Citi sails against the wind, says housing glut unlikely
It says scenario is not likely to happen in 2013/14, citing 'severe shortage'
By UMA SHANKARI
(SINGAPORE) Citigroup believes that the expected surge in the supply of new HDB flats and private homes over the next few years will not lead to a housing glut in 2013 and 2014 - a view that is contrary to that held by most other analysts.
A different view: Citi says that the current 'undersupply situation will likely take several years to clear, just like the oversupply situation in the early 2000s' The bank's property analysts also said in a new report that the current 'severe shortage' of HDB flats is likely to provide support for mass-market prices and demand.
This is again different from most analysts' predictions that a step-up in HDB supply will dampen demand for mass-market private homes and hit prices in the segment.
'We believe the prolonged period of under-building in the 2000s has resulted in the current severe housing shortage,' wrote Citi's property analysts, led by Wendy Koh, in their June 26 report.
'We estimate that the deficit in housing units is in excess of 50,000 currently and this undersupply situation will likely take several years to clear, just like the oversupply situation in the early 2000s.'
'With a severe shortage, we are not overly concerned about the rise in supply in both HDB and private residential units . . . A housing glut in 2013/14 is an unlikely scenario, based on our estimates.'
Citi's estimates show that the upcoming HDB supply and the potential increase in the income ceiling for new HDB flats will reduce HDB resale transactions by 7-15 per cent at most. The impact on the private property market would be even smaller, Citi reckons.
Ms Koh also said that the undersupply situation in the HDB market will support demand for and prices of suburban mass-market homes.
'Occupancy rate for mass-market properties are at an all-time high of 97.5 per cent. With yields averaging at around 4.2 per cent versus mortgage rates of just between 1.2-1.6 per cent, investment demand for small units and mass-market units could remain strong,' Ms Koh said.
However, the report cautioned that any further price increase or spike in volume in the mass-market segment risks more property measures as the government is monitoring the market closely.
Citi's views are a departure from the prevailing industry consensus that a housing glut is likely. CIMB analyst Donald Chua, for example, said that 'looming oversupply' from both the private and HDB markets is a big worry for the sector.
'We believe an oversupply situation is looming, going by rising private and HDB physical completions and expectations of a less liberal immigration policy,' Mr Chua said in a note last week.
'Population growth, if it normalises to 65,000- 80,000 per year (from around 162,000 annually in 2006-2011), implies a mere 20,300 units of incremental demand, based on 3.5 persons per household. This would not be sufficient to absorb net supply (HDB and private) of 33,300 units per year, on our estimates.'
Morgan Stanley also recently said that it continues to see a risk of oversupply in terms of physical completion and units available for sale, and expects residential prices to fall by about 7 per cent over the next two years.
Citi's analysts were more negative on the outlook for high-end and luxury
homes as well as the office market.
Demand for high-end homes is likely to remain lacklustre given the uncertain global economic outlook and the strong rental competition among newly completed units, Citi said.
'We believe rental for the high-end segment has probably peaked and downside risks outweigh upside risk in the coming 6-12 months,' said Ms Koh.
'The current rental yields averaging at 2.4 per cent provides very little room for further yield compression.'
However, as long as interest rates remain at current low levels, prices are likely to hold, she added.
And in the office market, Citi's report said that competition for tenants is likely to intensify as around one million square feet of new space that will be completed this year is still uncommitted.
'Leasing activities have slowed and major financial institutions appear to have satisfied their space needs,' Citi said. 'Rental rates are likely to flatten out, and capital values are likely to have peaked.'
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