Simon says: Home prices have hit floor

Source : Today - 10 Jul 2008

Head of property developer SC Global still bullish on the local real estate market

JUDGING from recent transactions, property prices appear to have hit or are near the floor, according to Mr Simon Cheong, the president of the Real Estate Developers’ Association of Singapore (Redas).

As evidence, Mr Cheong, the head of high-end property developer SC Global, points to recent transactions of luxury apartments at Nassim Park and Goodwood Residences, which went for nearly $3,000 psf and $2,800 psf respectively.

“The high-end is the leading indicator. Why? Now you see the sophisticated investor coming in - people who spend $10 million, $20 million, $30 million (on a property) - these guys are no fools you know,” he says noting that during the 1997 financial crisis luxury flats like those at Ardmore Park were selling for just $1,000 psf.

Even mid-class units at developments like those at Dakota, Clover by the Park and Livia are enjoying brisk sales.

“Nett nett, property is still a great performer in the mid to long term. For example, the stock market index in 1998 was 800 and today it is 2900. Property appreciation is actually comparable, if not better, if one factors in rentals received,” Mr Cheong says.

The property market is driven very much by sentiment, and not just by the laws of supply and demand - the “feel good” factor, he says.

According to Mr Cheong developers’ prices have fallen by 30 per cent in all sectors of the market since their peak last year, but are still double those before the sub-prime problem kicked in last August.

“The current situation is timely, as since 2005 the property market has been climbing relentlessly for eight straight quarters according to URA (Urban Redevelopment Authority) figures. So, it’s time it took a breather.

“We developers were getting concerned that it was climbing so fast. So the sub-prime crisis, in a way hit at the right time and took some of the steam off the market. In a way it came as a relief to developers who were afraid that the steep climb in prices could tempt the authorities to take measures to curb speculation,”Mr Cheong told Today.

He also pointed out that it was not in the interest of developers to see prices going up too fast: “There is no reason why developers would like to see an exuberant market and see the bubble burst.”

But he claims that his positive outlook for the property market is also driven by fundamentals as interest rates are at present so low and the inflation rate so high it does not make sense to keep your money in the bank.

“What do I do if I have a lot of money in my bank account earning 0.6-per-cent interest while inflation is 6 per cent or more, and my money gets smaller and smaller by the day?” he asked.

One answer is to put your money in property as in the long run it is a better hedge against inflation than equities.

Furthermore, property rentals currently provide yields of 2 to 4 per cent, again better than putting your money in the bank.

And there is plenty of money around for when Standard Chartered Bank, earlier this month offered a promotional deposit rate of 2.28 per cent, it was so swamped that it had to withdraw the offer in just two days.

Mr Cheong expects interest rates to remain low over the next two years or so.

The supply of properties is also not as high as many people think. He pointed to a recent Citibank report which said that the bank sees no oversupply of homes over the next two years.

The report estimated that only 60 per cent of the 30,000 units forecast by the URA, will be completed during this period as by end March there were 6,000 en bloc flats that had yet to be demolished.

For en blocs to return, prices will have to be double what they are now, especially with no plot ratio increase in the recent announcement of the Singapore Master Plan by URA, Mr Cheong said.

High construction costs have also resulted in many projects being delayed. With the many building projects going on - both by the private (including the integrated resort projects) and public sectors - and high material costs caused by worldwide demand, constructions costs will remain for some years, Mr Cheong said.

He pointed out at the same time that construction costs here are currently higher than those of Dubai or Hong Kong.

”It takes three months to tear a building down but three years to put them up. Once you have taken it down, supply is taken off immediately but to put that supply back it will take three years,” he said.

Construction costs are now double what they were a year ago, with high end building costs between $600 and 800 psf and at the low end from $300 to $350 psf.

Sometimes Singaporeans also do not realise that market here being relatively small, it would take less than 1 per cent of the available global funds to see the market run up. So, it is not unreasonable to expect a strong turnaround when the sentiment improves, Mr Cheong said.:

He added that Singapore has also become a global city and price comparisons of property were now benchmarked against cities like London, Hong Kong, Shanghai and New York rather than against historical prices here.

”And contrary to market perception, funding is not an issue, There is no shortage of funding for end purchasers as evidenced by various bank packages (for mortgage loans),” he noted.

”My advice to potential buyers is that if you do not have high exposure to the property market, it is an opportune time to consider property”, he said.