Citigroup Investment Research expects prices of private homes to climb 20-25

Citigroup Investment Research expects prices of private homes to climb 20-25 per cent this year - substantially more than the 12-15 per cent increase the bank predicted just a couple of months ago in April.

Home prices rose 10.2 per cent last year.

This year, rents as well as prices are likely to continue to surge as the supply of rental property dwindles, Citigroup said in a research note yesterday.

Net negative supply in the first quarter - about 880 units were demolished but only 716 units were completed - coupled with strong demand of 2,225 units pushed the occupancy rate to a record 94.9 per cent, the note said.

Property analyst Wendy Koh believes strong demand was due to strong employment, drawing foreign workers here. As many as 48,000 jobs were created in the first three months of 2007. Citigroup expects the residential occupancy rate to rise to new records of 96.6 per cent and 97.2 per cent by end-2007 and 2008 as supply continues to tighten.

Only 4,573 units are scheduled for completion from April to December 2007, Citigroup estimates. In 2006, about 3,500 units were affected by en bloc sales. Assuming 2,700 units are demolished from April to December, the net increase in supply for 2007 is likely to be just 1,700 - versus demand of 8,000.

Ms Koh also believes fewer units will be ready in 2008 and 2009 than the Urban Redevelopment Authority’s estimates of 6,600 and 10,600, as not all units are under construction yet. This will support a further rise in occupancy rates to above 97 per cent in 2008, she said.

Ms Koh also said as rents continue to outpace price rises, rental yields in the broader market - particularly the mass market, where price rises have lagged - will continue to rise. The current gross rental yield for mass market properties now averages 5.3 per cent, versus 5 per cent six months ago and 4.5 per cent a year ago.

‘Such yield improvement will start to attract some investors into the mass market segment, especially given that rents are likely to continue to surge as the occupancy rate continues to reach a record high,’ she said. Positive sentiment and strong affordability among first-time buyers is also likely to drive prices sharply higher in this segment, she predicts.

The report has ‘buy’ calls on Allgreen Properties, City Developments and Keppel Land and a ’sell’ call on CapitaLand.

Source: The Business Times, 07 June 2007