Oversupply and steep price falls in residential markets dominated headlines on URA data for 1Q09. Better-than-expected sales and rental volumes in 1Q stood out. The buyer’s strike is wrapping up and sales prices are being established. But calling a recovery in the residential market would be premature, as oversupply remains significant. The office market remains severe. We remain Neutral on the property sector, with CapitaLand our top BUY and CapitaCommercial Trust our top SELL.

Steepest pricing fall, oversupply remains. Singapore’s 1Q09 private residential price index fell 14% QoQ and 21% YoY, the steepest QoQ fall since the index’s inception. This was in line with the preliminary number. The cumulative fall, since the index’s peak, has reached 21.2%. However, the URA index lags physical prices, which we believe are already down 32-36% from peak. We expect the index to fall further next quarter. Furthermore, based on the 1Q09 URA release, we estimate supplies of unsold non-landed private homes (under construction) at 13,168 homes, down 3% QoQ. Inventory contraction, driven by stronger volume sales in 1Q09, was weaker than expected. Another 5,541 unsold homes have all the requirements to come onto the market. Overall, this would mean 16 months of inventory on the March sales run-rate.

Volumes surprise. On the positive side, 1Q09 primary transaction sales volume rose to 2,596 units, up 520% QoQ and a quarterly high, since 3Q07. Secondary transactions grew 21% QoQ. Demand was polarised towards the mass market, as sales made to clients currently living in public housing (HDB) accounted for 68% and 50% of primary and secondary sales volume. More interestingly, total private non-landed home occupancy grew 2,100 homes in 1Q09. This was ahead of expectations and at 55% of net occupancy growth of 2008. In 1Q09, rental volume also grew 8%, which is counterintuitive given rising unemployment. Part of this can come from HDB dwellers moving into private housing, given falling rents - a positive sign for rentals and a trend that bears watching closely.

Offices the ugliest of all. Office occupancy dropped for a second consecutive quarter, as 222,000sqf was vacated in 1Q09. Island-wide occupancy rate fell 1%, to 89.8%. The Singapore office rental index dropped 11% QoQ, now down 17% from its peak. We expect vacancies to rise throughout the year. This, coupled with the 9.4m sqf supply pipeline (2008- 12), will take the occupancy rate down to 81% by 2012.

Our forecast and picks. Our developer revalued Nav (RNav) estimates call for Singapore home prices down 10-15% from the levels seen at the end of 1Q09 (40-50% peak-to-trough). Should home prices stop falling (a bullish scenario, given supply conditions), our RNav estimate for CapitaLand(CAPL SP - S$2.59 - BUY) will rise to S$2.87/share (from current S$2.78) and for City Developments (CIT SP - S$5.83 - U-PF) will rise to S$6.78/share (from S$6.26). We expect office rents to fall 60% peak-to-trough, and we believe the office sector downturn will be prolonged. We remain Neutral on the property sector, with our top BUY being CapitaLand, which declared in-line results on Friday. Our preference for CapitaLand is driven by the company’s diverse portfolio (30% of assets are in China, a market that will recover earlier than Singapore), its low exposure to Singapore property and its strong balance-sheet. We would avoid office-centric stocks such as CapitaCommercial Trust(CCT SP - S$0.81 - SELL) (CCT SP – S$0.81-SELL).