction far lag completion estimates, with only 25,100 to be built from 2007-2010, according to Citigroup. Specifically, just 4,573 units are under construction in 2007 plus a further 6,633 in 2008. Jobs growth and the foreign worker inflow continue to overwhelm available residential units, Citigroup says. Jobs growth in 2007 is keeping pace with the 176,000 jobs generated in 2006, of which about half were taken up by foreigners.

'Accommodating the current flow of foreign workers looks near impossible with the current supply stock and pipeline,' the bank's report says.

'The lack of any slack also shows in completed but unsold units, which reached a new low of 567 at the end of the first quarter of 2007.'

En bloc sales will exacerbate the residential supply squeeze, Citigroup reckons. And it sees a risk of more policy measures.

'The government will likely favour supply side responses, including more land supply, more HDB flats and further relaxation of measures on rental of HDB properties,' it says. 'But demand-side measures cannot be ruled out if price increases continue to accelerate and speculation begins to test the comfort zone of the authorities.'

Anticipating dampening policies, Citigroup last week called for a shift from property counters to banks.

But it remains positive about the fundamentals for property because demand and supply dynamics continue to favour rental and capital growth for both the office and residential sectors. Still, policy uncertainty has affected the share prices of some property stocks, the report said.

Banks, which are beneficiaries of the property upturn because of property loans, are better proxies for the property boom, it said.

'With reasonable valuations and steady earnings growth, banks provide exposure to the reflation theme without the downside from policy uncertainty.'