Things look­ing up for hous­ing mar­ket

The New Paper - - VIEWS - ELI LEE

Op­ti­mism in prop­erty mar­ket jus­ti­fied as res­i­den­tial rents will be­gin to re­cover next year

On the morn­ing of July 11, 15 de­vel­op­ers con­verged on the 10th storey of the Ur­ban Re­de­vel­op­ment Au­thor­ity (URA) Cen­tre to sub­mit bids for a govern­ment land site in Woodleigh Lane.

By 8pm, the re­sults were out: a con­sor­tium led by Chip Eng Seng, a mid-sized de­vel­oper, won with the high­est bid of $701 mil­lion.

The price jolted the mar­ket; it was al­most 40 per cent above the price per square foot paid for a nearby site at Rain­tree Gar­dens just 10 months ago.

Real es­tate heavy­weights — Cap­i­taLand, City De­vel­op­ments and Kep­pel Land — all sub­mit­ted bids less than 3 per cent shy of its of­fer.

Since the au­thor­i­ties re­vised seller’s stamp du­ties in March this year, green shoots have vig­or­ously sprouted in Sin­ga­pore’s prop­erty mar­ket. In ad­di­tion to fast-ris­ing land bids and col­lec­tive sale ac­tiv­ity, sales vol­umes are also up and share prices of de­vel­op­ers have ral­lied.

Yet, doubts about the op­ti­mism re­main. Sin­ga­pore prop­erty prices are still in a bear mar­ket. The URA hous­ing price in­dex de­clined 0.1 per cent in the sec­ond quar­ter of the year.

Weak rents, eco­nomic un­cer­tain­ties and ris­ing in­ter­est rates also weigh on the prospects of a prop­erty re­cov­ery.

Is the op­ti­mism in the prop­erty mar­ket jus­ti­fied?

We be­lieve it is, for three rea­sons. First, res­i­den­tial rents will be­gin to re­cover next year. From 2014 to this year, the in­crease in home com­ple­tions ex­ceeded the needs of Sin­ga­pore’s pop­u­la­tion growth, driv­ing va­cancy rates up by three per­cent­age points from 5 per cent to 8 per cent. As a re­sult, rents fell 13 per cent over the pe­riod.

This sit­u­a­tion will re­verse next year.

Due to fewer launches in re­cent years, the an­nual rate of hous­ing com­ple­tions will de­cline by around 40 per cent over 2018 to 2020.

This falls be­low the needs of pop­u­la­tion growth based on the govern­ment’s projections, which will re­duce va­cancy rates and drive a re­bound in rents.

Sec­ond, two ma­jor fears of real es­tate bears to­day — the risk of a re­ces­sion and ris­ing rates — are over­wrought. With the global econ­omy chart­ing a re­fla­tion­ary path, the risk of a re­ces­sion in Sin­ga­pore over the near- to medium-term is low.

The Chi­nese govern­ment has shown con­sid­er­able suc­cess in en­gi­neer­ing a soft land­ing for its econ­omy.

In the ma­jor de­vel­oped economies — the United States, Euro­pean Union and Ja­pan — signs of higher growth are be­ing sus­tained by fun­da­men­tal im­prove­ments in the labour mar­ket and strength­en­ing house­hold de­mand.


Rate hikes act as a crit­i­cal coun­tercheck to po­ten­tial over­heat­ing, but cen­tral banks are un­der­stand­ably cau­tious about re­mov­ing the punch bowl too early, given the painstak­ing ef­forts taken to nurse the bur­geon­ing re­cov­ery.

With this in mind, the pace of rate hikes from the US Fed­eral Re­serve is ex­pected to be mea­sured, ris­ing slowly from 1.25 per cent to­day to 3 per cent in 2019. From his­tor­i­cal anal­y­sis, the prop­erty mar­ket here will take this in its stride.

Third, a ris­ing trend of col­lec­tive sales re­in­forces fun­da­men­tals.

While the mar­ket usu­ally de­bates whether ag­gres­sive pur­chases by de­vel­op­ers are backed by fun­da­men­tals, the fact is that col­lec­tive sales them­selves ex­ert pow­er­ful trickle-down ef­fects on de­mand and sup­ply.

Af­ter a col­lec­tive sale trans­ac­tion, the process to va­cate the orig­i­nal es­tate and com­plete the re­de­vel­op­ment typ­i­cally takes four to seven years.

Over this pe­riod, the phys­i­cal stock of homes avail­able for oc­cu­pancy in Sin­ga­pore is re­duced.

In the ini­tial years of a ris­ing col­lec­tive sales cy­cle, more homes are taken out of the phys­i­cal stock by col­lec­tive sale trans­ac­tions than those added back in, ex­ert­ing down­ward pres­sure on va­cancy rates and boost­ing res­i­den­tial rents.

At the same time, those who sold their homes en bloc to de­vel­op­ers of­ten en­ter the prop­erty mar­ket rapidly to re-es­tab­lish their ex­po­sure, flush with new cash and bor­row­ing head­room.

Many also help fund home pur­chases for younger fam­ily mem­bers who may be sub­ject to less stamp du­ties. This adds buy­ers into the mar­ket and in­creases de­mand.

In ad­di­tion, de­vel­op­ers typ­i­cally launch new units for sale af­ter one to two years. While there are usu­ally more units in the re­de­vel­op­ment than in the orig­i­nal es­tate, they will be sold at greatly higher prices per square foot. This tends to drive up prop­erty val­u­a­tions in the area.

Look­ing back, it is no sur­prise that col­lec­tive sales have sim­i­larly risen sharply at the turn­ing points of the last two prop­erty cy­cles in 2004 to 2005 and 2009 to 2010.

In the year-to-date, to­tal col­lec­tive sales here have hit $3.1 bil­lion, al­ready far sur­pass­ing the $1 bil­lion last year.

The writer is a vice-pres­i­dent and se­nior in­vest­ment an­a­lyst at OCBC In­vest­ment Re­search. This ar­ti­cle was pub­lished in The Busi­ness Times yes­ter­day.

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