They’re not out of the woods yet

Source : Today – 14 May 2009

PCOMING supply and concerns about payment defaults by customers on the deferred payment scheme (DPS) are some reasons the luxury residential segment is not out of the woods yet, according to UOB Kay Hian analyst Vikram Pandey.

In a research report dated May 12, he said 2,665 units would hit the high-end market this year, followed by 3,182 next year and a whopping 5,245 units in 2011, based on official data.

“With an increasing number of units in the high-end segment targeted for completion yearly to 2012, the high-end segment is starting to resemble a massive construction worksite. The sheer amount of work being carried out in areas like Orchard Road and Sentosa serves as a stark reminder of the demand-supply imbalance in the high-end segment,” wrote Mr Pandey.

He also expects the risk of customer defaults to be “heightened” by the progressive completion of developments and units sold under the DPS.

“As a result, consumer confidence in the high-end segment is expected to remain weak.”

In contrast, Mr Pandey said, consumer confidence has returned to the mass market and mid-tier segments, indicated by the surge in liquidity in the first quarter this year.

Citing the brokerage analysts’ visits to recent launches in Balestier and Choa Chu Kang, he noted the crowds consisted mainly of families. “This seems to suggest purchases were being made for owner-occupation rather than investment.”

He said: “We expect demand-supply dynamics to remain favourable in the mass market and mid-tier segments.”

When it comes to stock picks, however, counters linked to high-end developers remained on Mr Pandey’s list. He said, despite the recent surge in stock prices, he continued to see “good value” in property stocks.

For one, home prices have so far declined by between 30 and 40 per cent from their peak at the end of 2007 – which is less than UOB Kay Hian’s projection of a 50-per-cent fall, he said.

Consequently, the brokerage has raised its target prices for nine counters by an average of 35 per cent. This also takes into account a default rate of 30 per cent on units bought under the DPS and resold at a 40-per-cent discount to the original selling prices.