Singapore Companies
Published December 18, 2006

So long to HK, go 'long' on S'pore, says Merrill Lynch
Immmigration from HK to S'pore signals compelling pair trade next year


IMMIGRATION from Hong Kong to Singapore means 'one of the most compelling pair trades for 2007 will be long Singapore office and mass residential plays and short Hong Kong office landlords', says Merrill Lynch.

Singapore's population could double before 2020 thanks to immigration partly fuelled by a steady flow of financial services professionals out of Hong Kong, the bank says in a report called 'Phoenicia and Contamination City' - referring to Singapore and its Chinese rival respectively.

'The Lion City is undergoing one of its periodic bouts of regeneration and re-invention - this time focused on the twin developments of leisure services (integrated resorts) and financial services,' the report says. 'Mass immigration is likely to almost double the population over the next decade or so.'

This population growth is likely to force mass housing prices to catch up with the boom seen in the luxury sector, Merrill believes.

Singapore's M3 - a broad definition of the money supply that includes circulating currency and deposits with banks and non-bank financial institutions - grew 14.1 per cent in 2006, comparable to the rates seen in 1994 to 1995, when the property market doubled, it notes.

Accordingly, the luxury end of the market has risen 20-40 per cent over the past 18 months, but the remainder of the housing stock has stayed 'relatively flat year-on-year' and some 30 per cent below the 1996 high.

The report expresses 'conviction on the longer-term outlook' for residential prices, helped by momentum factors such as an expected 5 per cent growth in mortgage loans next year and a higher 2.7 month year-end bonus for civil servants.

City Developments and OCBC Bank are well-positioned to gain from this projected upside, particularly in the mass residential segment, says Merrill, which recently added the former to its Asia-Pacific Focus 1 list of 15 to 40 Asia-Pacific stocks that represent its highest-conviction 'buys'.

In a separate report, Merrill says OCBC has been more focused on Housing and Development Board and mass-market loans than United Overseas Bank and is better leveraged to loans than DBS Group.

Meanwhile, employment trends in the service sector have lifted net absorption of office space to 1.5 million sq ft per annum. Oncoming supply for the next three years is 2.05 million sq ft. 'We are not sure where companies will seat their employees,' says Merrill, which expects office rents to peak in 2009 at $12-$15 per sq ft, compared with the current $8-$10.

CityDev, Suntec Reit and CapitaCommercial Trust are the bank's chosen 'buys'. It has 'sell' calls on Hong Kong Land, Hysan and Great Eagle.

Besides the fact that Hong Kong's 'airborne cocktail of pollution' is driving professionals away, high rents are slowing demand, and 'the bulk of expansion from financial service companies, for this cycle at least, has been done', Merrill says.