Anybody home? Higher vacancy risk looms in 2013F

Condo vacancies may increase to 10.9%.

According to Nomura, the residential developers we cover (+37.1% YTD) have outperformed the broader FSSTI (+9.8% YTD) and are currently trading at an average discount to NAV of 23.6%, which is in line with the mid-cycle discount of 23%. Sentiment has improved from the trough at the beginning of the year when the Additional Buyers’ Stamp Duty (ABSD) was announced by the government to curb speculation.

Here's more from Nomura:

Private housing occupancy has also held up better than expected. As of end-September 2012, the occupancy of non-landed private homes (condos and apartments) was 93.1%, similar to the 93.2% at the beginning of the year.

While the high net absorption of 6,773 units in 9M12 (vs 5,220 units in the corresponding period last year) played a part, completions in 9M12 were lower than expected, which also helped to keep vacancy from expanding. A total of just 8,251 units of non-landed private homes were completed in 9M12, vs our previous forecast of 13,888 units for 2012F.

We believe the firmer-than-expected vacancy helped mass-market private housing rents gain 1.6% during 9M12. Prime luxury rents, on the other hand, have remained weak (-5.1% over the same period) as the market appears to be still digesting the new completions in the core central region (CCR).

With the completion of over 2,000 units now deferred to 2013F (lifting the projected completions in 2013F from 15,155 units previously to 17,758 units) we see higher vacancy risk in 2013F.

On our numbers, non-landed private housing vacancy could expand from the current 6.9% to 10.9% by the end of 2013F, even if net absorption were to remain at 9,000 units (annualising the 6,773 units in 9M12) next year.

This should translate into more pressure on rents, especially in the mass-market and mid-market segments given that over 70% of the 2013F completions are expected to be in the rest of central and outside central regions (RCR and OCR, respectively).

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