Developers may go for higher volumes, lower margins in mass, mid-segment
Recent events could make the residential property market vulnerable to declines in collective sales and speculative activity.
However, Goldman Sachs believes that other demand drivers such as the increase in resident population will help mitigate the fall in those selling their homes through collective sales and looking for replacement homes.
It reckons there will be little adverse impact from a drop in speculation while foreign buying will be relatively sticky. And the silver lining from the recent market slowdown brought about by the sub-prime mortgage crisis in the US is that it has weakened reasons for the Singapore government to curb price rises, argues a paper by Goldman Sachs Global Investment Research.
'Going forward, we think all developers will see more of their residential exposure being tied to mid- and mass-market projects via new site acquisitions so as to meet expected demand in those segments.
'We look for achievement of strong selling prices and take-up in forthcoming residential launches to demonstrate the strength of demand in the residential market and drive share price performance of Singapore developers,' according to the paper, titled 'Residential market shaken but still good for developers'.
The paper, authored by Goldman Sachs executive director (Asia-Pacific Investment Research) Leslie Yee, says the sharpest increases for Singapore residential property prices are over.
However, the operating environment in Singapore for developers is good, as they can still enjoy fat margins from developing their existing prime district residential landbanks, and reinvesting the money they make from selling such projects into mass/mid market sites where profit margins will be lower but volumes will be high.
'We see developers achieving margins of about 20 per cent in mid to mass market projects and tapping into opportunities as population increases,' Mr Yee said. He expects a positive demand picture, with net incremental annual demand of around 19,000 private homes over the next few years.
New demand will come from increases in the resident population, of which an increase in the number of permanent residents is a major driver; increase in the non-resident population; sellers of properties that are the subject of en bloc sales; and Housing and Development Board (HDB) upgraders.
The bank said its demand numbers do not factor in speculative buying. 'Given the speed and scale of price increases this year, we think a fall in speculative activity benefits the property market in the longer run by reducing pressure for government intervention to cool prices,' it added.
Goldman Sachs says it is not overly concerned about a decline in en bloc sellers looking for replacement properties arising from a near-term slowdown in collective sales amidst higher development charges and changes in legislation. This is because other components of demand will remain strong.
As for a slowdown in the supply of redevelopment sites if en bloc sales cool off, the paper argues that developers have enough residential projects on hand to execute, and the ability to acquire mid- and mass-market land from state tenders.
Goldman Sachs says it does not expect foreign buying, which has been instrumental in driving up residential property prices here, to dissipate as the factors attracting these buyers to the local property market - including transparency, openness to foreigners, and absence of capital gains tax - still hold.
Also, foreign buyers include permanent residents, whose property purchases here are likely to remain strong provided the momentum of new investments and jobs is maintained.
Goldman Sachs favours GuocoLand and City Developments for their leverage to the Singapore residential sector, accounting for 35 and 38 per cent respectively of their revalued net asset values.
In the mass segment of the private housing market, 'we see strong domestic economic factors and rising HDB resale prices underpinning price performance', the paper says.
'We think the government will be happy to see HDB resale prices rise so that larger segments of the population can enjoy the fruits of Singapore's success while continuing to ensure affordable housing for citizens through the HDB primary market,' Goldman Sachs reasons.
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