Merrill sees new homes demand outpacing supply

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Published February 7, 2007

Merrill sees new homes demand outpacing supply

By WEE LI-EN

(SINGAPORE) Demand for new homes will outstrip supply by almost 50 per cent in the next few years, according to a Merrill Lynch report.

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And this means property developers will see record high project margins of 40-60 per cent in the next two years and deliver record earnings growth, the investment bank believes.

Merrill expects private-sector demand to average 17,600 units a year but says supply will average only 12,000 units a year for the next few years. It also expects the average price of private property to increase from $471 psf to $680 psf, suggesting the market has 44 per cent upside potential.

Driving demand for new homes is an expected growth in population to five million by 2010 from about 4.4 million now, says Merrill.

Growth in temporary residents from countries such as Taiwan, Hong Kong, China and India is expected to be about 8 per cent by 2010.

Merrill also reckons upgrading from public to private housing will be another significant driver of demand, as more than 80 per cent of the population now stays in public housing.

Rental yield, which has averaged about 3-3.5 per cent during the past decade, is likely to increase as immigrants employed in major growth industries such as finance will likely look to rent rather than buy property, the investment bank believes. And this will provide a bigger pool for property investors.

Assuming that tenants are willing to pay up to 35 per cent of income as rent, Merrill expects average rent to increase to $2.77 psf by 2010 from $2.43 psf now.

Supply of new homes will average 12,080 units a year for the next three years, or double that of the past seven years between 2000 and 2006, it says.

It believes prime property - going for between $750 and $1,500 psf - will constitute 77 per cent of total new supply for the next three years, and 57 per cent between 2010 and 2015.

And it expects non-landed private property to outperform landed property. Prices for non-landed private property are expected to increase more than 9 per cent between 2007 and 2010, versus about 5 per cent for landed private property, it says.

Merrill has issued a 'buy' call on five property developers, such as Keppel Land and City Developments, and rates CapitaLand as having the biggest upside potential of 19.7 per cent with a 12-month price target of $8.50 per share.

While the sector has seen share gains of 83 per cent in the past year, it is still not expensive compared to previous periods, according to Merrill. The sector now trades at a premium to RNAV of less than 10 per cent, compared with previous peaks when stocks such as CapitaLand and City Developments traded at premiums of 20-40 per cent, it says.

Merrill also reckons private housing remains affordable for Singaporeans at current prices. Property is affordable if the monthly mortgage payment for the loan does not exceed 35 per cent of household income, but current expenditure on housing is only 25 per cent of household income for sub-prime and 32 per cent for prime property.

Merrill expects property prices to push the 40 per cent of income limit as they did during the previous property bull run in 1996. Singaporeans can afford to use more than 30 per cent of income for housing - levels in developed markets - as Singapore households have a high rate of savings and the ability to use retirement savings to fund housing.

However, between 2008 and 2010, Merrill expects development margins to drop back to 10-15 per cent, as land prices and construction costs increase and developers again divert capital back to regional markets such as China.