So far the market seems to have taken in its stride the removal of the interest absorption scheme (IAS) for properties. The knee-jerk decline of 43 points by the STI on Monday was followed by a sharp rebound on Wednesday as broader economic recovery factors continue to dominate. But there is an impending overbuilding of residential property in Singapore. According to Leong Wai Ho,director and senior regional economist at Barclays Capital, some 62,000 units are in the pipeline between now and 2013. In the first eight months of this year, almost 12,000 units were taken up compared to just over 4,000 units for the whole of last year.
However sales were already slowing month on month even before the government’s latest measures. What is the impact of this inventory on corporate Singapore?
The initial impact could well be felt by the banks. Mortgages represented the only area of loan growth for the banks this year, up 6% year to date, versus a contraction of 0.1% for total loans. According to Trevor Kalcic, regional banking analyst at RBS Securities, it will reduce the sector’s future growth by around 0.5%, through a negative impact on both volumes and margins.
Banks do not disclose sales under IAS, but analysts and economists estimate that IAS buyers could amount to about 30% of total sales. “Assuming that about 30% of these are marginal buyers who would only opt for IAS or nothing, then neutralizing these sales reduces our FY10F and FY11F Singapore system loan growth numbers of 2.5% and 3.5% respectively by less than 0.5%,” Kalcic states in a report issued on Monday. “If the measure leads to property price declines, we would expect it to have a further negative impact on volume.” On the margin front: banks charge developers an interest rate for offering the IAS scheme which is higher than the retail mortgage rate.
Hence, scrapping the IAS will have a negative impact on incremental net interest margins and revenue. Kalcic has forecast a sector PER average of 15 times for FY10 and 1.8 times price to tangible common equity which he says isn’t cheap anymore and has an underweight recommendation on the banking sector.
The removal of IAS is none too positive for property developers because of the dampening impact on speculative activity. However, Lim & Tan Research notes that the root cause of the recent “buying frenzy” (not just in the physical property market, but stocks) is the extremely low interest rates, with for instance the three-month inter-bank literally static at 0.6% with banks cutting deposit rates.
“This is not confined to Singapore” the report states. “Money market funds in the US have seen massive outflows, so have hedge funds, while investors shun structured products. With sentiment towards property stocks (chunk of the STI) dampened, surpassing the 2,700 level will remain a big challenge, until evidence emerges that buying interest actually remains healthy despite the latest measures.”
Nomura Research maintains its bearish view of the property sector and has an underweight rating on property stocks. “We see luxury/mass home prices falling 43.0% and 25.9% from the peak,” says a report dated Sept 14. “The risks of rising unsold inventory and defaults/distressed sales among deferred payment scheme buyers will reinforce expectations of lower prices crimping recovery expectations.”
Source : The Edge – 17 Sep 2009