Property Singapore - UOB Kay Hian 2016-07-25: URA 2Q16 Statistics ~ Residential Correction Decelerated While Retail Correction Accelerated

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URA 2Q16 Statistics: Residential Correction Decelerated While Retail Correction Accelerated

• URA 2Q16 statistics indicate that signs of stabilisation are emerging in the residential segment, while retail segment correction is accelerating. 
• The hospitality segment is seeing strong demand while industrial business park stands out with its favourable supply outlook. We prefer deep value and diversified names with exposure to these segments. 
• Maintain OVERWEIGHT on the property and REIT sectors with Ascendas REIT, CDL Hospitality Trust, Keppel REIT, City Developments and Wing Tai as top picks.

WHAT’S NEW

• The Urban Redevelopment Authority (URA) has released 2Q16 data, with the residential, office and retail price indices registering growth of -0.4% qoq (-2.9%yoy), - 1.5% qoq (-2.1% yoy) and -3.1% qoq (-5.4% yoy) respectively. 
• The rental indices for residential, office, and retail properties displayed declines of -0.6% qoq (-3.7% yoy), - 3.5% qoq, (-9.9% yoy) and -3.9% qoq (-8.9% yoy) respectively.

ACTION

• Maintain OVERWEIGHT on the property and REITs sectors as interest rates are expected to remain lower for longer as Brexit unfolds. 
• We prefer deep value and diversified names with exposure to the hospitality and industrial (business park) segments. 
• Our top picks are Ascendas REIT, CDL Hospitality Trust, Keppel REIT, City Developments and Wing Tai.

ESSENTIALS

Residential: Signs of stabilisation, as 2Q16 URA private home prices displayed the lowest qoq decline since 4Q13. 

• This marks the 11th consecutive price decline from 3Q13’s peak (-9.4% from peak). Recent trends include an uptick in sales volumes, on the back of recent launches that include GEM Residences and Stars of Kovan as well as movement in the high-end market. 
• Completed projects like OUE Twin Peaks saw healthy demand which was only captured in resale market data. This likely contributed to SRX data which revealed four consecutive months of mom growth in private property resale prices. 
• Transaction volumes are picking up, with 2,256 private homes (excluding ECs) sold in 2Q16 (+59% qoq, 2% yoy). This also reverses the two consecutive quarters of negative qoq growth witnessed from 4Q15.

Continued easing in the office segment, with 2Q16 overall office rents posting declines of -3.5% qoq, (-9.9% yoy). 

• According to CBRE, Grade-A office rentals declined a further 4% qoq in 2Q16 to hit S$9.50 psf pm (1Q16: S$9.90 psf). This represents a 17% decline in rentals from 1Q15’s peak of S$11.40 psf pm. 
• With 2Q16 seeing the fourth consecutive quarter of negative office space absorption islandwide, landlords are likely to have compromised on rentals to retain new tenants or attract new ones, with even the Grade-A market registering negative net take-ups in the quarter. However, we opine that this steep correction is not the beginning of an office downcycle as limited supply of office space from next year onwards will help to improve the office segment’s fundamentals. 
• We expect office rents to recover next year post the 10-15% correction this year.

Industrial: Business park segment standing out on supply front.

• CBRE estimates 2016 business park pre-committed supply at 44% (no known notable supply thereafter). 
• While the newly-completed Ascent and MBC II have added pressure to the market, forward supply consists of built-to-suit projects which are largely pre-committed. We note that media reports in Feb 16 identified Johnson & Johnson possibly taking up 170,000sf of space at business/science park Ascent as its first anchor tenant. 
• CBRE also purports signs of leasing interest from IT and pharmaceutical firms at the 1.1m sf (NLA) Mapletree Business City (MBC) Phase II (expected completion 2Q16). Accounting for about 49% of its portfolio value, we reckon AREIT could be a good play on the relatively more resilient business/science parks and hi-spec segments within the industrial sector.

Retail: Challenging environment.

• 2Q16 saw overall shop rentals fall 3.9% qoq (-8.9% yoy), an acceleration compared with previous quarterly declines. This marks the sixth consecutive quarter of decline and also implies the prevalence of a tenant's market in the retail scene. 
• The retail environment is expected to remain challenging due to increased supply, rising costs and threat from alternative retail channels. CBRE expects this to persist in the medium term, with landlords increasingly taking defensive steps like forward renewals to sustain occupancy levels. 
• Retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) have guided for more moderate rental reversions and we expect retail rental growth to trend in line with inflation. 
• Acquisitions and asset enhancement initiatives (AEI) are expected to continue catalysing growth, ie CMT’s Funan DigitaLife Mall (slated for 3Q16 commencement), FCT’s Northpoint Shopping Centre (commenced Mar 16) and Suntec’s Park Mall.

Hospitality: The comeback kid?

• In 5M16, overall visitors were up 13.3% yoy to reach 6.9m visitors, driven by resurgent Chinese tourists. China is currently Singapore’s largest tourist market after overtaking Indonesia last month, and the exuberant growth in Chinese visitors has been heartening, especially against the backdrop of a higher visitor base from Apr-Dec in 2015.
• In an earlier note, we pointed out that sustained Chinese arrival growth from April-May onwards would point to a material coup for Singapore’s hospitality scene, as phenomenal growth in the months before April this year stemmed from a lower-base effect after languishing Chinese arrivals from Oct 13 onwards. 
• Nonetheless, we are cognisant of the sizeable supply of about 3,930 rooms (6.4% yoy expansion) set to hit the market in 2016. This may partially explain the slight dip in industry RevPar (-0.8% yoy) for 5M16, as the sector grapples with supply digestion.

PEER COMPARISON 

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-25

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