Developers take a beating as new home sales set to crash 20% in 2019

This translates to around 7,500-8,500 sold units.

Property developers are faced with a dismal sales outlook for the year ahead as primary transaction volumes are expected to crash 20% YoY to 7,500-8,500 units in 2019 in line with the weakening residential property market, according to DBS Equity Research. 

Also read: Property sales dropped 12.5% to $31.4b in 2018

The sales momentum in the primary market has already dropped sharply to around 500-800 units per month since July 2018 following the revision of the additional buyer stamp duty (ABSD) and loan-to-value curbs. With primary home transaction volumes hitting roughly 9,300 units YTD11M18, primary home transaction volumes are expected to settle between 10,000-11,000 units for the full-year of 2018, Derek Tan, analyst at DBS said in a research note.

On the other hand, secondary sales volume may reach 8,000-10,000 units.

Buyers will likely hold off their purchases to get their pick of the litter as there are close to 40,000 units in the pipeline ready for launch. The supply influx comes in spite of the overall slowdown and uncertainty in the market caused by the double whammy of July’s cooling measures and revised rules on shoebox units.

Also read: Singaporeans eye overseas property purchases amidst high costs back home

Even though buyers may get to benefit from this scenario, the odds are against developers as they are unlikely to achieve strong sales during the back-to-back launches for 2019.

Although sell-through rates for new launches have picked up from 2014-2017, take-up levels have dipped in 2018 to suggest that developers are taking a longer time to clear unsold units. The development mimics the property market conditions of 2014-2015 which bore the brunt of the last round of cooling measures introduced from 2010-2013.

In fact, project launches during the first ten months of 2018 have already slowed to a take-up rate of at least 38% within one month of launch compared to a year ago 50% for 10M17, observed Tan. “Based on a selected sample of project launches over 2018, we found that project launches in the first six months of 2018 saw an average take-up rate of 75%,” he added.

Also read: Embattled developers bear larger debt burdens amidst cooling measures

Developers pinning their hopes on displaced homeowners to boost sluggish bottomlines are set to be disappointed as the number of residents looking for replacement homes is also tipped to taper off in the second half of 2019. In fact, Tan estimates that if homeowners are paid nine months after the close of en-bloc tenders, only an estimated 11% of the total 8,500 displaced households will receive their due in the first half of 2019.

“We believe that most of the buying from these displaced households will already be done before that [1H19] and will not be a significant boost to sales volumes in 2019,” he said. “Whilst demand for replacement units may be strong near term, we question the longer-term sustainability of demand from en-bloc buyers.”

Also read: More than 30 en bloc sales failed to find buyers

To add to their string of woes, home prices may fall by up to 3% in 2019 according to the property price index, which doesn’t bode well for developer valuations.

With stock prices of developers being historically affected by transaction volumes and prices, it comes as no surprise that the Developer Index (FSTREH Index) is already down by around 14% on a YTD18 basis to lag behind both REIT index (FSTREI) and the STI.

“In 2019, we expect developer’s valuations to be weighed down by a projected slowdown in sales volumes and declines in property prices as measured by the property price index (PPI). With developers trading at c.0.7x P/NAV currently, we believe most the negative news has been factored in,” said Tan.