Residential property

Residential property

Stimulus helped move finished stock in 1Q16, but new supply will drive presales up for the rest of the year. Revenue will fluctuate on the timing of condo completion and the effect of April’s stimulus package expiration. We anticipate a rise in backlog this year, securing growth and reducing forecast risk. Importantly, provincial purchasing power and demand is recovering, backed by rising farm income and growing tourism.

 

Presales momentum stepping up ... Government stimulus helped move finished stock in 1Q16, as seen in the 44% YoY plunge in new launches vs a slip of just 3% in presales for the seven lead developers (AP, LH, LPN, PS, QH, SIRI, and SPALI). Without the stimulus, we expect QoQ growth in presales in 2Q16 and 3Q16 to peak in 4Q16 on more new launches, especially condo. Our 2016 presales growth estimate for the lead seven is at 18% to Bt213bn (55% low-rise and 45% condo), outdoing industry growth of 5-10% as these players take share away from high-end non-listed and small listed firms, advantaged by the low interest rate, making funding easier and cheaper. 

 

… but revenue fluctuating. We expect QoQ revenue growth in 2Q16 from a record number of transfers at 32,950 units in April (+181% YoY) in greater Bangkok; it will then drop QoQ in 3Q16 and recover in 4Q16, in line with condo completions. SPALI is poised to do best in 2Q16. Aggregate revenue will inch up just 5% in 2016, but JV operational turnaround will pull profit up 10%. March backlog of Bt125.3bn secures 55% of 2016F. 

 

Backlog heading north, a positive sign. Aggregate backlog has fallen since 2014 on poor condo presales (-40% YoY in 2014). However, in 2016, condo presales growth will be good at 30% against a condo revenue contraction of 7%, meaning more backlog being built up. This will secure growth and reduce forecast risk.

 

Signs of provincial demand recovery, SIRI benefits most. Two out of three key drivers for provincial sales are showing some signs of recovery – rising farm income and tourists. Both bring more money into the provinces, raising purchasing power and housing demand from SMEs and workers involved in tourism-related services. Once the economy in the towns improves, more migration will be seen, also bumping up housing demand. SIRI is best placed to get in on this, with the largest finished inventory of Bt5-6bn in major provinces Phuket, Chiang Mai and Khon Kaen. 

 

Minimal impact from Land and Building Tax Act and Brexit. The cabinet recently passed the draft Land and Building Tax Act, which will collect property tax at a stepped rate based on property value; it is to take effect on January 1, 2017. This will pressure landowners to unload their raw land and thereby ease price hikes. At just 0.05% for three years for work-in-progress, tax expense for developers is tiny at <1% of our 2017F. The low tax rate of 0.03% to 0.3% for second homes and above is unlikely to dent investment demand since asset appreciation is much higher than the tax expense. The housing industry is largely domestic and thus immune from Brexit.

 

Top picks: LH (TP Bt12/share) and SPALI (TP Bt28/share). We like LH and SPALI for their growth outlook this year and next. Their backlogs are higher, meaning better earnings visibility and reduced forecast risk. SIRI is a good play on provincial recovery.