Path to prosperity: 2020-08-09

PropNex released its 1H20 financial results and reported a 151% surge in net profit after tax to $16.0m. According to PropNex the key driver of earnings growth was the project marketing services segment, which had revenue growth of $75.1m vs total revenue growth of $75.2m. As this is a higher margin segment relative to the resale market, there was an increase in gross profit margin to 11.4% in 1H20 vs 9.8% in 1H19.

PropNex 1H20 Results (Source: PropNex)

In previous quarters, PropNex mentioned that transactions usually would have a 1-2 quarter delay from the time the agreements are signed until the time PropNex is actually able to recognize revenue. Hence, we can deduce that the strong showing in 1H20 can be attributed to the stronger 2H19 in property sales.

Due to Covid-19 and the ensuing Circuit Breaker in Singapore, 2Q20 sales volume was strongly affected as there was a 37.6% qoq decline in private residential properties sold from 4,269 to 2,664. I believe that this would negatively impact 3Q and 4Q results and do not rule out a >20% decline in net profit in the coming quarters.

Outlook

PropNex believes that despite the headwinds brought about by weaker economic growth, demand in the property market can continue to be resilient due to a few factors

Lower interest rates to reduce the cost of buying properties with a mortgage
Developers adjusting their prices to more competitive levels
The weaker economic environment could help keep prices stable

PropNex also estimates that there could be 8,000-8,5000 new home sales in 2020 with a total of 14,500-15,500 total units (including resale) vs 19,150 in 2019. On the HDB front, PropNex forecasts HDB resale volume to be between 20,000 to 22,000 for FY20 vs 23,714 in 2019. The softer decline in HDB volumes reflects the relative affordability of public housing and also the large chunk of flats reaching their MOP in 2019/2020.

Takeaways

While I agree that lower interest rates make it conducive for buyers, it also increases the holding power of sellers who may not have adjusted down their selling price expectations. Therefore, transaction volumes may continue to remain low. The generous support provided by the government to businesses and individuals also helps to alleviate some of the financial pressures facing homeowners, in turn, lowering any urgent need for liquidity. 'Desperate' sellers could be HDB upgraders who have to sell their property.

On the topic of HDB upgraders, it was initially expected that 2020 would see a bumper crop of them due to the large number of HDB flats reaching their 5-year MOP. However, in light of the pandemic and uncertainties, I believe that a number of upgraders could have held back their upgrading plans until their job outlook becomes more certain. Assuming timelines are pushed back by 1 year, this could also result in 2021 having a super crop of 5-7 year-old HDBs being on the resale market. With completions of the latest BTO launch expected to be in 2025-2027, anxious homebuyers could turn to the resale market instead.

Another area to look out for is potential fire sales from developers racing to beat the ABSD deadline. In Jun 2020, we saw an instance of this (https://www.businesstimes.com.sg/real-estate/to-beat-absd-38-jervois-developer-launches-fire-sale-to-clear-units) when the developer of 38 Jervois slashed prices by up to $500,000 (13-24% discount) to avoid the ABSD. Unless absolutely necessary I believe that developers will try to hold on to their prices as major price cuts could result in options not being exercised, angry buyers who bought earlier or even impairments.

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