Singapore Property and Economics Stronger for Longer€¦ · Singapore Property and Economics...

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term stays intact, and we remain positive on the near-term outlook despiterising rates and policy risk. Top pick CDL; PT implies 57% upside.Zac Su and Deyi Tan are economists and are not opining on any securities.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a coninterest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investme

MMSingapore Property and Economics

Stronger for Longer

We reiterate our constructive view on the outlook for the economy and housing market. Our call for sustained home price growth over the medium

October 4, 2018 09:00 PM GMT

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

MM

MORGAN STANLEY ASIA (SINGAPORE) PTE.+

Wilson W Ng, CFAEquity Analyst

+656834-6345

[email protected]

Contributors

MORGAN STANLEY ASIA (SINGAPORE) PTE.

Zac SuEconomist

+656834-6739

[email protected]

MORGAN STANLEY ASIA LIMITED MORGAN STANLEY ASIA (SINGAPORE) PTE.+

Deyi TanEconomist

+8522848-7410

[email protected]

Samuel OngResearch Associate

+656834-6437

[email protected]

MMSingapore Property and Economics

Stronger for Longer

Structural growth story stays intact: Following the announce-ment of new cooling measures and public housing policies this year, we revisit our structural thesis calling for home prices to double by 2030. We take stock of recent developments, and we remain confi-dent that our expectation for sustained home price appreciation over the medium term is on track. In particular, we estimate that Singapore's presales market will grow from S$10bn p.a. to S$30bn over the same period – which suggests that residential development is not only a viable but also a growing business opportunity for devel-opers.

Laying out our base, bull, and bear scenarios; home prices double by 2034 in bear case: Our 2030 projections are predicated on our estimate of medium-term potential growth at 3% on average over 2018-2030. How would faster-/slower-than-expected GDP growth affect home prices? We introduce our base, bull, and bear growth scenarios, laying out our assumptions for demographics, capital stock, and productivity growth trends. In our bull case, GDP growth stands at 4%; home prices triple by 2030. In our bear case, GDP growth stands at 2%; home prices grow 73% by 2030, doubling by 2034 instead of 2030.

Near-term property outlook still compelling: We expect GDP growth at 3.6% in 2018 and 3.3% in 2019, which is above consensus. We expect growth drivers to broaden from exports to domestic demand, as capex and consumer spending show sustained recovery. Direct impact from trade tensions is still limited for now, but a key risk to watch is how protracted the trade negotiation process turns out to be. Underpinned by still-healthy growth momentum, we see home prices rising 10% by end-2019, despite recent cooling measures and rising interest rates. Indeed, we note that home prices rose in four of the five previous rate hike cycles. Contrary to common perception, we believe housing supply-demand dynamics remain favourable, and we anticipate a wave of capital inflows into the housing market from en bloc beneficiaries and HDB upgraders.

Developers undervalued: Housing fundamentals in both the near and long term appear healthy, yet developer valuations are dis-tressed, which we see as unwarranted. After a share price decline of 28% YTD (vs. the STI's +4%), our top pick CDL is trading at a discount to RNAV of 49%, and we estimate that its share price already implies zero value for its residential business. We see evidence of rising prop-erty values being a positive surprise to market expectations and cata-lyzing a re-rating in CDL over the next 12 months. See Singapore Property (Developers): Fundamentals Intact; Distressed Valuations (4 Oct 2018).

We reiterate our constructive view on the outlook for the economy and housing market. Our call for sustained home price growth over the medium

term stays intact, and we remain positive on the near-term outlook despite rising rates and policy risk. Top pick CDL; PT implies 57% upside.

Industry View

Attractive

https://ny.matrix.ms.com/eqr/article/webapp/e8b6c83a-c15c-11e8-9e35-04169db3030a



2030

ios for

MM Contents

5 Investment Summary

7 Why our thesis of home prices doubling byis still intact

14 Revenue Opportunity to Triple

16 Introducing our base, bull, and bear scenarhome prices

19 Cyclical Growth Outlook Compelling

32 Valuation methodology and risks

4

M

MORGAN STANLEY RESEARCH 5

MStill doubling by 2030? Yes. Last year, we put forward our con-structive view on the housing market in Singapore (see Singapore Economics & Property: Property Prices Inflecting and On Track to Double by 2030, April 2017). We called for home prices to inflect in 2018 after a four-year decline and to double by 2030.

A lot has happened since then – GDP growth came in stronger than our original forecasts, and home prices rebounded even earlier than we had initially expected, which in turn led to rising confidence in the housing market. That said, a new round of property cooling measures was announced in July 2018, which significantly affected sentiment in the housing market. This was then followed by new public housing initiatives announced in August 2018, which have material implica-tions for private home prices in both the near and longer term, in our view.

Structural growth story intact: Taking stock of recent develop-ments, we revisit our earlier thesis and find that the structural demand and supply drivers supporting our expectation of sustained medium-term home price appreciation are playing out per our expec-tations:

1. Household formation rate rising: The resident household formation rate remains healthy, and the proportion of skilled foreign workers continued to rise in 2017, which supports fun-damental occupational demand for housing.

2. Singapore's economy to continue to outperform other DMs: Singapore's economy grew 3.6% in 2017, outstripping DM growth of 2.3%. What's noteworthy is that productivity growth in Singapore has picked up as well.

3. Investment capital remains forthcoming: An upcoming wave of mega-flagship projects to enhance Singapore's status as a vibrant global city are on track. Meanwhile, leading tech firms are attracted to Singapore's global hub status. Google is setting up its regional headquarters in Singapore and Facebook is building a US$1bn data centre here – its first in Asia.

4. Bequest motives and shifting manpower trends alleviate property market selling pressures as population ages: Shifting manpower trends, in which retirement age gets pushed out further, alleviate selling pressures in the housing market. As it is, elderly labour force participation rate rose further to 27% in 2017.

Investment Summary5. Elastic supply-side adjustment reduces the likelihood of

excess supply: Recent property curbs specifically discour-aged land acquisitions, which were causing a buildup in the supply pipeline.

Bear case – home prices double by 2034. We remain confident in our projection that property prices can double over 2016-30, which we estimate implies a tripling of the revenue opportunity for prop-erty developers. Our 2030 projections are predicated on our esti-mate of medium-term potential growth at 3% on average over 2018-2030.

In this report, we introduce our bull and bear growth scenarios, laying out our assumptions for demographics, capital stock, and produc-tivity growth trends and their impact on our potential growth esti-mates.

l In our bull case, medium term potential GDP growth stands at 4%, and we expect home prices to triple by 2030.

l In our bear case, medium term potential GDP growth stands at 2%, and home prices grow 73% by 2030, which means that prices will still double by 2034.

Near term – home prixes rise 10% by end-2019: Despite the latest round of cooling measures and an environment of rising interest rates, we think home prices can continue to rise another 10% by end-2019. Home prices rose in four of the last five rate hike cycles, under-pinned by healthy economic growth. In 2018/19. we expect interest rates to rise, but also expect the economy to expand 3.6% in 2018 and 3.3% in 2019, which is currently above consensus. Furthermore, we anticipate a wave of capital inflows into the housing market from en bloc beneficiaries and Housing Development Board (HDB) upgraders, while housing supply is still below historical average and set to fall.

Developer stocks undervalued: Housing fundamentals in both the near and long term appear healthy, yet developer valuations are dis-tressed, we estimate pricing in a 8% fall in home prices. We view this as unwarranted. We see evidence of rising property values being a positive surprise to market expectations and catalyzing a re-rating in CDL over the next 12 months. Our top pick is CDL (see Singapore Developers: Fundamentals Intact; Distressed Valuations (4 Oct 2018).

https://ny.matrix.ms.com/eqr/article/webapp/84ccf77c-1db6-11e7-9401-22a6e5f2982d?ch=rpint&sch=ar#/section=5-3






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6

MExhibit 1:Home prices to rise 8% in 2019

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Source: URA, Morgan Stanley Research. e = Morgan Stanley Research estimates.

Exhibit 2:...as GDP growth stays at a healthy clip...

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Source: Bloomberg, Morgan Stanley (e) Research estimates

Exhibit 3:...and despite rising rates.

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83% -11% 13% 8% 42% 0% so far

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Interest Rate (3M SIBOR trough and peak qtrs) Property Price Change

Property

Interest

Rates (%):

Source: MAS, CEIC, URA, Morgan Stanley Research

Exhibit 5:...as the revenue opportunity for developers triples

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Source: URA, Morgan Stanley Research (e) estimates

Exhibit 4:Base case of prices doubling by 2030 on track (bear case: double by 2034)….

Base: +98%

Bull: +126%

Bear: +73%

Double

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Home Prices (4Q16 = 100) MS forecasts

2016-30

2016-2034

Source: URA, Morgan Stanley Research

Exhibit 6:Developers undervalued and pricing in home price decline

Ave: (28) Ave: +3%

-1SD: (50) (50)

-1SD: -9%

+1SD: (5) +1SD: +15%

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Correlation: +71%

+8%

Source: URA, Datastream, Morgan Stanley Research estimates

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M

Revisiting our thesis

Why now?A year has passed since our previous report calling for home prices to double by 2030. In light of the new round of property cooling measures as well as new public housing policies announced by policymakers, we revisit our structural thesis on home prices, and take stock of recent developments. In our view, the fundamental drivers of medium-term home price appreciation remain intact – in fact, they have played out over the past year per our expectations.

Taking stock of recent developments since our bullish call on the housing market: Early last year in April, we put out a report high-lighting our constructive view on the housing market in Singapore – see Singapore Economics & Property: Property Prices Inflecting and On Track to Double by 2030, April 2017.

In particular, we argue that residential property as an asset class in Singapore remains attractive, and we expect home prices to double by 2030, as Singapore's economy continues to outperform DM peers over the medium term. We run through the fundamental demand and supply drivers supporting our thesis below.

Demand driver #1

We expect a rising household formation rate, driven by singles, and shifting profile of foreign labour towards higher-skilled workers to continue to drive housing demand, and help to offset slower headline population growth.

Taking stock: On demographics, we think that the composition of population matters more than the population size for housing demand. We think that the rising household formation rate, driven by the increasing number of single-member households, and the shift in the profile of the foreign workforce towards higher-skilled workers

Why our thesis of home prices doubling by 2030 is still intact

will help to offset the drag from the slowdown in headline popula-tion growth. So far, resident household formation growth (2.1% YoY) continued to outpace overall resident population growth (0.8% YoY) in 2017 ( Exhibit 7 ), with the former driven by a rising number of single households (7.5% YoY vs 7.0% YoY in 2016) ( Exhibit 8 ).

Meanwhile, the proportion of higher-skilled foreign workers (i.e., employment pass and S pass holders) continued to edge up, to com-prise one-third of the total foreign workforce in 2017 ( Exhibit 9 ). A greater proportion of skilled foreign workers who command higher income suggests greater purchasing power and higher expat demand for housing, which would mitigate or even offset the slower overall foreign workforce growth.

Demand driver #2

We expect Singapore's economy to continue to outperform other advanced economies over the medium term – hence supporting income growth and consequently housing demand.

Taking stock: Income growth matters more than demographic varia-bles for home prices, based on our cross-country regression analysis ( Exhibit 13 ). We estimate medium-term potential GDP growth for Singapore at 3%. This means that Singapore's economy will continue to outperform other advanced economies over the medium term, as working age population growth is even less favourable for other advanced economies and would be in negative territory ( Exhibit 11 ). Indeed, in comparison, the OECD estimated that the medium-term potential GDP growth over the corresponding period for the US, Euro Area and Japan stands at 1.7%, 1.3%, and 1.0%, respectively ( Exhibit 10 ). As it is, Singapore's economy grew 3.6% over 2017, out-stripping DM growth of 2.3%.

Ultimately, an economy's long-term growth potential hinges on pro-ductivity growth, and policymakers' productivity drive has shown some initial signs of bearing fruit – Singapore's productivity growth picked up significantly over 2017 ( Exhibit 12 ). We discuss this in greater detail in the section Introducing our bull and bear sce-narios for home prices .



M

8

MDemand driver #3

Investment capital will be forthcoming, given the continued global relevance of Singapore as a city state economy.

Taking stock: Apart from occupational demand, investment demand also matters for home prices. Singapore's policymakers are typically on the front foot with regard to structural reforms, and so we argue that Singapore’s ability to stay relevant as a global hub will help to attract continued capital inflows into the property market. In our view, Singapore’s upcoming wave of mega-flagship projects – such as Changi Airport’s Project Jewel and Terminal 5, the second Central Business District (CBD) in Jurong Lake District, and the next-generation seaport in Tuas – showcases ongoing efforts to enhance Singapore’s competitive edge as a vibrant global city in attracting for-eign capital and talent ( Exhibit 17 ).

Supply driver #1

Bequest motives, lease buyback schemes, and shifting manpower trends assuage property market selling pressures that come as the population ages.

Taking stock: Property markets tend to face selling pressures as the population ages, with senior citizens selling assets to fund their retirement according to the lifecycle hypothesis. However, in

Singapore, we think that a combination of factors mitigates these selling pressures: bequest motives, lease buyback scheme in the public housing market, and shifting manpower trends, in which retirement gets pushed back further ( Exhibit 14 ). Specifically, on the latter, the labour force participation rate of the elderly (age 65 and above) has already risen over time from 10.8% in 2000 to 17.6% in 2010 and further to 26.8% in 2017 ( Exhibit 15 ).

Supply driver #2

Elastic supply-side adjustment reduces the likelihood of excess supply as well as the persistence of any supply-demand mismatch.

Taking stock: In our view, what is unique for Singapore is the combi-nation of the government being the largest landowner and the domi-nance of public housing in the housing market ( Exhibit 16 ). This means that the supply-side adjustment will be more elastic over the medium term, which helps to reduce the likelihood of excess supply in the housing market. In fact, while the latest round of cooling meas-ures had dampened sentiment in the property market somewhat, we think that the latest public housing policies announced by policy-makers are a massive shot in the arm for private housing. We elabo-rate more below.

M


M11 charts on why we see home prices doubling by 2030

Exhibit 7:Resident household formation rate has been rising and outpacing resi-dent population growth...

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Source: CEIC, Morgan Stanley Research

Exhibit 9:Proportion of skilled foreign workers has been rising over time, which augurs well for housing demand

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EP & S Pass holders (% of total foreign workforce excl foreign domestic workers)

Source: Ministry of Manpower, Morgan Stanley Research; Note: Foreign domestic workers are domestic helpers in Singapore.

Exhibit 11:…as Singapore's labour force growth is still positive, whilst other coun-tries' working age population growth is set to decline

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Working age population growth, % CAGR (2015-2030)

Source: UN population database, Morgan Stanley Research; Note: Demographic forecasts are UN popula-tion estimates under the medium variant. According to UN population estimates, Singapore's working age population growth is expected to remain positive, averaging 0.04% (CAGR) between 2015 and 2030. In our potential GDP growth estimates, we have factored in the Population White Paper's labour force growth rates of 1.0% from now till 2030 instead.

Exhibit 8:…because of an increasing number of single resident households, which in turn drives fundamental occupational demand for housing

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Exhibit 10:Singapore's potential GDP growth to remain at a premium versus other advanced economies...

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Source: OECD, Morgan Stanley Research; Note: Long-term potential growth for Singapore refers to Morgan Stanley Research estimate, whilst the potential growth estimates for the other advanced econo-mies / grouping refer to OECD long-term baseline projections.

Exhibit 12:Singapore's productivity growth is showing signs of improvement

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MExhibit 13:Housing prices can still rise despite demographic headwinds

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Estimated demographic effect (% per annum)

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Source: Morgan Stanley Research estimates; * Note: Estimates above are based on our regression anal-ysis. Hong Kong estimates are from 1980-2015, as the housing price data start from 1980 onwards.

Exhibit 15:Labour force participation among the elderly has risen over time, dimin-ishing the impact of aging on housing prices

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Exhibit 14:Proportion of elderly single-person households is on the rise, as more elderly prefer staying in their existing home instead of going to live with their children once they retire

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Exhibit 16:Home price movements: where is the sweet spot? We think it's ±2% QoQ

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Exhibit 17:Upcoming mega infrastructure projects to enhance Singapore as a vibrant global city

Mega Projects Estimated completion Estimated Cost

Changi Airport’s Project Jewel end-2018 ~US$1.1bn

Next-generation Seaport in TuasDec 2020 (Phase 1)

(total of 4 phases over 30 years)~US$1.7bn

Greater Southern Waterfront By 2027 NA

Changi Airport Terminal 5 2030A Changi Airport Development Fund with S$4bn initial

seed money has been set up to fund the project

Kuala Lumpur-Singapore High-Speed RailSuspended for 2 years (now expected to be

completed in 2031 when project is resumed)~US$25n originally

Jurong Lake District project After 2040 NA

Source: Various news sources, Morgan Stanley Research

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MNew public housing initiatives

What's new On 19 August 2018, during Singapore’s annual National Day Rally speech, Prime Minister Lee Hsien Loong announced two new initiatives for the public housing sector – Home Improvement Programme II (HIP II) and Voluntary Early Redevelopment Scheme (VERS) – which will apply to Housing Development Board (HDB) flats.

More upgrading works (HIP II): HDB flats, mostly sold on 99-year leases, are currently eligible for HIP when they hit around 30 years old – this applies to close to half of more than 1 million existing HDB flats. The scope of the works covers maintenance issues, such as ceiling leaks and damaged pipes, and upgrade of the electricity supply. At an average cost of S$2,500 per unit (before government subsidies of up to up to 95% for citizen households), works proceed when at least 75% of a block’s eligible Singapore Citizen households have voted in favour. In addition, the government has recently announced that a second round of HIP – HIP II – will be rolled out for flats 60-70 years old to help keep them "safe and livable, and also help them retain their value as their (99-year) leases run down.”

More en bloc potential (VERS): In the private housing market, owners of aging private condos may be able to cash out (often at a significant profit) by selling their units en bloc to developers sourcing land for redevelopment. In the public housing market, however, the closest equivalent of an en bloc sale is the Selective En bloc Redevelopment Scheme (SERS), whereby the government identifies older HDB estates for redevelopment, offering for compensation the market value of eligible units plus the option of purchasing replace-ment HDB flat at a subsidized rate or a S$30,000 ex gratia payment. HDB estimates that only about 5% of flats are suitable for SERS, most of which have already been identified.

The government recently announced that in addition to SERS, Voluntary Early Redevelopment Scheme (VERS) will be rolled out for flats that turn 70 years old, which will happen in about 20 years. Unlike SERS, which is triggered at the option of the government (buyer), VERS is to be triggered by HDB flat owners (sellers), much like private condo en bloc sales whereby a majority vote is required. Though the government stated that compensation for VERS is likely to be less generous than SERS, it does mean that all HDB units now have the potential to be sold back to the government before their 99-year leases end and values run down to zero.

Others: On 20 August 2018, the Minister for National Development, Mr. Lawrence Wong, announced that eligibility for the Lease Buyback Scheme (LBS) would be expanded to all HDB flats, from four-room or smaller flats previously. LBS allows flat owners aged above 65 and earning less than S$12,000 per month to sell the tail end of their lease back to HDB. In addition, Minister Wong also stated that he is reviewing existing rules that prevent the use of Central Provident Fund (CPF) pension funds to finance HDB flats that have less than 30 years remaining on tehir lease.

Exhibit 18:HDB Schedule of Upgrading Works and Exit Options

Source: HDB, Morgan Stanley Research

M

12

MImplications for private housing

Why it mattersWe see the new public housing initiatives announced by policymakers boosting HDB resale prices, and we believe that this in turn supports our thesis of sustained private housing price appreciation. Over the longer run, VERS helps even the pace of redeveloping HDB estates that reach the 99-year mark, which helps to stabilize supply and (in our view) the outlook for price appreciation.

Positive for HDB resale prices: We believe the new initiatives serve to strengthen resale prices of HDB flats. Heavily subsidized HIP upgrading works in years 30 and 60 help stem the depreciation in building value, preserving the overall resale value of the flat as the land lease matures, in our view. Additional exit alternatives in the form of VERs and LBS, while longer-term, embed higher option values for units today that were not present earlier, in our view. They

also alleviate previous concerns that the majority of HDB unit owners might have to end up holding on to units as that depreciate to zero in year 99.

Should restrictions on CPF financing of older units be relaxed, that would also widen the pool of potential buyers in the resale market, which we believe would be incrementally supportive of HDB resales prices.

HDB prices drive private housing demand: Close to half of all pri-vate homes sold by developers are bought by Singaporeans upgrading from their existing HDB flat ( Exhibit 19 ). We infer this from some data we collected on private home sales in 1995-2017, where 46% of total units sold by developers went to buyers with an HDB address ( Exhibit 19 ). HDB flat owners are allowed to sell their units in the resale market and purchase a private property after living in it for five years. They are typically able to finance their new private property using a combination of mortgage and sales proceeds. Resale HDB prices are 30-40% higher than the cost of acquiring a new HDB flat ( Exhibit 20 ), and higher HDB resale prices improve the sellers’ ability and confidence to finance a new private property.

Exhibit 19:HDB upgraders comprise nearly half of private home sales

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Exhibit 20:Public and Private Home Price Comparison

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1.0

1.5

New Resale Mass (OCR) Mid (RCR) High (CCR)

HDB Private Private Private

4R = 3BR = 970sqft 1,004 sqft 1,090 sqft 1,510sqft

Home Prices, average YTD 2018 (S$mn) 1.7 3.4

Source: HDB, URA, Morgan Stanley Research

M


MPositive for private home prices: We believe higher HDB resale prices will drive higher private home prices – private home prices are 90% correlated with HDB resale prices over 1995-2017 ( Exhibit 21 ) . Though higher resale HDB prices increase the ability of buyers to upgrade to a private property, a more attractive HDB product could sway the incremental buyer away from private properties.

That said, we believe the net effect on private housing is still positive. The pool of potential buyers with the option to decide between pri-vate and HDB resale properties is rather limited. Foreigners are not allowed to buy HDB resale units, and so in most cases they are locals

who are unmarried and younger than 35. Local married couples meeting the S$12k per month income ceiling for HDB new sales are likely to take that option over a 30-40% more expensive resale unit.

We note that income caps to qualify for HDB new sales have steadily been increased, allowing a wider pool of buyers to access HDB units, yet the proportion of Singaporeans living in HDB units has declined from a peak of 88% in 2000 to 79% currently ( Exhibit 22 ) , as a growing number of households move to private properties.

Exhibit 22:More moving from HDB to private properties

81%

87% 86%

88%

84% 82%

80% 79%

4 5

8 8 8 10

12 12

1985 1990 1995 2000 2005 2010 2015 2017

% of Residents living in HDB flats Income celing (S$k/mth)

Source: Singstat, NUS, Morgan Stanley Research

Exhibit 21:Private home prices move with HDB resale prices

50

100

150

Home Price Index (1Q09 = 100)

URA (private)

HDB (public resale)

Correlation: +90%

Source: URA, HDB, Morgan Stanley Research

Exhibit 23:Eligibility requirements for various housing optionsGeneral Eligibility EC Private

Requirements New Resale

Citizenship Citizen Citizen / PR Citizen -

Married? Yes No if older than 35 Yes -

Income (S$/mth) <S$12k - <S$14k -

HDB

Source: HDB, Morgan Stanley Research

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14

M

S$33bn market by 2030Developers sold S$9bn of private homes in 2016, and we forecast this could triple by 2030 – close to levels of comparable cities Hong Kong and London, and about half of New York's. This suggests the residential development is a not only a viable but also growing business opportunity for developers. We estimate the market share captured by the three developers we cover averaged 30% in 2012-2017.

Exhibit 24:Presales to triple...

19

9 9 9

14

33

2013-17 ave: 12

0

5

10

15

20

25

30

35

2013 2014 2015 2016 2017 … 2030e

S$

bn

Primary Home Sales Value (S$bn)

x3

Source: URA, Morgan Stanley Research (e) estimates,

Exhibit 25:...to levels near London and HK

7

24 25

31

50

0

10

20

30

40

50

60

SG Current SG 2030 LN Current HK Current NY Current

Pri

ma

ry H

om

e S

ale

s (U

S$

bn

)

Still smaller than other major cities after tripling

Source: Urban Redevelopment Authority of Singapore, Hong Kong Land Registry, Real Estate Board of New York, Morgan Stanley Research (e) estimates

Revenue Opportunity to TripleKey assumptions: In addition to our 2016-30 home price growth projection of +5% p.a., we introduce our medium-term volume growth forecast of +3% p.a., which we apply from 2017 onwards. A +3% p.a. growth rate implies a doubling of unit volumes from 2016 levels, resulting in a 16k-unit primary home sales run rate by 2030. We see private residential sales growing 3% p.a. over the long run, as we think occupier demand for housing will grow at the same rate.

Key AssumptionsHome prices (S$psf, private) +5% p.a. (2016-2030)Sales volumes (units, primary) +3% p.a. (2017-2030)Housing demand (unit change in occupied stock, total)

+3% p.a. (2017-2030)

# of Households +1.8% p.a (2016-2030)% of households living in private housing 20%->25% (2016-2030)

Private residential demand +3% p.a: The private residential market has been taking share from HDB since 1995, with the proportion of resident households living in private residential doubling to 21% since then. We believe this is largely driven by Singaporeans upgrading from their existing HDB flat (see section Implications for private housing ) and expect this to continue. Singles are allowed to buy HDBs only upon reaching 35 years old, so the pushing out of mar-riages should also prompt a continued rotation into private residen-tial property. By 2030, a quarter of resident households could be living in private residences, in our view, adding some 1.4% to growth over the medium term on top of 1.8% p.a. household formation rate. This adds up to medium-term demand for private residential prop-erty of 3.2% of stock p.a., which translates to approximately, 16k units, implying a 3% volume growth p.a. until 2030 ( Exhibit 26 ).

Household formation +2% p.a.: In the 2013 Population White Paper, policymakers projected a 6.5-6.9mn population by 2030, implying some 1.4% p.a. growth from 2017, slowing significantly from a 2.0% growth rate from 2000-16. Though slowing population growth (see section Revisiting our thesis ) is a concern to us, we believe this drag could be offset by the shift in composition of popu-lation which favors smaller households, resulting in household for-mation at a rate of 1.8% p.a.

M


MExhibit 26:Getting to 3% growth in volumes

3.2%

1.4%

0.4%

1.4%

Population growth Change in HH

composition

Condos take share Pte resi growth rate

Source: Morgan Stanley Research

Exhibit 27:Singaporeans marrying later

20

21

22

23

24

25

26

27

28

29

30

31

32

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Median Marriage Age

Male Female

Married later -> Can't BTO early -> Get Condo

Source: Singstat, Morgan Stanley Research

Where we could be wrong: We have assumed that home prices grow 5% p.a. through 2030, and that every 1ppt change affects our S$33bn estimate by 14% (e.g. 4% p.a. in home prices -> S$29bn market by 2030).

We have also assumed that the proportion of households living in private housing (rather than public housing) grows steadily, to 25% in 2030, from 15% in 2003 and 20% in 2016. If the proportion remains constant instead of growing, our S$33bn estimate is reduced 14%, to S$29bn.

Embedded within our calculations is the assumption that housing sales keep pace with occupier demand for housing – i.,e., increases in home purchases through the cycle are eventually met by increases in number of homes occupied. Inherent in this is no structural change in vacancies. Private housing vacancies stood at 7.1% in June 2018, in the middle of the 30-year range of 5-10%.

M

16

M

In our view, we see home prices keeping pace with income growth over the medium term. Wage growth over the past 20 years has averaged 4% per annum. We believe steady growth in wages will be sustained over the next decade, supporting a continued secular uptrend in property prices while keeping affordability levels in check.

Below, we discuss our base, bull, and bear (BBB) scenarios for home prices.

What was in our base case?

1. Prices +5% p.a. (in S$psf terms): From 1975 to 2016, home prices increased at a rate of 7% p.a. We believe home prices will double by 2030 and average annual appreciation of 5%.

Introducing our base, bull, and bear scenarios for home prices

We believe a 5% long-term growth rate will keep pace with income growth, keeping affordability levels (as measured by home price to income) stable.

2. Income +4% p.a.: We believe Singapore can achieve 4% growth in nominal GDP per capita over the long term, from ~5% nominal GDP growth and ~1% population growth. We think nominal GDP growth could come in at 4.5%–5.0%, from our potential GDP growth estimate of 3.0% as discussed in the earlier section, and our expectation of 1.5%–2.0% medi-um-term headline inflation.

3. Home prices +4% p.a.: Keeping pace with income growth, we believe that until 2030, home prices per unit can sustain an average of 4% growth per year. We believe this will result from a 5% p.a. increase in prices per square foot and a 1% decline p.a. in average home size in square feet ( Exhibit 28 ).

Exhibit 28:Home prices (in S$psf) to grow 5% p.a. to keep pace with income


M


MExploring the base, bull, and bear scenarios

The major determinant of sustainable economic growth and higher wages is productivity growth. In this context, Singapore's policy-makers are relatively nimble, and we expect them to be able to push ahead with the restructuring necessary to raise productivity and enhance the economy's long-term growth prospects. Indeed, policy-makers presented seven key strategies to elevate Singapore to the next rung of development in the Committee on the Future Economy (CFE) report published in 2017. In particular, they emphasized the need to build deep capabilities, raise productivity, promote the adop-tion of digital technology, drive innovation and internationalization across domestic enterprises, and encourage the local workforce to upgrade their skillsets to be future-ready.

Specifically, measures such as the following showcase how policy-makers in Singapore have generally been on the front foot with regard to structural reforms to enable local industries, firms and the labour force to adapt to the shifting global landscape:

l The S$4.5bn Industry Transformation Programme – this brings together industry partners, trade associations and chambers, unions, and public agencies to develop and implement a tailored Industry Transformation Map (ITM) for 23 industries.

l The SkillsFuture programme – this promotes lifelong learning among citizens.

Our base case

We look for potential GDP growth to average 3.0% over 2018-2030. Our estimates are based on the following: we incorporate the Population White Paper assumption that working age population growth will slow to an average of 1.0% from now till 2030. However, we assume that policy efforts to combat the slowdown in immigra-tion policy by lifting the labour force participation rate bear fruit. The labour force participation rate increases at a 20-year historical average run-rate, taking it from 68.2% in 2017 (de-trended) to 70.8% in 2030, as the higher dependency ratio, longer mortality, and rising re-employment age urge greater labour participation. This will lead growth in the working population to rise 1.3% YoY between now and 2030 (versus a 20-year average of 2.4% YoY), assuming a Non-Accelerating Inflation Rate of Unemployment (NAIRU) of 2.1%.

A slowdown in the working age population means that capex growth is also likely to slow, as returns on incremental capex diminish. Looking at the historical relationship between working-age popula-

tion and capex growth, we expect net capital stock to grow 3.7% YoY in this period (vs. a 20-year average of 5.6% YoY).

Meanwhile, we expect total factor productivity to contribute 0.5ppt to potential GDP growth, a slowdown from the 0.9ppt in the past 20 years given the negative correlation with demographics.

Our bull case

We look for potential GDP growth of 4.0% in 2015-2020. We look for the labour force participation rate to rise at double the pace pro-jected in the base case, from 68.2% in 2017 to 73.4% in 2030. As a result, %YoY growth in working population will stand at 1.6% in 2018-2030.

On the other hand, policy initiatives by the government reap favour-able results. Measures to encourage productivity and innovation result in corporates undertaking more capex in order to offset the labour shortfall. This leads the net capital stock to rise 4.9% YoY during 2018-2030.

Total factor productivity contribution also improves to 0.8ppt as determined policy efforts mitigate the productivity drag from slower immigration and weak demography.

Our bear case

We expect potential GDP growth of 2.0% in 2018-2030. Labour market policies only manage to keep the labour force participation rate from declining and it stays unchanged at 68.2% through to 2030. As a result, working population grows 1.0% YoY for 2018-2030.

Meanwhile, net capital stock grows at a slower pace of 2.7% YoY as corporates see less need to invest given weaker demand and total factor productivity also suffers, contributing only 0.3ppt to potential GDP growth ( Exhibit 29 ).

Implications for home prices

l Base case: home prices will double by 2030.l Bull case: home prices will triple by 2030.l Bear case: home prices will rise 73% by 2030, but will double by

2034 ( Exhibit 30 ).

M

18

MExhibit 29: BBB scenarios for potential growth

5.3

1.9

4.4

3.3

2.0 2.0

3.6 3.6 3.3

Base case LT

average: +3

0

1

2

3

4

5

6GDP Growth (Real, % YoY)

2018-30 Bear-Bull avg range: +2 to +4%


Exhibit 30:Home price trajectory under our BBB scenarios


Key Assumptions Bear Base Bull

Home prices +4% p.a. +5% p.a. +6% p.a.

Potential GDP growth (nominal basis) +4% p.a. +5% p.a. +6% p.a.

Potential GDP growth (real basis) +2% p.a. +3% p.a. +4% p.a.

Labour Force Participation (detrended) 68%, unchanged 68% -> 71% 68% ->73%

Net Capital Stock Growth +2.7% p.a. +3.7% p.a. +4.9% p.a.

Total Factor Productivity (contribution to potential growth) +0.3 ppt +0.5 ppt +0.8 ppt

Other assumptions Inflation: 2% p.a; Population growth: +1% p.a.; Housing unit size: -1% p.a.

proving 010 fur-ean that

yment

ot to mentals. d we still think

bove with appears trade

$18bn of property

hich form f eligible recently support rs to sell

bout the ems from

MM

Home prices to keep risingContrary to popular opinion, we think home prices will continue to grow another 10% by end-2019. Recently implemented cooling measures are likely to cause a deceleration in growth, not a decline, in prices. We see positive growth underpinned by still healthy economic growth outlook and a favourable supply-demand environment.

Housing fundamentals are solid: Unsold inventory levels are below historical average, and set to tighten further from here as land acquisition activity – particular from en bloc sales – slows down dra-matically from July 2018. In contrast to a tight supply outlook, we see demand growing from two key sources.

Cyclical Growth Outlook Compelling

Key Concerns Our View

1) Rising Interest Rates Home prices rose in four of five previous rate hike cycles: Rising rates tend to coincide with imeconomic growth outlook, which supports housing demand. Housing policies put in place since 2ther reduce the risk of fire sales due to higher mortgage costs. Tighter limits on home financing mcash for down payments is a bigger constraint for the incremental home buyer, not mortgage paaffordability, and household net cash positions are at record highs.

2) Cooling Measures Goal is stability, not decline: The government explicitly stated that the goal of property curbs is nsend prices down, but rather to ensure price stability, at growth rates in line with economic fundaForeign buyers, most affected by recent stamp duty increases, make up just 5% of the market ansee evidence of foreign buying in recent months. Local investors have been affected too, but we housing is still relatively underrepresented in their portfolios.

3) Economic Slowdown GDP growth to stay healthy. We expect GDP growth at 3.6% in 2018 and 3.3% in 2019, which is aconsensus. Specifically, we expect growth drivers to broaden from exports to domestic demand,capex and private consumption showing a sustained recovery. Direct impact from trade tensionslimited for now, as export volume has held up. That said, a key risk to watch is how protracted thenegotiation process turns out to be, given Singapore's high export orientation.

1. En bloc beneficiaries could be putting back up to Sunlevered capital back into the S$10bn a yearmarket, mostly in 2019.

2. The number of HDB (public housing) upgraders, whalf of condo buyers, is likely to grow. The pool oupgraders is growing significantly from 2019 andannounced public housing enhancements couldresale HDB prices and encourage more HDB ownetheir flats and upgrade to condos.

Concerns overdone. The market remains unconvinced ahousing market's near-term outlook, which we think stthree key concerns. We address them below.


M

20

M

Exhibit 31:Home prices to grow 8% in 2019

(1)

(12)

(2) (2)

1 4

10

31

(5)

2

18

6 3 1

(4) (4) (3)

1

10 8

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

e

20

19

e

Home Prices YoY (%)

MS e

Source: URA, Morgan Stanley Research. e = Morgan Stanley Research estimates.

Home prices to keep rising…

Prices to grow through 2019

Still rising: After growing 8% in 9M18, we think home prices can still grow 2% per quarter through 2019. Following cooling measures implemented in July this year, quarterly consecutive price growth slowed from 3-4% per quarter in 1Q and 2Q, to 0.5% in 3Q based on URA's flash estimate. We think growth momentum can recover from 4Q as buyers and sellers reset their expectations after the initial sur-prise, supported by an improving outlook for public housing (HDB), which received a boost form new initiatives announced in August. We believe demand from HDB upgraders and en bloc beneficiaries will absorb the units in the pipeline for launches, to an extent where developers continue to price above, rather than below nearby bench-mark levels.

Meanwhile, falling levels of condo completions (mostly launched and sold 3-4 years ago) and demolitions stemming from en bloc sales are likely to result in tighter vacancies and a stronger rental market for landlords through 2019. This could support higher condo prices in the resale market.

Exhibit 32:Tighter vacancies to drive rent growth

5 7

6

11

7

4 1

6 8 9

11 9

12

19 19 21

16

7 5

5

6

7

8

9

10

0

5

10

15

20

25

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

e

20

19

e

Vacancy (%) '000 Units

Th

ou

san

ds

Private Housing Supply Private Vacancy (RHS)

Source: URA, Morgan Stanley Research. e = Morgan Stanley Research estimates

Exhibit 33:HDB upgrader demand to grow threefold over 2019-22

10 10 7

9 9 4

7

20

12 15

30

25 26

35

-

10

20

30

40

20092010201120122013201420152016201720182019202020212022

# of HDB Flats turning 5 years old and can be sold ('000)

~3X

10k units p.a.

30k units p.a.

Source: data.gov.sg, Morgan Stanley Research

Demand healthy

Wave of capital from HDB upgraders... Close to half of all private homes sold by developers are bought by Singaporeans upgrading from their existing HDB flat ( Exhibit 19 ), mostly exempt from having to pay any ABSD. A key constraint is the Minimum Occupation Period (MOP) of five years, a policy which requires them to live in their HDB flats for five years before being allowed to purchase pri-vate property.

We see a wave of newly eligible HDB upgraders hitting the private property market from 2019, as their HDB flats pass the critical five-year mark. We estimate that 30k HDB flat owners will become eli-gible per year over the next four years, three times the run rate of the past decade. ( Exhibit 33 ). We also see new public housing initiatives announced by the government supporting HDB resale prices, which we believe in turn supports rising private home prices. For more detail, see Section New public housing initiatives .

M


M...and another wave from en bloc beneficiaries: The en bloc boom that lasted from May 2017 to June 2018 will transfer some S$18bn of proceeds to displaced home owners, as developers bought them out to redevelop their old condos to new ones. The resulting injection of household liquidity has only just begun, and we believe it will persist through 2019, since it typically takes 1-2 years between the tender award and the collection of proceeds. S$18bn of (largely cash) pro-ceeds is a substantial amount, especially considering that additional capital is likely to find its way back into the property market for replacement homes, and could be leveraged up to four times that amount using mortgages. To put that into perspective, total devel-oper sales have averaged just S$15bn a year over the past decade.

Exhibit 34:S$18bn of en bloc deals announced since 2017...

0.6 0.7

2.2

0.3 0.1

1.8

3.2

1.5 1.2

0.2 0.4

1.0

-20%

-10%

0%

10%

20%

30%

40%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

YT

D'1

8

vate Residential Prices

Pte Resi Index YoY (RHS)

7.8 11.5 8.0 10.0

En Bloc Deals (S$bn)

0.3 0.7 1.9

1.1 0.0

2.7

1.5

0.1 0.1 0.6 0.7

2.2

7.8

11.5

0.3 0.1

1.8

3.2

1.5 1.2 0.2 0.4

1.0

8.0

9.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

YT

D'1

8

En Bloc Sales

Source: Business Times, Straits Times, Morgan Stanley Research.

Supply tighter

Supply still tight: Unsold inventory levels of 28,000 units (including project launches in the pipeline) are still below historical average levels ( Exhibit 36 ), despite the recent surge in additions to the pipeline primarily from en bloc activity since 2017.

Exhibit 35:...with proceeds to be collected by home owners mostly in 2019

2 2

4

6

4

2 2

4

6

4

0

1

2

3

4

5

6

7

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2017 2018 2019

En Bloc Proceeds (S$ bn)

Announced Received (assuming 6 quarters later)

Source: Business Times, Straits Times, Morgan Stanley Research.

On 6 July 2018, the government raised stamp duties 5-15%, stating later in a 17 July joint MOF/MND/MAS press release that the raise was "focused especially on developers, who have been bidding aggres-sively for residential land and pricing units higher." Since then, there have been zero successful en bloc land transactions, compared to S$1-2bn average monthly run rate in the preceding 12 months.

We think the end of elevated en bloc activity means that addition to pipeline launch supply will slow significantly from here, and unsold inventory levels are likely to start falling again ( Exhibit 37 ). We think this tighter supply in the primary market will be partially offset by an increase in secondary market supply. Prior to the latest meas-ures, there were 140-150 condos seeking an en bloc sale to devel-opers. As their success rate declines, we think the response from most homeowners would be to try again at a different price or time (as opposed to selling in the resale market at a lower price than what developers are willing to pay). For some projects, however, we could see units reappearing in the resale market, adding to overall supply.

Exhibit 36:Unsold inventory levels below average...

35

28

0

10

20

30

40

50

Th

ou

san

ds

Unsold inventory ('000 units) Average since 2000


Exhibit 37:...and could fall from here

(7) (7) (8)

(11)

(4)

4 3 5

10 12

(3) (4) (3)

(0)

8

(15)

(10)

(5)

0

5

10

15

2014 2015 2016 2017 1H18

Units '000

(Sales) (Gross addition) Net addition to unsold inventory


M

22

MSupply risks: We estimate that net additions to stock will fall signifi-cantly through 2020 but surge in 2022 ( Exhibit 38 ), driven by the completion of projects that are currently ready for launch or about to be. This could weigh on occupancies and rents then, and poten-tially the outlook for prices. That said, we think 2022's increase in supply could sharply reverse in 2023 as further additions to the supply pipeline slow substantially from 2Q18 ( Exhibit 39 ). En bloc activity has slowed to a halt since July 2018, with zero transactions done vs. S$1-2bn per month in the preceding twelve months. This means the pipeline of en bloc-sourced projects is likely to diminish from here as units are completed, but without any (or with fewer) additions from new en bloc transactions.

The pipeline of Government Land Sales (GLS)-sourced projects could also fall further from here. The latest semiannual GLS pro-grammes are adding units to the pipeline at a pace slower than the number of units being completed.

Exhibit 38:2022 Supply Spike...

4 4 4 5 7 6

8

12 12

10 9

5 7

6

11

7

4

1

6 8 9

11 9

12

19 19 21

16

7 5

1

10

22

1990-2017 ave, 9

0

5

10

15

20

25

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

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03

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18

e

20

19

e

20

20

e

20

21

e

20

22

e

Th

ou

san

ds

Private residential supply (#, chg in stock)

Private Total

Unsold


Exhibit 39:..Likely to Reverse Quickly

54

74 66 67

79 90

96 90

75

60 48 51 55

9 16 14 16 29

40 49 52 49

42 34 30 30

44

58 53 51

50

50 47 38

26

18

14 21 25

0

20

40

60

80

100

120

Upcoming Supply ('000 units)

From En Bloc

From GLS


M


M...despite rising interest rates...

Home prices rose in four of the five previous rate hike cycles: Empirically, home prices have risen in four of the last five interest rate hike cycles since 1993 ( Exhibit 40 ). Rising mortgage rates could the-oretically weigh on home prices in either or both of two ways:

1. Panic and mortgagee default sales flood the market with supply;

2. Mortgage costs become prohibitively expensive for the incre-mental home buyer and curbs demand.

We saw this happen during the 1997 Asian Financial Crisis, when the three-month SIBOR rose from 2.3% in 1Q93 to 6.7% in 4Q97, and home prices fell 11%. However, the other rate hike cycles since 1993 were milder, and home prices rose rather than fell. We believe this is because in those instances, rising rates were counter-cyclical, coin-ciding with an improving economic growth outlook, which more than offset the supply effects of fire sales and demand effects of mort-gage affordability.

We believe home prices can rise another 14% from 2Q18-2019 even as three-month SIBOR rates rise from 1.6% to 1.75%. Current policy restrictions on home purchases will mean that rising rates have an even lesser negative impact on home prices.

Exhibit 40:Home prices rose in four of the last five rate hike cycles

1.7 2.3

1.7 0.6

1.4 0.4

4.4

6.7

2.9 3.6

2.6 1.6

83% -11% 13% 8% 42% 0% so far

1993-94 1996-97 1999-00 2003-06 2004-07 2014-Now

Interest Rate (3M SIBOR trough and peak qtrs) Property Price Change

Property

Interest

Rates (%):

Source: MAS, CEIC, URA, Morgan Stanley Research

Existing policies lower risk of panic and fire sales: Since 2010, seller stamp duties (SSD) have been in place to restrict speculative activity – currently, selling a property within the first year of pur-chase would incur a 12% stamp duty on the transaction value. Homeowners faced with rising mortgage costs may be less inclined to sell their property to avoid SSD, in our view, reducing supply-side pressures.

Since SSD was introduced, homes resold within three years or pur-chases have fallen from 40% of transactions to just 2% ( Exhibit 41 ); average holding periods have steadily risen from 4 years to 9 years ( Exhibit 42 ).

Furthermore, we think the 2013 introduction of Total Debt Servicing Ratio, which caps mortgage payments at 60% of borrowers' incomes, limits the potential for mortgage defaults. Loan to Value (LTV) limits on home purchases decreased from 90% to 80% in 2010, and to 75% in 2018. This further reduces the risk of excess leverage and mort-gage default risk, in our view.

Exhibit 41:Homeowners avoid selling in the first three years

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Sold within 3 years (% of transactions)

SSD introduced in

2010, raised in 2011

Source: URA, Alphawise, Morgan Stanley Research

Exhibit 42:Sellers have an average holding period of nine years

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Holding Period (average # of years from purchase)

Source: URA, Alphawise, Morgan Stanley Research

M

24

MRising rates not a big deterrent for incremental home buyers: Through lower mortgage margins, lenders have absorbed around half the 120bps rise in base interest rates since 2014. The three-month SIBOR has risen 120bps from a low of 0.4% from 2014 to 1.6% currently, but mortgage rates available to buyers have risen just 60bps over the same period ( Exhibit 43 ). Rising household cash bal-ance suggests ample liquidity and no urgent need for banks to reverse that trend, in our view.

Furthermore, falling LTV limits on home purchases also mean smaller loan amounts and mortgage payments – we think the 25% minimum down payment is a bigger limiting factor than affording monthly mortgages. We estimate the average household in Singapore has more than enough income (S$11k per month) to afford the mortgage payments for a new S$1.2mn home (S$3k per month), but barely enough cash (2Q18: S$292k cash before CPF) required for the 25% down payment of S$300k (which can be partially paid with CPF).

Even if mortgage rates were to rise from 2% currently to 7%, mort-gage payments would still fall within the regulatory threshold of 60% ( Exhibit 44 ).

Exhibit 43:Mortgage rates rising more slowly than three-month SIBOR

1.2

1.8

0.4

1.6

2.13

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2014 Aug'18 Jun'19e

Mortgage rate (%)* 3M SIBOR (%)

*In 2014, mortgage rates were as low as 3M SIBOR + 80bps.

In Aug'18, mortgage rates were as low as 1.85% fixed,

or 1.66% floating, based on 1M SIBOR +15bps

Source: Straits Times, CEIC, Morgan Stanley Research

Exhibit 45:Household leverage remains elevated, but has stabilized recently...

0%

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Household debt Mortgages: Financial institutions

Mortgages: HDB Personal loans: Motor vehicles loans

Personal loans: Credit/ charge cards Personal loans: Others

% of GDP

Source: CEIC, DOS, Morgan Stanley Research

Household leverage remains elevated... Singapore's high ratio of household debt to GDP has been a concern, even though the buildup in overall household debt has not been as sizable as the 23% seen in Malaysia and 26% in Thailand between 2007 and 2017. As it is, overall household debt has edged down somewhat from the peak of 74.6% of GDP in 2014 to 71.4% of GDP in 2Q18 ( Exhibit 45 ), as nominal GDP growth outstripped household debt growth over 2017 ( Exhibit 46 ).

That said, there are selected segments of household debt that have risen recently. Specifically, the growth of mortgages from financial institutions and other personal loans has picked up in recent quar-ters. Furthermore, new housing loan limits granted for investment have rebounded since 2Q17, growing at double-digit YoY levels, before moderating in 2Q18.

In our view, the pickup in mortgages has likely prompted the latest round of MAS macroprudential measures to rein in any acceleration in household leverage.

Overall, we think resident household balances remain healthy on a net basis, and we elaborate more below.

Exhibit 46:... as nominal GDP growth outstripped household debt growth

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Total private sector debt (%YoY)

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Source: CEIC, MAS, Morgan Stanley Research

Exhibit 44:Average households can afford mortgage payments even with higher interest rates

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% of Income

Mortgage rate

Assumptions:

Home Price: S$1.2m

LTV: 75%

Tenure: 30 years

Income: S$11k/mth,

Ave Household income in 2017


M


M…but household balance sheets are now stronger: The average household in Singapore is in a net cash position, wider than it's ever been since 1995 when data became available ( Exhibit 47 ). Including CPF pension fund monies, which mostly can be used to fund home purchases, households have on average S$361k net of mortgages and other loans, enough for a down payment for a US$1mn private condo ( Exhibit 48 ).

Exhibit 47:Households in net cash position...

17 7

(1) (8)

(13)

(27) (28) (33) (31)

(25) (14)

9

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Exhibit 48:...in addition to CPF money that could be used for property

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M

26

M

Exhibit 49:Foreign buyers make up 5% of the market

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% of Foreign Buyers

Increase in stamp duties % of transactions by foreigners


Exhibit 51:Transaction costs of buying, selling and property holding taxes of a US$2m residential property

Source: JLL Estimates

introduced similar measures to prevent housing price bubbles in their respective markets. For example, in 2017:

l Canada imposed a 15% transfer tax on foreign home buyers in Toronto.

l Australia raised a similar tax from 4% to 8% in Sydneyl New Zealand proposed banning foreign buyers altogether.

Currently, overall frictional costs for foreign buyers investing in Singapore property are comparable to those in Tokyo and Hong Kong, though above the 10-20% range for Sydney, Paris, New York, and London ( Exhibit 51 ). There is also zero inheritance tax in Singapore, compared to up to 40-50% in the US, UK, and Japan ( Exhibit 52 ).

According to Knight Frank's 2018 Wealth Report, Singapore ranks fifth among the most expensive cities for prime properties in the world, behind Monaco, Hong Kong, New York, and London. After fac-toring in transaction costs and inheritance tax, it may still offer value relative to other international cities.

Exhibit 50: Chinese are the biggest foreign buyers

8%

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12%

9% 8%

9%

6%

2% 3% 3% 2% 2% 2% 2%

2%

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1% 1%

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8%

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14%

2012 2013 2014 2015 2016 2017 1H18

% of foreign buyers Other

MY

ID

CH


Exhibit 52:Inheritance taxes

40% 40% 45%

55%

0% 0% 0% 0% 0% 5%

10%

Singapore Hong Kong Australia UK US France Japan

Inheritance Taxes

Source: EY Worldwide Estate and Inheritance Tax Guide 2017

...and despite cooling measures

Foreigners will still buy housing

Foreigners comprise just 5% of demand: Following higher stamp duties implemented on 6 July 2018, foreign buyers are now subject to 24% (~4% regular + 20% additional) stamp duties on home pur-chases, 5ppt higher than before. Compared to unaffected local first-time buyers, demand from this segment of buyers could be constrained, That said, foreigners make up just 5% of housing units transacted in 2Q18 – the private property market remains dominated by local citizens and permanent residents. We think foreigner partici-pation in the housing market will be maintained as barriers to entry are also raised in other countries, but any declines will have a mar-ginal impact on the property market.

Barriers to entry comparable with those in other regions:. Raising Singapore's property stamp duties applicable to foreigners and sec-ond-time local buyers comes at a time when other countries have

M


MForeigners still buying: Anecdotally, there appears to be some evi-dence that foreigners have still been buying units after recent cooling measures. CDL reported that foreigners bought five units of New Futura in July after cooling measures were in place, as well as a fur-ther seven units of South Beach Residences over the first two weeks of sales in September. Based on caveats lodged as of 6 September 2018, foreigners contributed 6% of total transactions in July and 4% in August.

Investors will still buy housing

Investors comprise 25% of demand: Unlike local first-time buyers who tend to be owner-occupiers, local investors looking to purchase a second or third property for investment are subject to ABSD of 12% and 15%, 5ppt higher since 6 July 2018. Higher stamp duties could sway local investment demand toward strata-titled commercial properties or properties overseas, especially if the SGD were to strengthen. Based on a MAS survey of housing loans, we think inves-tors make up about a quarter of housing demand ( Exhibit 54 ) – a minority, but significant enough to affect housing prices.

Will cooling measures shift investment dollars away from housing? Property curbs may sway incremental investments toward other alternatives, such as stocks or bonds, but households' asset exposure to residential properties is low by historical standards. Net of mortgages, housing comprises 49% of Singapore's household net worth, compared to a 1995-2017 average of 54% ( Exhibit 53 ). Hence, we believe property is still relatively underowned as an asset class relative to other investments, and that households will gener-ally not feel an urgent need to diversify their portfolios away from it.

Exhibit 53:Household portfolios are not overexposed to housing


Exhibit 54:Mortgage data suggests 20-30% of buyers are investors

27% 29% 24% 25% 25% 22% 27% 22% 22% 0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016 2017 1Q18 2Q18

Mortgage Limits Granted

Owner

occupied

Investment

property

Source: MAS, Morgan Stanley Research

M

28

MPolicy makers aim for stability, not decline

"The cooling measures are not meant to send prices down, but to moderate the property market" – stated an official press release from the authorities (comprising MOF, MND, and MAS) in July 2018. The government has repeatedly emphasized that the goal of cooling measures is home price stability and price growth sustainability – at levels keeping pace with economic fundamentals. In that regard, we expect the timeliness and intensity of policy intervention to apply equally to both up- and down-cycles. Singapore aims to achieve an average real GDP growth rate of 2-3% p.a. (which we think translates to ~5% in nominal terms accounting for inflation) over the next decade, based on the government-led Committee on the Future Economy's 2017 report.

Should Singapore be able to achieve its goal of steady economic growth, current rhetoric from the government suggests that home prices will be managed within a band that also keeps pace in a steady upward trajectory.

Risks of overshooting: Though the goal of policy makers is price stability rather than decline, the risk remains that cooling policy could be too effective, causing the home price trajectory to over-shoot to the downside in the near term. We believe the likely policy response to this is a scaling back of earlier cooling measures, but prices could fall in the interim months or quarters following an overly severe round of policy cooling.

In addition, any policies designed specifically to reduce the gap between private condo and public HDB resale prices (as opposed to just raising HDB resale value) could result in a decline in private

Exhibit 55:Raising the value of HDB resale units is positive for private condos; Raising accessibility is not


housing prices. An example could be loosening eligibility require-ments for buying HDB resale units, such as the requirement to be married, be 35 years or older (for singles), or have a citizen/PR resi-dency status. This would support HDB resale demand and prices but could come at the expense of the private housing market. Unlike efforts to raise the value proposition of HDB resale flats, which we see as positively affecting private home prices, increasing HDB acces-sibility to buyers that would have otherwise bought in the private market ( Exhibit 55 ) could be negative for private home prices.

Cooling measures could be reversed: The government introduced eight rounds of policy tightening for the housing market as home prices grew 60% in 2009-13. It partially removed seller stamp duties in 2017, before re-embarking on policy tightening in 2018. As most of the cooling measures from the previous tightening cycle remain in place, this leaves a much wider toolkit to stimulate the housing market via policy easing should the need arise. Policy measures such as LTV limits and stamp duties are "cyclical" and can be adjusted based on prevailing market conditions, stated MAS Chairman Ravi Menon in 2014.

l LTV limits, which have been tightened since 2010 to 75% currently, had previously been eased in 2005 from 80% to 90%.

l Seller Stamp Duties (SSD) also had precedents for easing – in 1997 when they were reduced from 3% to 0%, and in 2017 when they were reduced by 4ppt.

l Additional Buyer Stamp Duties (ABSD), which go as high as 20% currently, leave much scope for easing, and we think will be amongst the first measures to be eased should home prices fall.

M


MUnderpinned by healthy economic growth

Property market trends driven by domestic economy: The macro-economic outlook matters, given that changes in economic condi-tions have a direct bearing on the property market.,A steady macroeconomic outlook would be supportive of property demand and consequently prices. Indeed, we find a strong positive correla-tion between GDP growth and property price growth in 1995-2017 ( Exhibit 56 ).

Exhibit 56:Economic growth to drive property prices

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Home Prices YoY (%) SG Nom. GDP YoY (%)

MS e

Correlation: 66%

Source: URA, CEIC, Morgan Stanley (e) Research estimates

Cyclical growth momentum to stay healthy: We expect GDP growth of 3.6% in 2018 and 3.3% in 2019 ( Exhibit 59 ). Our growth estimates are above consensus, which stands at 3.2% and 2.7%, respectively ( Exhibit 57 ). In the near term, we expect cyclical growth momentum to hold up, with the growth drivers broadening out from trade-related sectors into domestic-oriented sectors ( Exhibit 58 ), as well as more spillover from exports into domestic demand. As it is, the incoming growth trajectory had been stronger than expected in 1H18, coming in at +4.2% YoY. We expect 2H18 growth momentum to moderate, but to a still-healthy level.

Exhibit 58:Growth drivers broadening out from trade-related sectors into other sectors

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Trade-related cluster

Modern services cluster

Domestic cluster

Others

Overall Real GDP (%YoY)

(%-pt contribution)

Source: CEIC, MAS, Morgan Stanley Research; Note: Trade-related cluster includes manufacturing, whole-sale & retail trade, and transportation and storage; modern services cluster includes finance and insur-ance, information and communication, and business services; domestic-oriented cluster includes construction, utilities, other goods industries, accommodation and food, and other services industries.

Exhibit 59:Singapore: Macro forecastsSingapore 2017 2018O 2019O 2018E 2019E

Real GDP growth %YoY 3.6 -- -- 3.6 3.3

-Private Consumption %YoY 3.1 -- -- 3.4 3.2

-Public Consumption %YoY 4.1 -- -- 5.0 5.0

-Gross Capital Formation %YoY 8.7 -- -- 2.8 1.9

--Gross Fixed Capex %YoY -1.8 -- -- 2.8 3.0

-Exports %YoY 4.1 -- -- 4.3 4.0

-Imports %YoY 5.2 -- -- 4.2 4.0

-Domestic demand %YoY 5.4 -- -- 3.4 2.9

-Domestic demand

(ex inventories)%YoY 1.4 -- -- 3.4 3.4

Headline CPI %YoY 0.6 0.9 1.4 0.7 1.1

3M SIBOR % 1.50 1.65 2.13 1.75 2.13

Source: CEIC, Morgan Stanley Research; Note: O refers to original Morgan Stanley Research estimates; E refers to revised Morgan Stanley Research estimates

Exhibit 57:GDP growth: where we stand vs. consensus

3.2

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2012 2013 2014 2015 2016 2017 2018e 2019e

Singapore Real GDP Growth (%)

Consensus range

Median

MS forecast

Source: Bloomberg, Morgan Stanley (e) Research estimates

M

30

M2) Private consumption has turned around amid an improving labour market: Overall, we see private consumption momentum sustaining pace amid improving labour market conditions as cyclical growth momentum stays healthy ( Exhibit 63 ). Employment growth and average wage growth typically trail real GDP growth by two to three quarters ( Exhibit 62 ). So far, both wages and employ-ment have already shown signs of improvement, and we expect the steady growth momentum to continue to filter through to the labour market.

Specifically, on domestic demand, we highlight the following two points:

1) Capex momentum has rebounded: Previously it was in negative YoY territory, mainly owing to weak private sector construction activity ( Exhibit 60 ). We expect private construction activities to pick up further given the slew of en bloc transactions that have already been passed since last year, which will spur building works in the quarters ahead ( Exhibit61 ). In addition, public construction activities should also get a boost from the ramp-up in public infra-structure/amenities projects. Meanwhile, sustained export momentum should help support other sub-components of GFCF.

Exhibit 60:Fixed capex momentum has picked up…

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GFCF GFCF: Construction & works

GFCF: Machinery & equipment GFCF: Intellectual property products

GFCF: Transport Equipment (RS)

(%YoY)


Exhibit 62:Labour market indicators typically lag real economic activities; wages and employment have seen signs of improvement

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Average resident wage growth (%YoY) (lag 2Q)

(%YoY)


Exhibit 63:Private consumption has turned around

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Exhibit61:…as construction capex recovers gradually

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Construction Contracts Awarded (%YoY, 4Q forward) (LS)

Real GDP: Construction (%YoY) (RS)


M


MKey risks – where we could we be wrong

As it is, the latest August export print showed that sequential momentum in export volume has remained on a healthy trajectory ( Exhibit 65 ). This corroborates our view that the direct impact of the safeguard measures imposed by the US earlier this year – i.e., tar-iffs on solar panels, washing machines, steel and aluminium products – is manageable for now ( Exhibit 64 ).

That said, growth risks would arise from a potentially significant escalation in trade tensions. This could lead to demand destruction from higher tariffs with knock-on implications for domestic/interna-tional supply chain linkages. It could also affect private sector confi-dence and undermine the capex momentum which has been supporting the global synchronous recovery.

Overall, given Singapore's high export orientation, we watch for the sustainability of the global growth cycle, as well as how protracted the US trade negotiation process turns out to be.

Exhibit 64:Direct impact of trade tariffs implemented so far is limited

Singapore's exports

(2017)

% of total exports

to US% of total exports % of GDP

Solar panel 2.38% 0.15% 0.18%

Washing machine 0.00% 0.00% 0.00%

Iron and Steel 0.02% 0.00% 0.00%

Aluminium products 0.20% 0.01% 0.02%

Total 2.61% 0.17% 0.19%

Source: UN Comtrade, Morgan Stanley Research

Exhibit 65:Export volume still showing healthy sequential momentum

90

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Export volume (SA, 3mma)

Export volume (SA)

Indexed Jan-2013=100

Singapore


SD below 13.25/shr, rating but umptions: , 12% for d market

ive rental

the group RNAV dis-

value via

alues and

mand and

ire and be

MMValuation methodology and risksCTDM.SI

Our price target of S$14.20 is set at a 21% discount (0.25 SD below the historical 17-year average) to our RNAV estimate of S$17.80/shr, to reflect a risk off environment, and exposure to a decelerating but positive home price growth outlook. Key RNAV assumptions: Residential projects – discount rate of 9% for Singapore, 12% for overseas. Commercial projects cap rate assumptions: office – 3.75%, retail 4.75%, hospitality 5.25%.

Key downside risks to our price target

Negative developments in the Singapore residential market, such as further cooling measures from the government or a sharper-than-ex-pected rise in interest rates. Weaker-than-expected earnings on project delays or write-offs in land value on softer-than-expected property market.Higher cap rates and a decline in the value of its commercial portfolio.

CATL.SI

Our price target of S$4.20 is set at a 38% discount (0.25 SD below the historical 17-year average) to our RNAV estimate of S$6.70/shr to reflect a risk off environment, and limited exposure to a decelerating but positive home price growth outlook. Key RNAV assumptions: Residential projects – discount rate of 9% for Singapore, 12% for China, 14% for Vietnam. Commercial projects are valued at reported market values.

Key downside risks to our price target

Impairments to projects in China and Singapore.A rise in interest rates (as government bond yields edge up) could lead to cap rate expansion on investment properties and lower resi-dential demand.A slowdown in consumer demand in China and Singapore could affect the performance of its retail malls.Potential exclusion from FTSE EPRA/NAREIT Developed Asia Index should EBITDA from developed markets fall below 50% for two con-secutive years because of rising contributions from China.

UTOS.SI

Our price target of S$8.00 is set at a 40% discount (0.25 the historical 17-year average) to our RNAV estimate of S$to reflect a risk off environment, and exposure to a decelepositive home price growth outlook. Key RNAV assResidential projects – discount rate of 9% for SingaporeChina and UK. Commercial projects are valued at reportevalues.

Risks to our price target:

Upside

l Execution of rental income growth: sustained positreversions and growing hospitality contracts.

l Any further efforts to simplify the complexity within structure could improve access to cash and narrow the count.

l Recycling of Singapore commercial assets could unlockdivestment gains and management fees.

Downside

l Higher interest rate expectations drive down property vfreeze up transaction liquidity in home sales volumes.

l Commercial assets succumb to growing market-wide desupply headwinds.

l Efforts to further simplify group structure could backfcostly to UOL.

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MDisclosure SectionThe information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, regulated by the Securities and Exchange Board of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration No. INH000001105); Stock Broker (BSE Registration No. INB011054237 and NSE Registration No. INB/INF231054231), Merchant Banker (SEBI Registration No. INM000011203), and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-372-2014) which accepts the responsi-bility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research, and/or PT. Morgan Stanley Sekuritas Indonesia and their affiliates (collectively, "Morgan Stanley").

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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Wilson W Ng, CFA.

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Important US Regulatory Disclosures on Subject Companies

The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Wilson W Ng, CFA - Ascott Residence Trust(common or preferred stock).

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MSTOCK RATINGS

Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution

(as of September 30, 2018)

The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Coverage Universe Investment Banking Clients (IBC)Other Material Investment Services Clients

(MISC)Stock Rating

CategoryCount % of Total Count % of Total IBC % of Rating Category Count % of Total Other MISC

Overweight/Buy 1178 37% 308 42% 26% 562 40%Equal-weight/Hold 1378 44% 343 46% 25% 625 44%

Not-Rated/Hold 49 2% 5 1% 10% 7 0%Underweight/Sell 554 18% 83 11% 15% 224 16%

Total 3,159 739 1418

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.

Analyst Stock Ratings

Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views

Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.

In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.

Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.

Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.

Stock Price, Price Target and Rating History (See Rating Definitions)

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INDUSTRY COVERAGE: ASEAN Property

COMPANY (TICKER) RATING (AS OF) PRICE* (10/04/2018)

Mulya Chandra, CFA

Alam Sutera Realty (ASRI.JK) O (08/07/2018) Rp282Bumi Serpong Damai (BSDE.JK) O (01/08/2015) Rp1,035Ciputra Development (CTRA.JK) E (08/07/2018) Rp785Lippo Karawaci (LPKR.JK) U (08/07/2018) Rp316Pakuwon Jati (PWON.JK) O (08/07/2018) Rp494Summarecon Agung (SMRA.JK) U (08/07/2018) Rp575

Wilson W Ng, CFA

Ascendas Real Estate Investment Trust (AEMN.SI) O (06/04/2013) S$2.57Ascott Residence Trust (ASRT.SI) U (06/27/2018) S$1.10Ayala Land (ALI.PS) O (10/26/2017) PP38.60CapitaLand (CATL.SI) O (06/10/2014) S$3.31CapitaLand Commercial Trust (CACT.SI) E (06/27/2018) S$1.76CapitaLand Mall Trust (CMLT.SI) E (02/08/2017) S$2.16CDL Hospitality Trusts (CDLT.SI) E (07/30/2018) S$1.61City Developments (CTDM.SI) O (03/31/2016) S$8.79Frasers Logistics and Industrial Trust (FRAE.SI) E (07/20/2016) S$1.07Keppel REIT (KASA.SI) O (08/23/2018) S$1.18Megaworld Corporation (MEG.PS) E (10/06/2016) PP4.10Robinsons Land Corporation (RLC.PS) E (04/16/2018) PP19.68SM Prime Holdings (SMPH.PS) E (02/08/2017) PP34.10Suntec REIT (SUNT.SI) U (08/23/2018) S$1.86UOL Group Limited (UTOS.SI) E (03/31/2016) S$6.68Vinhomes JSC (VHM.HM) O (06/18/2018) VND102,600.00Stock Ratings are subject to change. Please see latest research for each company.* Historical prices are not split adjusted.

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