Over the past year, Singapore’s booming new home sales has begun to raise questions of potential cooling measures by the government. To prevent developers from bidding up land prices to meet the rising demand, another option by the government would be to increase the land supply, as it looks to strike a balance between supporting a recovery and not hitting too hard on the brakes on the housing market.

Key points

  • Firm land bids by developers a sign of confidence. Expect continual price growth but an uptick in government land supply to act as a natural dampener
  • MQ believes steep Revalued Net Asset Value (RNAV) discounts are not justified in an environment of rising asset values.
  • Capitaland and UOL are MQ’s conviction picks, and it is raising Earnings Per Share (EPS) estimates and Target Prices (TPs) for CityDev and UOL

Positive read-through from the land market

MQ sees firm land bids by developers as a reflection of their confidence in Singapore’s property market. MQ raises its 2021 home price growth forecast to +10% (from +3%) as it expects ample liquidity and a rebounding economy will continue to underpin property price growth. While the risk of policy tightening has increased with the continuous price hikes, MQ believes intervention is not necessary as it expects the rise in government land supply will act as a natural dampener.

Either way, steep RNAV discounts appear to have priced in the risk of a policy tightening, and MQ sees limited share price reaction even if policies get tightened. On the other hand, MQ argues that the steep discounts are not justified as RNAVs are firmly supported by rising property prices.

Update on Singapore’s land market

Land-starved developers bidding high. Despite COVID-19 uncertainties, robust new home sales have led to falling residential inventory levels in the market. This has led to elevated land bids in recent transactions as developers seek to replenish their landbank. MQ sees this as a reflection of developers’ confidence in the market and is a harbinger of further property price appreciation.

Uptick in government land supply to keep price hikes in check. The increase in Government Land Sales supply in the second half of 2021 and the impending launch of the Marina View White site will lift residential land supply by 2.3x year-on-year to approximately 5,400 residential units in the coming year.

This includes 4,400 private units and almost 1,000 Executive Condominium units. MQ believes the sizeable increase should keep price hikes in check and prevent an eventual sharp escalation in home prices. Successful land bids from these upcoming tenders could drive further upside to RNAVs.

MQ expects a small rebound in private land deals. With private new home sales tracking at 10-12,000 units a year, MQ believes the 4,400 units from the planned government launches will not be sufficient to satisfy land-starved developers. More sites on the government’s reserve list could be triggered, and MQ sees a spillover into the private market.

Sales via en bloc, the most common source of private land, should see a rebound. Nonetheless, MQ sees stringent regulatory regimes preventing overexuberance seen in past cycles. MQ also expects developers to look inwards by redeveloping existing assets as an alternate source of land.

Developer stocks attractively priced amidst rising asset prices

MQ argues that the steep RNAV discounts for developer stocks are not justified with RNAVs firmly supported by rising property prices. MQ raises EPS and TPs for CityDev and UOL after incorporating their latest tender wins and maintain Outperform ratings.

MQ advocates positioning in CapitaLand for investors keen to avoid development risks. MQ views its ongoing restructuring exercise positively and estimate attractive implied valuations for the surviving entity.

– MQ has an Outperform rating for Capitaland with a price target of S$4.35/share

– MQ has an Outperform rating for CityDev with a price target of S$8.95/share

– MQ has an Outperform rating for UOL with a price target of S$9.40/share

All 12-month target prices above are based on a Revalued Net Asset Value (RNAV) methodology.