Private property prices to correct by at least 5%

5% decline in 2014, 5-15% in 2015.

According to Barclays, "we expect private home prices will correct 5% in 2014, and another 5-15% in 2015 on rising interest rates coinciding with higher vacancies from peak supply coming through in 2015-16, amidst a weak secondary market."

Singapore developers as a whole are facing heavy headwinds, which led the research firm to advise investors to stick to REITs, specifically Office and Industrial REITs, than developers.

Here's the full analysis from Barclays:

Public housing and mid to high end private home prices finally started falling: The URA Property Price Index rose 0.4% q/q, slowing down from +1.0% in 2Q13. The Core Central Region (CCR, proxy for high-to luxury end) fell 0.5% q/q (vs -0.2% in 2Q13), and Rest of Central Region (RCR, proxy for mid-end) fell 1.1%, vs +0.2% in 2Q13. The Outside Central Region (OCR, proxy for mass market) rose 2.1%, vs +3.8% in 2Q13. Public housing resale prices fell for the first time in 18 quarters, by -0.7% q/q.

In line with our views: We initiated coverage on 27 Sep “Developers fundamentals weakening”: on two of the largest Singapore developers – City Developments (CDL, PT S$9.12) and Keppel Land (KPLD, PT S$3.30) – with Underweight ratings, as we see headwinds emerging for Singapore developers. We expect private home prices will correct 5% in 2014, and another 5-15% in 2015 on rising interest rates coinciding with higher vacancies from peak supply coming through in 2015-16, amidst a weak secondary market. We prefer the REITs relative to developers, with sector preference: Office, Industrial, Retail, Residential in that order, top picks: KREIT, CCT, AREIT, MINT. CAPL is our only OW developer as it is more diversified and attractively priced.

Update on recent launches. After a dismal 482 and 742 units sold in July and August 2013 respectively, way below the 1,658 monthly average in 1H13, due to the June 28 Total Debt Servicing Ratio (TDSR) measures, September developer volumes could pick up on good demand on recent launches. CapitaLand’s Sky Vue in Bishan reportedly sold 430 of the total 694 units on 28-29 Sep, at ASP of S$1,500 psf. UOL’s Thomson Three has sold 250 units (total 445) since launch in mid-Sep, at ASP of S$1,350 psf. We expect developer take-up to average 1,000 -1,100 units per month in Sep-Dec and for FY13 volumes to fall 30% y/y in 2013E to 15,500 units.

Developer stocks highly correlated to transaction values and expected price declines: 1) developer stock prices are highly correlated with total transaction volumes and values, and we expect volumes and prices to soften; 2) we estimate residential developers have traded at 25-40% discounts to RNAV when 6-month forward home prices fall 10-20%. Currently CDL and KPLD are trading at 21 and 25% to their end-2014 RNAVs respectively, while CAPL is trading at 37% discount.