Published July 20, 2007

Split over DC impact on property stocks

Margin erosion for developers who can't pass on the higher cost


(SINGAPORE) Property stocks have taken a beating over the past two days since the government announced an increase in the development charge (DC) for increasing the intensity of land use, with investors still mulling over its impact on the property market here. But the effect is still unclear, with analysts split in their opinions on this matter.

The surprise announcement on Wednesday by the Urban Redevelopment Authority (URA) that the charge was going up to 70 per cent of the appreciation in land value that arises from changing the use of a site or more intensive construction on it. The DC had previously been set at 50 per cent. This measure was largely seen as preventing overheating in the residential property market, although the URA said this was not the intention.

Analysts with a bearish view believe the rise in the DC will erode margins in some property projects where developers may be unable to pass the additional cost to the end buyers.

'DCs on future development projects where the land use is changed or if the plot ratio has been increased will rise, eroding developer margins. While it has limited impact on current projects and therefore current RNAV (revised net asset value) estimates, this is likely to lower profitability and thus the justification for developer stocks to trade at a substantial premium to RNAV,' JPMorgan said in a note.

The brokerage said the DC increase is likely to affect development sites that have been acquired in the past six months through collective sales where there is an increase in the plot ratio of the site, with the impact heaviest on those with more exposure to the Singapore housing market and trading at a premium to their RNAVs.

JPMorgan has an 'underweight' call on Allgreen, City Developments, Wheelock Properties and Wing Tai - these having between 47 per cent and 66 per cent of exposure to Singapore housing in proportion of their total RNAVs.

Analysts said the reaction affecting shares in property companies was due in part to an anticipation of further dampening measures from the government, with the intention of stopping speculative activity in the housing sector.

Prompted by the latest measure, DBS Vickers cut its rating on the property sector to 'neutral' from 'overweight' as it believes the DC increase could affect the way developers accumulate their land banks, reducing these developers' ability to outperform the broader market.

Among the developers, CapitaLand is seen to be most affected by the DC hike as it has built up an extensive land bank. JPMorgan estimates the DC for Farrer Court could rise from $500 million to $700 million and that for Gillman Heights from $90 million to $126 million.

Responding to these concerns, a CapitaLand spokesperson told BT yesterday that these two properties are large and branded residential developments for which the group had factored in a conservative estimate for the DC. 'For these two properties, we expect the impact of the new DC rate to be between one per cent and 3 per cent increase in total development costs,' the spokesperson said.

Yesterday, CapitaLand shares continued their slide, falling five cents to $7.50. Among other property stocks still heading south were City Developments, which closed down 20 cents at $15.70, Wing Tai Holdings, off 12 cents at $3.58, and Allgreen shedding eight cents to $1.88.

Besides CapitaLand, UOB KayHian noted that Guocoland, Wing Tai, SC Global, United Overseas Land and CityDev - which have made en bloc purchases in the last three months - may need to pay a higher DC for their purchases as the provisional permission for those sites may have yet to be obtained.

But Guocoland spokeswoman yesterday told BT that its DC for existing projects has been locked up, so it is not affected by the increase.

Some analysts remain bullish about the sector, viewing the DC hike as a short-term negative impact, with Citigroup calling the recent sell-down an 'overreaction', which provides a 'buying opportunity'. It is sticking to its 'buy' call on Allgreen, Wing Tai and CityDev but has a 'sell' rating on CapitaLand due to its rich valuation.

Goldman Sachs said it believes that any further move to address the supply side of the property market will result in more manageable price increases over time. 'We think sentiment could in the near term be negative on property stocks but believe the story of Singapore developers riding on the positive Singapore physical market story remains unchanged,' it said, keeping a 'neutral' call on CapitaLand, CityDev and Keppel Land, and a 'buy' call on Guocoland.

Yesterday, Guocoland rose 10 cents to $5.20, unfazed since the announcement of the hike.