SINGAPORE (Dec 13): Goldman Sachs says residential property prices in Singapore could beat previous expectations and increase by 5% per annum in 2018 and 2019.

Goldman Sachs had previously forecast that home prices would rise by between 1 to 3% per annum over the next two years.

The rosier outlook comes on the back of a 0.7% quarter-on-quarter improvement in residential property prices in 3Q17 – the first uptick after 15 consecutive quarters of decline.

“In Singapore, prices, policy and rates find an intricate balance, giving rise to new opportunities for growth,” says lead analyst Paul Lian in a report on Dec 6. “And with the cyclical upcycle well underway, the focus has shifted to developers with more active investments for outperformance.”

“The recovery is also creating more opportunities for developers in the residential segment, and yields should compress as the growth in capital values outpaces rental growth over the next two years,” he adds.

According to Goldman Sachs, home prices are set to be driven higher by a combination of declining inventories, higher land costs, pent-up demand, replacement demand from en bloc sales, and still low interest rates.

"Home sales have been sluggish since the Total Debt Servicing Ratio (TDSR) framework was introduced in June 2013, and near-term buying from pent-up demand over the last four years will be a key driver of home prices in the near-term,” says Lian.

“The baby steps to ease policies in March 2017 signaled the government’s more accommodative stance towards the housing market and home buyers that were previously on the sidelines returned,” he adds.

While upward pressure on home prices could see the government stepping in to implement addition demand-side property cooling measures, Lian believes there are “several factors mitigating the risk of a policy reversal.”

These include a high number of vacancies, which is expected to continue to place pressure on rents and rental yields. As of 3Q17, the number of vacant private homes stood at 30,136 – close to an all-time high. According to Lian, this implies a vacancy rate of 8.4%.

“Mitigating factors allay fears over a policy reversal and additional cooling measures,” Lian says. “Rather, we expect that the government will increase land supply to rein in rising land prices.”

“Stocks have further to go and we expect the next leg to be driven by accelerating NAV (net asset value) growth, underpinned by improving physical market fundamentals, similar to the 2005 upcycle,” Lian says. “The cyclical upturn in residential and office is creating opportunities for NAV growth; we think developer NAVs can grow 6-9% per annum for the next three years, from 3-4% previously.”

The analyst says he prefers developers that have larger exposure to the residential and office recovery, which he believes the market has yet to fully price in.

In this light, City Developments (CDL) is Goldman Sachs’ top pick.

“Singapore’s residential bellwether, CDL, is one of the most active developers,” says Lian. “We believe CDL today is more returns-focused and we expect the highest core ROEs versus peers over the next 3 years.”

Goldman Sachs is upgrading CDL to “buy”, from “neutral” previously, and raising its target price to $16.20, from $12.06 previously.

“With the largest residential land bank in our coverage, CDL is a prime proxy to ride the upcycle,” says Lian. “Its strong launch pipeline should enable it to maintain its high single-digit market share in the housing market and benefit from a broadening of the housing recovery into the high-end segment, serving as further impetus for growth.”

This story, written by Stanislaus Jude Chan for The Edge Singapore, first appeared on Dec 13.