SUPPLIES, SUPPLIES, SUPPLIES!

4 November 2011

The evidence for a price drop in Singapore's residential property market is stacking up even as investors here continue to buy up small units in the outskirts, setting new highs for average per sq ft prices.

The Urban Redevelopment Authority (URA) released last Friday the full set of third-quarter property data - sending a clear signal about the avalanche of supply of homes.

About 80 pages of the URA report were on the private residential market. Two things stuck out: The expected supply of homes getting the Temporary Occupation Permit (TOP) for this year and next year increased yet again, surpassing previous forecasts; and the vacancy total of non-landed properties at 12,975 units is just shy of that during the Lehman Brothers crisis peak in 3Q2009 at 13,084 units.

In a previous commentary in Today (Feb 11), we had cautioned that "we need to be wary about the supply in 2011 and 2012 because the global economic recovery remains elusive." At that time, the complete set of URA data for 4Q2010 was just published and the expected TOP supply for this year was 8,430 units and for next year was 8,116 units. In that same article, IPA's projections for the total completions this year and next year were 11,500 units each year.

Just nine months later, the official forecast for this year has risen 29 per cent to 10,889, with 9,196 completed in the first three quarters and another 1,693 due for completion in 4Q2011. The number for next year rose to 48 per cent to 12,043. If investors had made their decisions to invest this February thinking that the supply in this year and next year will be moderate at 8,000 over units, they may be stuck, especially because of the hefty seller's stamp duty.
The huge supply hitting the market will arrive earlier than official forecasts. In the interests of operational efficiency, including collecting progress payments, developers and construction companies are generally ahead of planned schedules, especially for projects that are by and large fully sold. We believe that, over the next few quarters, expected TOP numbers will continue to grow for 2012 and 2013 stock. We have revised our estimates for completions in 2012 to 2015 (See table).

The second point of note in the URA data is the number of vacant private homes. During the quarter, 4,565 units were granted TOP and that resulted in an increase of 2,173 vacant units. The overall vacancy rate rose from 5.1 per cent in 2Q2011 to 5.8 per cent in the last quarter. We are approaching and will soon breach the peak vacancy of 6.2 per cent in 3Q2009, about a year after the collapse of Lehman.

Vacancy rates will increase over the next few quarters if the take-up from tenants does not outpace the TOP supply. Looking at the pipeline of completions, we see for example, Alexis, Optima, Reflections, Parvis, etc., coming onstream. These are projects that attracted a significant proportion of investors rather than owner-occupiers. There will be strong competition among landlords for tenants.

On the surface, the market may look healthy to some as many of the recent launches were significantly sold out within the first two months of launch, including the HDB's record supply of Build-To-Order flats.

But, as emphasised in my book Real Estate Riches, we need to look beyond the take up at launches and match physical supply to real demand from families. When the completions of HDB and mass market condominiums swamp us in 2012 to 2015, we may end up paying for today's excesses, unless the doors to foreigners open wide again like in 2006 to 2008.

Around the world, many banks are retrenching or slowing down hiring, the electronics sector is downsizing and the current wave of corporate profits have been derived not from significant expansion of business but mainly from cost reduction. Inflation remains stubbornly high and economic growth stays low.

In Singapore, low interest rates support holding power and cash-rich investors seeking to beat inflation are still looking at real estate investments.

I believe the prices for landed properties will continue to rise, perhaps a little more slowly than the 2.4 per cent and the 3.6 per cent increase in the last two quarters, respectively.

Since holding power is steady and there is a strong deterrent in the form of the seller's stamp duty, the sub-sale and resale categories should not see significant discounting unless the residents' unemployment rate rises significantly. However, there is room in the new sales category for prices to dip. Recent transacted prices for new sales in the mass market show that developers have enough profit headroom to accept lower prices and still generate normal profits.

On balance, in the immediate term, we expect a 5 to 10 per cent reduction in private residential prices, i.e. a drop of the URA PPI from 205.7 points to around 190 within the next 12 months, mainly due to new sales from mass markets where the supply wave is strongest.

Where prices go beyond next year would depend on recovery of the global economy and how Singapore might benefit. For those who need to invest because their cash reserves are earning too little interest income, our advice is: Do not buy into an imaginary future rental income, invest in apartments that come with tenancy. Even in a seemingly high market like today's, good value can be found in districts 9 and 10, where 10-year-old condominiums might be gotten for around S$1,200 to S$1,400 psf, similar to the price levels of some of the new properties in the Outside Central Region.

by Ku Swee Yong, founder of real estate agency International Property Advisor, specialising in property services for high-net-worth clients. He is the author of Real Estate Riches: Understanding Singapore's Property Market in a Volatile Economy.