Analysts cautious as property prices peak

Property prices continue skywards in Singapore and on Sentosa. On Jul 1, the Urban Redevelopment Authority (URA) released the flash estimates of the property price index (PPI) for 2Q10 which indicated that property prices are above their 1996 peaks.

But before you pop the champagne, analysts are sounding words of caution. Donald Chua, property analyst at CIMB says in a report dated Jul 2: “We view this set of data cautiously. Year to date, prices have grown by more than 10%. This has affected overall affordability, which we estimate is now inching closer to the banks’ 35% threshold of mortgage-to-income ratio even with the unprecedented low mortgage rates. We also believe the government will be watching this set of data with much interest, which will increase risks of further policy noise.” CIMB has an underweight on the property sector, with City Developments its key underperform. The report says Wing Tai offers better valuations.

In a June 28 report, Citigroup analysts are also wary of rising prices. “The much anticipated high-end volume has yet to materialise despite the completion of both integrated resorts. Take-up remains relatively weak for the few high-end properties launched. With one-third of the district nine units scheduled for completion in the next 12–15 months unsold, the risk is in developers with weaker holding power and owners who have acquired multiple units at the peak in 2007/08 on deferred payment,” the report states. “We think the risk of high-end properties surprising on the downside outweighs the risk of them surprising on the upside,” it adds.

According the URA flash figures, 2Q10 saw a broad-based increase in prices for all segments of the market. Overall PPI is up 5.2% q-o-q to 184.1pts, compared with a growth of 5.6% previously. The index is now above the previous peak level of 181pts seen in 3Q96. The largest price increase in the quarter was recorded in the mass-market regions while the core central region saw a 5.1% q-o-q growth.

Citi is expecting rental and resale prices in in the mass-market segment to rise by another 5–10%, but warns that policy risk remains in this segment. The biggest positive factor is liquidity and the record-low mortgage rates, Citi says. “With mortgage rates at below 2% and unlikely to rise significantly in the next 6 to 12 months, this would help mitigate any significant downward price pressures in the high-end segment.”

Preferring to err on the side of caution, Citi is recommending the low-risk S-REITs over developers “given the increasingly unfavourable risk/reward ratio”. Among the developers, its top pick for the sector is CapitaLand for its attractive valuation and diversified portfolio followed by hold recommendations for CapitaMalls Asia and Keppel Land because of their limited exposure to Singapore residential property. Citi has sells on City Developments and Allgreen Properties which are skewed towards residential segment. It likes the REITs most, and its favourites are Ascendas REIT, CapitaCommercial Trust, Suntec REIT and Mapletree Logistics Trust.

CIMB favours the office segment and its top pick is Keppel Land. According DTZ estimates, office rents bottomed in 2Q10 after having fallen 50–60% from the peak in 3Q08. Prime offices in Raffles Place led the turnaround in rents with a 1.3% increase quarter-on-quarter to $7.90 per sq ft per month. Cheng Siow Ying, DTZ’s Executive Director (Business Space) says in a report dated June 29: “Due to the strong economic recovery, a large number of new leases signed in the first half of the year involved companies taking up expansion space. We see broad based recovery in demand from all business sectors led by banks and financial institutions.”

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