Only the beginning of a sector re-rating
In line with the market, property stocks have rallied ~30% YTD. Despite this, we
think stocks will continue to re-rate as visibility of 2010 pricing growth improves.

Given the rapid decline in residential pricing, we are confident prices will bottom in
2009 and that a 2010 recovery is in sight. This should support share price
momentum as stocks, which have been highly correlated to the residential pricing,
lead moves in the physical market.

Expecting +20% residential price recovery in 2010
Supporting our view of a potential V-shaped property recovery, we have identified
trends which supported residential prices in past cycles: (1) sequential positive
GDP growth, (2) reversion above mean of sales volumes, and (3) positive swings
in net absorption. We believe 2010 will support these trends and hence set the
backdrop for a market rebound. We are expecting price increase of 20% in 2010.

Upgrading Singapore developers
–> Only the beginning of a sector re-rating: In line with the market, property
stocks have rallied ~30% YTD. Despite this, we think stocks will continue to
re-rate as visibility of 2010 pricing growth improves. Given the rapid drop in
residential pricing, we are confident prices will bottom in 2009 and that a
2010 recovery is in sight. This should support share price momentum as
stocks, which have been highly correlated to the residential pricing, lead
moves in the physical market.

–> Funding issues behind us: At the beginning of 2009, we maintained a
negative stance on the Singapore property sector due to funding and
balance-sheet issues. S$4.5bn of new equity later, we believe these issues
are largely behind us. We expect property stocks will trade closer to market
fundamentals and hence focus our analysis on the outlook for the Singapore
residential market in 2010.

–> 2010 inflection points for positive price growth: We have identified
three trends which have supported price growth in past cycles: (1) sequential
positive GDP growth, (2) reversion above mean of transaction volumes, and
(3) positive swings in net absorption. We believe that 2010 will support these
trends and hence set the backdrop for a price recovery in the residential
market. We now expect a 2010 turnaround in pricing levels (+20%).

–> Translating physical market dynamics to stock price performance: In
past cycles when QoQ residential pricing change is on an uptrend, the stocks
also showed upward price momentum. In 1Q09, the market recorded the
sharpest price decline in 20 years (-13% QoQ). We think the worst for QoQ
residential pricing decline is behind us and that stock prices will trend higher.

–> It could be a volatile ride in the meantime: We feel confident that stock
prices will be higher in 12 months; however, we also highlight it is likely to be
a volatile ride. We expect negative data will continue to emerge, the
residential index will keep falling and the DPS will trigger default.
Nevertheless, we think investors should focus on 2010 and accumulate on
any share price weakness.

Identifying trough in physical market
Residential volumes leading indicator of trough price index
–> Residential volumes are a leading indicator of troughs in pricing. Historically,
once volumes drop sharply, it takes another 3-4 quarters of pricing correction
before market pricing bottoms.

–> In the past downturns (1998/2003), volumes declined to levels on par with
what we experienced in 4Q08. Recall that transaction volumes in 4Q08 were
the lowest on record in 15 years.

–> We saw healthy volumes return to the market in 1Q09. Primary market
transactions were supported by the launch of mass market projects.
Secondary market volumes also showed growth (+11% QoQ).

Transaction volumes moving towards historical mean
–> We expect that 2Q09 transaction volumes will be as good, if not better than
1Q09 numbers as new launches continue to see good support. More
importantly, interest appears to be returning to the mid- and high-end
segments of the market. We expect that secondary transactions will at least
be sustained at today’s levels as price corrections help to match buyers’ and

–> We think that the volume trough is now behind us and that the pricing index
will bottom in 2H09. Despite our expectation that the index will bottom in
2H09, we think that at a project level, completed residential units are
transacted at only 5-10% from the trough. This is because (1) the index tends
to lag and (2) TOP projects in 2H09 will show greater pricing pressure as
they near completion.

–> We expect that volumes will revert to above the mean by 2010 as price
growth visibility returns.

Transaction volumes moving towards historical mean???? We expect that 2Q09 transaction volumes will be as good, if not better than
1Q09 numbers as new launches continue to see good support. More
importantly, interest appears to be returning to the mid- and high-end
segments of the market. We expect that secondary transactions will at least
be sustained at today’s levels as price corrections help to match buyers’ and
sellers’ expectations.

–> We think that the volume trough is now behind us and that the pricing index
will bottom in 2H09. Despite our expectation that the index will bottom in
2H09, we think that at a project level, completed residential units are
transacted at only 5-10% from the trough. This is because (1) the index tends
to lag and (2) TOP projects in 2H09 will show greater pricing pressure as
they near completion.

–> We expect that volumes will revert to above the mean by 2010 as price
growth visibility returns.

(2) Above-average transaction volumes
–>transaction volumes reverting above the mean. In both 1998 and 2006,
residential prices only started to move in an uptrend once transaction
volumes reverted to above the mean of 4,100.

–> We expect that transaction volumes will be volatile in 2009. However, looking
to 2010, we believe that troughs in pricing will spur transaction volumes due
to increased participation in the market. There is also a backlog of new
launches, which we believe will help primary transactions.

(3) Net absorption reverting to positive territory???? In periods where net absorption turns positive, historically pricing growth also
shows a positive trend. We believe net absorption will turn positive in 2010
as supply moderates and demand stabilizes.

–> Just 12 months ago, the forecast supply to hit the market in 2010 was as
high as 18,000 new units. Today, the number has moderated to 5,200 units,
with 90% currently under construction. This is 40% below the historical
average addition of annual supply of close to 9,000 units.

–> Given the lack of demand visibility, we are still using a conservative demand
assumption of 3,000 units in 2009 and 5,000 units in 2010 (on par with
demand numbers seen in corresponding periods of GDP growth).

Where are residential prices today?
The physical market has stabilized
Over the past 1-2 months residential pricing has begun to show signs of
stabilization. We have observed that at a project level, floor pricing has been set
for completed stock and that in some cases transacted prices have actually
begun to show very slight improvements. We estimate that high-end prices are
down 30% from the peak and mid-range prices are down 24% from the peak,
while mass market projects are down 15% from the peak.
But the residential index will keep falling
Despite our expectation that floor pricing has been set, we still expect the
residential index will continue to decline. This will be primarily driven by projects
which will obtain their TOP (temporary occupation permit) in 2H09. Judging from
projects which have received TOP in 1H09, transaction prices only reach clearing
levels 1-2 months prior to owners having to take possession of the units. This is
as a result of the DPS (deferred payment scheme) which requires 80% payment
on completion.

Project-level pricing
We have tracked individual transactions on a project basis within the high, mid
and mass market to give a better sense of pricing decline. From the peak, highend
prices have fallen by 30%, mid-market by 24% and mass market by 15%.

Expectation for 2010 pricing
Given the accelerated pace of pricing decline and pickup in transaction volumes
we have seen, we now believe that residential pricing will bottom in 2009 (-35%
from peak and -30% YoY).
Instead of a further 10% decline in 2010, we now expect a turnaround in pricing
levels. This comes on the back of our 3% positive growth in GDP as well as a
moderation in supply in 2010. We now forecast prices to grow by 20% in 2010.

Pricing forecast by segments
We saw prices in the high-end segment starting to increase in 2005, while the
mid- and mass market segments began to move only a year later. In addition, the
magnitude of the run-up in prices (peak in 1Q08 vs 1Q05) in the high-end
segment was ~70% vs ~40% for the mid and mass market segments. However,
in the downturn, both the high-end and mid-market segments suffered a 24%
decline from the peak, while the mass market held up relatively well, falling only
14%. As a result, we expect varying degrees of pricing declines across the
different segments.

–> High-end to fall 35% from peak (30% YoY): We expect the magnitude of
re-rating to be the greatest in the high-end segment given (1) the highest
increase in prices during the upturn, (2) the largest amount of speculation,
and (3) the highest risk of default from DPS purchases as the largest
proportion of DPS purchased units due for completion in 2009/10 is in the
Core Central Region.

–> Mid-market to fall 30% from peak (25% YoY): Post the massive pricing
decline in the mid-market segment (-17.0% QoQ) in 1Q09, exceeding even
the high-end segment (-16.2% QoQ), we expect the QoQ percentage decline
to soften. We forecast prices to fall 25% YoY with the gap between the midand
high-end segment narrowing to levels last seen in 2005.

–> Mass market to fall 25% from peak (20% YoY): We believe the price
decline in the mass market segment will be more subdued as (1) only 26% of
total units under construction as at 4Q08 is attributable to the mass market
vs historical average of 40%, and (2) of the 7,100 units (44% of total) sold
under the DPS which are due for completion in 2009/10, only 25% is in the
Outside Core Central region and the risk of potential defaults from DPS
purchased units is hence significantly less.

Pricing differential across segments
Based on our forecasts, we expect the gap between the mid-market and high-end
segments to narrow back to the levels in 2004/05 prior to the upturn in the
property cycle where high-end prices overshot on the upside.
However, due to the increased participation by HDB upgraders in the private
residential market, as well as the narrowing gap between HDB and mass market
prices, we expect the mass market segment to hold up better. As a result, we
forecast the discount of mass to mid-market pricing to narrow going forward.

V-shaped recovery is possible
The equity markets are clearly signaling a V-shaped recovery in the residential
market, in our view. While demand visibility in 2010 remains poor, we do not rule
out the possibility of a sharp recovery. An analysis of the market dynamics which
resulted in the sharp rebound of residential prices in 1999 indicates to us that the
market dynamics in 2009/10 are looking as if they will play out in a very similar
way to what was seen in 1998/99.

Why we can’t rule out sharp recovery in residential prices
–> 1999 recovery preceded by sharp pricing decline: In the 12 months prior
to the 1999 pricing recovery, Singapore residential prices fell ~30%. This is
almost identical to the magnitude of decline we forecast in 2009. This is also
in direct contrast to the U-shaped recovery of 2005/06 in which residential
prices showed gradual decline from the 1999 peak to the 2004 trough.

–> GDP growth reverted from negative to positive: Singapore’s GDP growth
was recorded at -3% in 1998 and +2% in 1999. The year in which residential
pricing picked up was the inflection between negative and positive GDP
growth. BAS-ML economists are forecasting -6.5% GDP growth in 2009 and
+3% growth in 2010. Our 2010 forecast for Singapore is based on the core
assumption that global demand, albeit weak, should stabilize next year.

–> Demand exceeded supply in recovery year: In 1999 we saw positive net
absorption of ~1,000 units as demand exceeded supply. Using our demand
assumption of 5,000 units (vs historical average demand of ~7,000 units), we
forecast net absorption will show a positive trend in 2010 of ~1,000 units. We
believe our demand assumption could be subject to upside surprise should
the economic reality turn out better than we expect.

This article was first published by Banks of America and Merrill Lynch Research.