Singapore residential property

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Jefferies strategist Chris Wood made an interesting comment in his 4Q21 Asia Maxima report. He expressed a bullish view on Singaporean residential property developers, quoting a 40% discount to book and rapidly improving fundamentals. Here is a short report on the sector to figure out whether his bullishness is warranted or not.

Executive summary

  • Supply & demand for residential property is not necessarily out of sync. The 2009-2013 period was a bubble and should not be seen as a baseline.

  • The retail, office and hospitality segments have suffered over the past two years due to cross-border travel restrictions, working from home during the pandemic and the threat from e-commerce. But several of these factors are one-off in nature.

  • I see value in City Developments, given high-quality assets, excellent execution and an upside of almost +60% using reasonable assumptions.

  • I’m also bullish on small-cap Bukit Sembawang, which sit on a valuable land bank and has won awards as one of the best property developers in Singapore.


Introduction to Singapore’s housing market

Housing in Singapore can be divided into three separate categories:

  • Built to order (BTO) public housing, a.k.a. HDB flats (Housing & Development Board). Typical prices of SG$300-400,000 for 99-year leases.

  • Resold HDB flats. Typical prices of SG$400-600,000 for 99-year leases.

  • Private housing. Typically condos landed housing. Prices in excess of SG$1 million, depending on location and type (whether leasehold or freehold).

The Housing Development Board (HDB) system

Singapore has a 91% homeownership rate, much thanks to the government’s public housing scheme under the Housing & Development Board (HDB). The HDB system was created to solve the nation’s housing shortage right after the People’s Action Party came to power in 1960.

While public housing existed even before the Housing Development Board, construction of such buildings accelerated after it was set up in 1960. It hoped that HDB flats would provide the population with high-quality housing. The government also reasoned that if the population owned their flat, they would be more committed to defending the nation in case of a conflict.

A 1967 law allowed the government to compulsorily acquire private land for public housing (“HDBs”). That sped up the construction of HDBs. By 1965 roughly 23% of Singapore’s population lived in public housing. By 1984, that number had reached 62% and by 2017 roughly 82%.

In 1989, a new quota policy was introduced to ensure racial harmony: each housing block from then on needed to ensure that it had residents from each of Singapore’s three key ethnicities: Chinese, Indians and Malays.

All HDB flats are 99-year leases, after which you will have to return the flat to the government. Since the HDB system was set up in 1960 and few 99-year leases existed before then, lease expires have only started occurring. In theory, the value of the leasehold will go to zero after the 99 years have passed.

There are four flat types, of 36-130 square metres in floor area. In addition, studio apartments for the elderly are also being developed in a separate housing program.

Flats are typically built-to-order (BTO), which take a few years to finish. Owner-occupied HDBs can then be resold at market prices. There is also a small market for rental public housing but those are mostly for low-income individuals.

One contributing factor to the success of the HDB system was a rule change that allowed buyers to use their pension (“Central Provident Fund”, CPF) to pay for their flats (either the mortgage payment, repayment or both). That eased the burden on homebuyers to finance their purchases.

Financing of HDBs happens either via so-called HDB loans at a 2.6% fixed-rate or bank loans with variable interest rates. But there are many constraints and eligibility requirements as well as subsidies for low-income individuals. Repayment is done over 25 years. Eligibility and the specific terms for bank loans depend on the contracts offered by each individual bank.

Private housing in Singapore

In addition to public housing (HDBs), there are also private apartments (either 99-year leases, 999-year leases or freehold) as well as landed property (typically freehold). Private housing tends to be far more expensive with typical prices of SG$1-2 million.

There are three main types of private property: landed property, apartments and shophouses.

Landed property includes bungalows (including super-expensive “good class bungalows”), semi-detached houses and terrace houses.

Apartments: The most common type of private housing in Singapore, ranging from condominiums, executive condominiums and other apartments.

Shophouses and other: Shophouses converted into residential living spaces.

Geographical overview

The Singaporean property market is typically divided into three areas: resale condo median price. Note: the Singapore Dollar / US Dollar exchange rate is 1.35.

  • Core central region (“CCR”): SG$1,844/sqft; median price SG$2.3 million

  • Rest of central region (“RCR”): SG$1,394/sqft; median price SG$1.5 million

  • Outside central region (“OCR”): SG$1,019/sqft; median price SG$1.1 million


Macro backdrop

The Singapore Dollar is not a cheap currency, trading at the higher range of its historical real effective exchange rate.

Singapore’s demographics are poor, with a fertility rate of 1.1 children per woman, compared to a replacement rate of 2.1. The population pyramid is problematic when it comes to home demand because, in 10 years, the number of individuals purchasing homes (the 25-35-year-old range) will drop significantly.

Instead, Singapore is reliant on immigration, which up until 2015 kept overall population growth at over 1%. A popular backlash and new restrictions caused immigration to drop. The last government guidance back in 2012 planned for a 7 million population by 2030, which would imply a 2% yearly growth in population from the current 5.7 million. That seems unlikely at this point but I would not rule out 1% as a more reasonable long-term estimate.

The household formation rate is rising due to a higher number of singles that each requires his or her own home.

On average since 2011, the number of households has been growing 2.0% per year or roughly 27,000 per year. This is a good proxy for the theoretical sustainable demand for property.

As in most other developed nations in Asia, household debt in Singapore is not low. But it has not reached the worrying levels of Korea or Thailand either. In the context of low interest rates, the current level of household debt should not be a concern.

What provides support for the current housing market is the fact that the 6-month Singapore interbank rate (SIBOR) has dropped since the pandemic to close to all-time lows of 0.6%. With a 100bps spread, that means that the interest payment on a mortgage will be 1.6% or SG$16,000 on SG$1 million mortgage - a modest amount. Of course, amortisation comes on top of this and home buyers will also run the risk of interest rates rising at some point.

Singapore’s housing market is often referred to as cheap. That’s probably true if you look at the BTO HDB market. However, these are 99-year leases and not directly comparable to freehold property.

In terms of private housing, prices are in line with that in other major Asian cities. The private housing affordability ratio is currently in the low-teens. And a large percentage of the private housing comprises 99-year leases as well, so it is not fair to compare the prices to say Seoul or Tokyo.

In absolute terms, Singapore’s private housing prices are in line with those of other major cities, such as London and Paris. Again, not necessarily like-for-like since only a portion of these apartments are freehold.

Cap rates have been around 3% for the average private residential property though if you’re looking for freehold, prepare to pay 2.5%. These levels are only marginally better than what you get in Hong Kong.


Recent industry trends

The three major phases of Singapore’s residential property market since the Asian Financial Crisis can be divided into:

  1. The 1998-2006 post-crisis period, with forced deleveraging and widespread negative equity.

  2. The 2009-2013 market rally as Asian credit growth accelerated significantly and some of that liquidity flowed to Singapore.

  3. The post-2013 stabilisation period, when the property market cooled due to several policy measures, including additional buy stamp duty and immigration restrictions.

During the market rally, a number of new restrictions were introduced to cool the market. These included prohibitions of interest-only housing loans, loan-to-value ratio limits, tenor restriction limits, total debt service ratio limits (TDSR) and mortgage service ratio limits.

But the most important new policy was the additional buyer’s stamp duty introduced in 2011. The rate increased in 2013 and again in 2018.

The total stamp duty that any purchaser of a property will now have to pay includes basic stamp duty of 1-3% + an additional buyer’s stamp duty of up to 23%. This additional buyer’s stamp duty killed any speculative activity. Today, most buyers of Singapore private housing or resale HDB housing are owner-occupiers.

Today, almost ten years since the introduction of the additional buyer’s stamp duty, it looks like we have entered a new period for housing prices, with price indices and volumes recovering strongly since 2020.

Here is the price index for HDB resale flat:

Private property prices have also increased roughly 10% since the start of the pandemic.

Monthly resale volumes for private property have been very strong since the pandemic as well.

On a longer time scale, the resale market is now even stronger with the full year 2021 numbers potentially exceeding the prior 2010 peak. Note that the last bar only represents a half-year’s worth of units sold and that the numbers for full-year 2021 will be close to double this.

New home sales have been somewhat weak due to COVID-19 related delays. But the 6.5k units sold in the first half of 2021 suggest light at the end of the tunnel. For many developers, 2021 will be the best year since 2013.

In terms of the regional split, volumes have been the strongest in the outside regions, most likely due to upgrading demand from HDB owners who have seen their HDB home prices increases. Starting from around August, however, there are now signs of a pick-up in buyer interest of residential property in the core central region as well.

What separates the current market rally from the one in 2009-2013 is the absence of foreigners and the absence of speculation. Most transactions that we have seen are done by owner-occupiers.

It looks like the central bank Monetary Authority of Singapore is comfortable with recent developments in the property market as well, with Managing Director Ravi Menon saying that:

“[The] property market is not considered overheated at this juncture… We hope the market will continue to remain stable and that we don’t have to make any moves.”

The upward move in prices seems to be supported by rent fundamentals as well. Rental indices have surged in 2021, perhaps due to Singapore’s large budget deficit, demand for home offices or demand for short-term rental as new homeowners wait for their BTO flats to complete.

Here is a chart showing how unprecedented the 2020s budget deficit was from a historical perspective. Singapore’s M2 money supply growth hit 13% at the peak before contracting.


Residential supply & demand outlook

So demand from household formation seems to be around the 30,000 mark - including both HDB and private housing.

Meanwhile, the supply of newly built HDBs has risen from a low of 2,700 in 2006 to 35,000 in 2017. More recently, that number has come down to around 19,000. Call it 20,000 as the best guess for future supply.

On the private side, we should be expecting 11-14,000 new homes per year until 2024.

Add up HDB supply and private housing and you will end up with 30-35,000 homes. This seems to be just right in order to satisfy demand, or perhaps somewhat on the higher side.

Meanwhile, government land sales have been limited since the peak around 2012. This means that the supply picture will remain constructive.

If volumes continue at the current level, inventory will be running low. The current stock of uncompleted apartments is only 17,000 units.

In the core central region, it will take 3 years to work through the excess inventory. But in the outside core region, that supply will only last 1 year. These levels are low from a historical perspective. We should therefore expect prices to stay strong and new home sales to pick up in the near term.


Office, retail and hospitality

While this write-up is focused on the residential market - just for reference - this is how the current rental market looks like for offices and retail. Workplace foot traffic is down 26% yet office rental rates are actually almost flat since the start of the pandemic. Retail rents have seen greater pressure and will continue to face pressure as e-commerce takes wallet share over the next decade. Retail and office cap rates have expanded as well but cap rates tend to be more cyclical and thus mean-revert.

The hospitality market has been pressured by a lack of inbound tourism. Occupancy has benefitted from staycations and quarantine demand, cushioning the blow. In September, island-wide occupancy hit 63% vs the 87% level seen prior to the pandemic. The gap is likely to narrow now that Singapore is opening up its borders to the outside world through the over 15 vaccinated travel lanes announced last month.


Singapore’s largest developers

Here are the market caps of Singapore’s largest listed residential property developers. In addition to these, there are a number of private developers such as the Far East Organisation and Allgreen.

Three of the largest listed property developers are:

  • CapitaLand: A mall developer turned investment manager, but with additional business in hotels and Chinese residential real estate development.

  • City Developments: A residential and office developer mostly focused on Singapore combined with a SG$6 billion hotel portfolio.

  • Frasers Property: A spin-off from Fraser & Neave with a highly diversified portfolio of developments, however only 20% of revenues are from Singapore currently.

Note that these three developers in fact have very little exposure to residential property development. They should be seen more as property owners, and thus compound capital at close to prevailing currently-low cap rates.

To me, buying property at a 4% cap rate does not seem like a great value proposition. I’d be more interested in a private developer that can earn a return on equity in the double-digits.

Here is a chart showing the exposure of each developer to residential property development and their exposure to the Singaporean market:

The most pure-play listed Singaporean residential developers you can find are:

  • Bukit Sembawang: An award-winning developer with a rich history and 100% focus on Singaporean residential property development.

  • Roxy-Pacific: A family-run residential developer focuses on small properties in Singapore and Australia, currently being taken private.

  • GuocoLand: A mixed-developer with a focus on Singapore.

The company that has experienced the greatest growth in tangible book value per share is small-cap Roxy-Pacific. Number two is highly-leveraged Oxley Holdings and number three is mixed-developer UOL Group. Note that while Bukit Sembawang has not compounded tangible book value per share, it has been generous in its dividend payments.

Here is a short discussion about each of the companies mentioned above:


CapitaLand Investment (CLI SP)

CapitaLand was originally formed via the merger between DBS Land and Pidemco Land in 2000. It’s now the largest property developer in Southeast Asia, with operations spanning residential, commercial, retail, business parks, industrial property and logistics as well as financial services. It’s perhaps most famous for its top-of-the-line malls bearing the CapitaLand brand name. It was early on in the REIT game, being a sponsor to seven listed REITs and managing over SG$132 billion in property across its segments.

Recently, the company undertook a restructuring to become more asset-light and recycle assets quicker. This new corporate structure means that the ListCo will become more of a property manager while funds hold the actual assets.

Using assumptions provided by CLSA, including 17x P/E for the investment management segment, 16x EBITDA for the hospitality segment, an office cap rate 4.3-5.0% and a retail mall cap rate of 5.5-6.0%, together with a 25% discount to NAV, you get to a price of SG$3.3/share - not far from the current share price. It doesn’t smell like an opportunity to me.

The upside would be if CapitaLand can truly build a fund management platform for third-party assets. However, I’m sceptical that the recent restructuring will bring about much change.


City Developments (CIT SP)

Singapore’s second-largest listed developer, with exposure across residential development, hospitality and other property investments. A few of its commercial assets include Republic Plaza and City Square Mall. It has a large Singapore residential landbank exposure compared to its peers and a SG$6 billion hotel portfolio. Roughly 46% of assets are in Singapore, and the rest in China, the UK, the US and other countries.

Just like CapitaLand, City Development is planning to recycle assets on its balance sheet into REITs to unlock value. But so far, it only manages one REIT through 50% owned IREIT Global Group. We should expect more value to be unlocked in this manner.

In 2019, before the pandemic, City Developments made SG$180 million in EBITDA from hotels and SG$475 million in EBITDA from its other investment properties (office and retail). Using a 16x EBITDA multiple yields a valuation of SG$10.5 billion for the company’s investment properties.

Valuing the residential segment at 1.2x book yields a value of SG$6.4 billion. Subsidiaries are worth another SG$2.5 billion. Overseas assets are worth another SG2.9 billion.

Add them all together and you get to a gross asset value of SG$22 billion, which after deducting net debt of SG$7.8 billion and applying a 25% discount yields a target share price of SG$11.3/share. Compared to the current share price of SG$7.2, that gives you an upside of +57%. In my view, that’s quite a decent upside for a company this stable.


UOL Group (UOL SP)

A major Singaporean property developer connected to United Overseas Bank. Half of the revenues come from residential development and the other half from office, retail and hospitality properties. A few of UOL’s assets include United Square, Novena Square and Odeon Towers. Its mall assets include Kinex, Velocity@Novena Square, KINEX, West Mall and Marina Square. The hospitality business is conducted under the Pan Pacific Hotels Group, which includes the Parkroyal brand. The overseas business is a mix of Australian, UK and Chinese developments.

In 2019, UOL made an aggregate SG$575 million in EBITDA from its hotel operations and mall assets. While Pan Pacific has suffered greatly during the pandemic, a recovery seems within reach. Applying a 16x EBITDA multiple yields a value of SG$9.2 billion of the hotel portfolio. Assuming 1.2x book for the development arm gives you a value of SG$3.8 billion. Other investments and operations are worth roughly SG$1.1 billion. Altogether, you’re looking at a gross asset value of SG$14.2 billion. Deduct net debt of SG$4.1 billion and apply a 25% discount to NAV and you’re looking at a value per share of SG$9.0. That implies an upside to the current share price of +25%.

The company values its properties much higher than 16x EBITDA (~6% cap rate) but it’s not something I’m comfortable doing, especially not in the high-risk hospitality industry.


Frasers Property (FPL SP)

The property-arm spinoff from conglomerate Frasers and Neave, with a truly international presence. Only 20% of revenues come from Singaporean developments. It has a residential property development arm as well as investments in a variety of investment properties. It’s also the sponsor of several REITs using the Frasers brand name and sponsor to the following REITs:

  • Frasers Centrepoint Trust (FCT SP)

  • Frasers Hospitality Trust (FHT SP)

  • Frasers Logistics & Commercial Trust (FLCT SP)

Its Frasers serviced property arm is the second-largest in the market. The hotel business is also run under the “Fraser” brand name.

Applying normal assumptions, including 1.2x book for the residential segment, 20x EBIT for the serviced apartment business, office & industrial investment properties at the fair value calculation of an aggregate SG$5.0 billion and other stakes in REITs of SG$5.5 billion, I get to a gross asset value of SG$17.4 billion, a net asset value after debt and the perpetual bond of SG$7.2 billion and a target price of SG$1.9/share after applying a 25% NAV discount. That would imply an upside of +60% from the current share price of SG$1.2/share. Certainly inexpensive.


GuocoLand (GUOL SP)

GuocoLand is a property developer and manager of hotel properties with assets of SG$11 billion, connected to Malaysian conglomerate Hong Leong Group. It owns the GuocoTower and GuocoMidtown developments in Singapore as well as several developments in China and Malaysia. Roughly 75% of revenues come from Singapore and the rest from China and Malaysia. Recently, it has also entered the UK and Australian markets. The historical ROE has been poor at just 8% over the past 10 years, despite the use of a significant amount of debt. Roughly 50% of total assets comprise mature investment properties.

GuocoLand suffered during the pandemic due to the company’s exposure to hotel properties, including Sofitel Singapore, but also due to fair value losses and impairment charges. I estimate sustainable EBITDA to be around SG$300 million.

Put a 16x multiple on that and you’ll end up with an EV of SG$4.8 billion. Deduct net debt of SG$4.3 billion and there is only SG$500 million left in net asset value. I doubt you will get a much higher intrinsic value with a full NAV calculation. Whichever way I look at it, I find it difficult to find any margin of safety.


Oxley Holdings (OHL SP)

A developer of residential, commercial and industrial projects. Singapore is only a small portion of the overall business, being spread out across Southeast Asia, the UK, Japan, China (where it has a large development in the Hebei province) and Australia.

Since 2013, Oxley has taken stakes in a number of overseas developers, including:

  • 20% stake in Galliard, a UK developer

  • 40% stake in Pindan Group Pty in Western Australia

  • 15% stake in United Engineers, a Singaporean developer and engineering company

Partly due to these acquisitions, Oxley now has a significant debt burden and has recently tried to delever. It is among the most indebted of any Singaporean developer.

In FY2021, Oxley had a good year. An operating profit - mostly from residential property development - of SG$197 million capitalised at a multiple of 12x would yield a target gross asset value of SG$2.4 billion.

From another perspective, assuming 1.2x book for development properties and a 4% cap rate on investment properties plus a 25% discount to NAV yields a net asset value of SG$2.0 billion.

The problem is that Oxley has net debt of SG$2.3 billion, making it questionable whether Oxley Holdings is solvent or not. I’m finding it difficult to justify the current market cap of SG$826 million.


Roxy-Pacific (ROXY SP)

A residential property developer with half-half exposure to Singapore and Australia. Most residential developments are small-scale condominium projects. It also runs boutique hotels in Japan, Maldives, Thailand and Singapore as well as a small retail centre called Roxy Square in Singapore.

The controlling family led by Chairman Teo Hong Lim recently bid SG$0.485/share for the remaining shares in Roxy-Pacific, a 20% premium to the last share price prior to the bid. There is not much upside to the offer price, and I’m personally not comfortable getting involved in merger arbitrage. That said, Roxy-Pacific seems to be a well-managed developer that has compounded capital at a reasonable rate. Paying 1.2x for a high-quality developer seems fair, especially since the short-term fundamentals are positive.


Bukit Sembawang Estates (BS SP)

A pure-play property developer in Singapore with a long history, being founded in 1911 and entering the property sector in the 1950s. Today, it’s almost entirely focused on residential development projects in Singapore, where it is seen as one of the leaders. Its land bank is concentrated around Seletar Hills and Sembawang Hills areas where it has been constructing 4,600 landed homes over the past half-century. But it also develops high-rise condominiums focused on prime areas such as the River Valley and Orchard.

Bukit Sembawang currently trades at 0.95x book. I think this undervalues the business. While the company’s landbank is perhaps of no greater quality than those of its peers, it hardly has any debt - in fact, it has a net cash position with SG$729 million in cash and only SG$338 million in borrowings. There may be contract liabilities against some of that cash - but still.

The key in the valuation of Bukit Sembawang is the value of their 2.4 million sqft land bank on Ang Mo Kio Ave 5, which seems to be valued at historical prices at an aggregate of SG$740 million. Assuming a price per sellable square foot of SG$800, this land could be worth SG$2.2 billion. Apply a 25% discount to total net asset value including the land and you’ll end up with a target price of SG$10/share.

Even from a current earnings perspective, Bukit Sembawang made SG$189 million in net profit in FY2021. Apply a historical 12x multiple and you’ll end up at a target price of SG$8.8/share, implying an upside of +64%.


Recommendations

The Singaporean residential property market is currently enjoying a cyclical upturn, which should lead to near-term improvement in fundamentals for most of the major developers. Don’t expect massive growth, however, unless immigration restrictions are lifted. It’s a mature market where supply is already meeting demand from household formation.

The retail, office and hospitality segments are suffering due to COVID-19 related travel restrictions, individuals working from home and the threat from e-commerce. The value of such property may well recover after the current COVID-19 outbreak is brought under control.

Among the large caps, I find an upside in both City Developments and Frasers Property. I favour the former due to its stronger execution, high-quality assets and a greater focus on the Singaporean market.

Among the small caps, I’m most bullish about Bukit Sembawang, which sits on a valuable land bank and is known as one of the best developers in Singapore.


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