Monday, October 29, 2007

Exit Of Deferred Payments Not A Fatal Blow: Goldman

Source : The Business Times, October 29, 2007

Mid to mass market may be hardest hit as some projects see 50% opt for scheme

The withdrawal of the deferred payment scheme (DPS) for property purchases may quell demand in the short term, but will not deal a fatal blow to Singapore's residential market, says Goldman Sachs.

Negative sentiment: Analysts have trimmed their forecast residential selling prices by around 3-4%.

The investment bank also expects negative investor sentiment on property developers in the short term, but kept its 'buy' on GuocoLand and a positive view on real estate investment trusts (Reits).

Goldman Sachs Global Investment Research's report is among the first to be made available after the government announced last Friday that it was removing a scheme that allowed the bulk of payments for property purchases to be deferred till the project was completed.

Goldman said that parties that are likely to be affected by the move include property speculators, foreigners buying Singapore properties here and 'buyers who are stretching their affordability to buy a property'.

The bank says that the key test bed for the negative impact is the mid to mass market, even though the prime to luxury end of the residential market will be affected as well.

This is because 'there are projects in this segment where over 50 per cent of purchases are accounted for by buyers opting for the DPS route', and 'the need to secure financing upfront will cause buyers in this segment to hesitate in committing to buying'.

However, its analysts see certain mitigating factors like strong job creation and economic growth, which supports a positive long-term outlook on this segment.

In the short run, the pace of new launches and take-up of new launches are expected to slow over the next three to six months as property prices are likely to come under marginal pressure.

Goldman said that this would result from undiscounted selling prices, which could have been set higher using DPS, negative impact on certain pools of demand and negative impact on sentiment.

Indeed, the removal of DPS raises the risk of government intervention to curb rising property prices, the report added.

'Given such a backdrop, we foresee developers being less aggressive in recycling monies earned from successful launches into beefing up residential land banks,' it said.

Hence, its analysts have trimmed their forecast residential selling prices by around 3-4 per cent, assuming flat prices in 2008 as well as slower growth going forward.

'We also remove the 10 per cent premium to return on net asset value, where applicable, to reflect a more murky picture on developers recycling capital to expand land bank.'

Against this backdrop, Goldman kept its 'buy' on GuocoLand with a price target of $6.20 as 'we continue to like the China projects and find valuation attractive'.

Also, it maintains its 'neutral' stance on CapitaLand, City Developments and Keppel Land with price targets of $8.30, $15.70 and $8.90 respectively.

1 comment:

Anonymous said...

The following will start to happen in months to come.

The sharp rise in the property mkt during the last 12 months was partly fuel by the enbloc sales, speculators and of course there are the geniune buyers who are worried abt missing the boat.

It is beyong doubt that the DPS plays a impt role in the developer's sales as buyers only need to pay up 3 yrs later. With this remove, it is just like stocks, when the brokers removes the T+4, just like the recent UniAsia, the buyers will have to pay upfront when buying, the prices will fall, if not collapse.

When the developers offer DPS, they are indeed paying for the interest incurred and hence build the cost into the prices. At 4% per yr, for 3 years, the interest playable by the developer would come up to 12%.

Without DPS, the developers, with the saving of some 12%, can afford to give a discount of that amt . It would be very logical to see Prices of the new development without DPS dropped by at least 10%, if not 15%.

The developers business is to buy land, build them and sell at a Profit. Buy low sell high, buy high sell higher.. they do not mind buying land at high prices IF they can sell their properties at higher prices.. as long as they can make money.

Now, with the removal of DFS, the govt is sending out a Strong signal that they are serious abt stabilising the property mkt. Minister has mentioned that there may be more measures to come. Capital gain tax, reduction of the loan quantum to 70%, extra stamp duty if sold within the few 1-2 years, etc, are the weapons that the govt has.

Now, being a developer, one would be worry abt the Future demand and hence more willingly to lower their prices to dispose of the remaining units. Visit a showroom this weekend and next, you will believe it. When the developers start cutting their prices, it will more or less bring down the average px of the property.

Next, the resale mkt will be affected with the lowering of prices by the developers. Lets say, developer A cut their prices by 10%, it would be logically to presume that the resale properties at the nearby development will also fall by 10% if not more, otherwise buyers would buy directly from developers who may throw in more freebie.

Currently, there are many speculators who are caught with many units, waiting to unload. When they see the developers reducing their prices, they will start to panic and unload theirs. One thing for sure, until these speculators or Spec-vestors clear their holdings, they will Not commit more units. Some of my speculators friends have voice concren and will be sellling their units, even at breakeven prices. These were the 'Wholesales" buyers for the developers, they come in and grab 5-10 units without a blink. with these group of "Wholesalers" gone, the developers may find sales dropped as they are dealing more with "retail" customer who come in and buy 1 unit at a time.

When the sales at the new development is slow, the confidence will drop, buyers who are worry abt missing the boat will now hold and wait. When the developrs cant sell their units as fast they have done so in the last 2 years, they will consider abt their Bidding of land or enbloc properties. They will now bid at lower prices than before and may stay out completely until they sold out their current stock.

Without the high prices offered by the keen developers, the enbloc craz will die down. some enbloc may have to reduce their expectation in order to secure a buyer. The hugh capital gain reaped by the enbloc will be reduced, hence the enblocer will not be willing to pay high price for their replacment property.

There will be a Domino Fall just like the spiral up in the last 24 months. Now, it is just the beginning of the Domino Fall...

Worst is that more supplies are coming out in the next 24 months and the promise by the govt to introduce more measures if required to curb the sharp rise in property prices.

I foresee a correction of 20% from here