Property Boom Expected To Continue

Source : The Business Times, November 14 2007

Robust economy, jobs growth, strong housing demand and en bloc sales proceeds are key drivers, say KU SWEE YONG and ZENG ZHEN

THE bullish sentiment in Singapore's residential market continued into 2007 from where it left off in 2006. In the first nine months of this year, the market recorded a total of 29,331 sales transactions worth some $52 billion. This represents a year-on-year increase of 89 and 116 per cent respectively.

The demand for high-end residential housing has been growing at a feverish pace over the past two years and although the stock market plunge may have affected investor sentiment, new benchmark prices continued to make headlines over the past two quarters. Rising fast to support the high-end residential sector are the mid-tier and mass market segments, which have picked up significantly since early 2007 with record prices set at several project launches. Strong economic outlook, coupled with higher salaries and bigger bonuses and rapid jobs growth have brought new impetus for investors, home owners and speculators to upgrade and/or to purchase.

Comparing average prices with those at the end of 2006, the average price for homes in the super luxury market segment (luxury developments which crossed the $2,500 psf mark in Q4/2006) jumped 42 per cent to $3,700, while the high-end market segment (luxury developments in Districts 1, 4, 9, 10 & 11) rose by 36 per cent to $2,076 per sq ft. The average prices for both mid-tier and mass market developments have also risen by more than 50 per cent, albeit from a lower base, to $1,250 per sq ft and $700 per sq ft respectively.

One major market driver is en bloc sales, which have been very active since early 2005. However, with the prolonged US sub-prime credit woes, hikes in development charge rates and the tightening of en bloc sales legislation, the en bloc sizzle has taken a breather from the end of the third quarter of this year.

This has been a phenomenal year for en bloc sales. Since January, some 95 en bloc sales with a total value of $11.3 billion were transacted, compared to 65 transactions totalling $7.5 billion for the whole of 2006.

The displaced tenants and owner-occupiers from these properties have contributed to the overall increase in rentals and capital values of homes in the mid-tier, mass and public market segments.

Notwithstanding the stock market shock in the third quarter, the buying momentum is expected to resume between next month and early 2008 given the wave of purchases from displaced en bloc-owners who are expected to collect their money and buy a replacement home around this time. This time round, the mid-tier and mass market segments will lead the way with a strong growth, lending solid fundamentals to prices in the high-end and luxury sectors.

For next year, the residential market in Singapore is expected to remain strong with all segments looking set to continue growing supported by robust domestic economy, jobs growth, wage growth in both the public and private sectors, strong housing demand from expatriates relocating to Singapore and reinvestment of proceeds from en bloc sales.

The general market consensus is that supply will tighten due to a short- term supply crunch in 2008, as the expected demolitions from en bloc sales outstrip the completion of new projects. The tightness in supply will be exacerbated by the need to fill job vacancies which stood at close to 40,000 by mid-2007 with unemployment standing at 1.7 per cent in September 2007.

An estimated 10,000 units from en bloc sales are also expected to be demolished in 2008 while TOPs from new projects are expected to re-supply only 8,000 units. (This is largely due to the few construction starts back in 2003 and 2004 when economic confidence was low, which resulted in low completion numbers in 2007 and 2008.)

Furthermore, there is also the potential risk for a slower pace of construction of residential properties arising from the strong competition for resources in the construction sector. This is largely due to the fact that several of these mega projects are also scheduled for completion within the next three to four years. Some of these mega projects include the two integrated resorts, BFC, petrochemicals plants in Jurong Island, public infrastructure such as the Circle Line and Circle Line Extension, common services tunnel in Marina Bay, sports hub at Kallang, and Gardens by The Bay.

On the demand side, there are several significant events that could spur investments into Singapore. The first is next September's Formula 1 night race, which will bring international attention to Singapore starting from February, when the F1 season begins.

The weakening US dollar, strengthening Sing dollar, reduced confidence in US markets and political uncertainties as several key regional countries will be holding their general elections soon, could encourage more high-net-worth individuals (HNWIs) from around the region to park some of their wealth here.

The strong Singapore property market has also caught the eye of fund managers from Europe, the Middle East and Japan who have been investing in Asian real estate; and Singapore will benefit from that allocation in 2008 and beyond.

The high-end market is expected to remain steady with average prices likely to rise by another 15 to 20 per cent to hit an average of $3,000 per sq ft. With such strong demand, it would not be to far-fetched to expect some units in super luxury residential projects to cross the $6,000 per sq ft mark.

Developers will continue to raise prices for luxury high-end apartments with superior product quality, such as more spacious surrounding, and designer fixtures and fittings. At the same time, the replacement cost of land, whether from en bloc sales or government land sales, will continue to go up.

Meanwhile, Singapore's status as a global financial centre, tax-friendly environment, strong currency and liquidity in the local market will keep attracting investment interest from the fast-growing private banking sector which, in turn, are attracting HNWIs to the region as well as expatriates entering Singapore's job market.

While the high-end market takes a slower growth next year over an increased baseline, the mid-tier and mass markets will surge in 2008 due to strong demand and spill-over effects from the high-end market. Twelve months ago, we proclaimed that 2007 will be the year of resurgence for the mass market. We were spot on. We now know that the resurgence is backed by solid fundamentals and we expect this sector to soar in 2008.

Assuming two-thirds of home owners, who sold their properties en bloc in the first nine months of 2007, will buy replacement homes, we could expect to see some 4,300 buyers with a budget of approximately $7.5 billion looking for homes in the first half of 2008.

Soaring high-end prices and supply crunch in prime districts have forced some buyers to turn their attention to mid-tier projects. In addition, public and private sector wage rise backed by robust domestic economy, tighter job market will also drive up demands from HDB upgraders or families exceeding the HDB income ceiling, particularly in the mass market segment.

Strong demand could also push mid-tier prices up by another 20 to 40 per cent to between $1,500 and $2,000 per sq ft for the whole of 2008. Areas that will benefit from the rise in the mid-tier market include Balestier, Bukit Timah, Novena, Thomson and Upper East Coast.

As many of the mass market areas are still relatively undervalued, it is expected that prices will grow strongly, up by between 30 and 50 per cent from a low base, with average prices reaching around $1,000 per sq ft.

Areas likely to see the most significant price gains include Upper Paya Lebar, Hougang, Ang Mo Kio, Upper Thomson to Mandai, Clementi, West Coast, Jurong East, Upper Bukit Timah and Bedok.

There are several projects in the high-end and super luxury markets to keep an eye on in 2008, such as the Ritz-Carlton Residences at Cairnhill, Hilltops at Cairnhill, Paterson Suites at Paterson Road, and The Marina Collection and The Quayside Isle in Sentosa Cove.

We would also be monitoring The Cascadia and Floridian at Bukit Timah, and the development by CDL in Thomson Road for signals of strength in the mid-tier market.

For the mass market segment, it will be the developments at Simon Road and Bedok Reservoir and Park Natura at Bukit Batok.

In the landed property sector, international attention-grabbers in Sentosa Cove could be launched in 2008.

The rental market is also expected to strengthen. Based on robust demand and limited supply being completed, coupled with the withdrawal of properties in the prime districts through en bloc sales, rentals are likely to hit new highs.

Rents in prime districts will increase by 20 to 30 per cent next year, to an average of $6 to $8 per sq ft per month. The trend of existing tenants in prime districts moving out to fringe or suburban areas will continue, and this will support the annual 50 to 80 per cent growth of the suburban rental markets, at average rents of $4 to $5 per sq ft per month.

Though the property market continues to exhibit strong performance, there are several factors which could affect the residential sales market. Factors such as prolonged uncertainties in the global equity markets, further property measures imposed by the government to cool the market, rising oil prices and high inflation rate could possibly dampen investors' sentiment and confidence.

Increased operating costs due to rising residential and office rents have also sparked concerns about the erosion of Singapore's attractiveness for MNCs.

The Singapore government targets a long-term economic growth of 4 to 6 per cent per annum. We have been making basic changes to diversify our economy, through the IRs (conventions/exhibitions, Universal Studios theme parks), through investments in R&D and intellectual property, through continued liberalisation of funds management, private banking and insurance industries. This re-positioning of Singapore as a vibrant, global city will continue to support the residential market.

Singapore is undergoing a structural upwards re-rating of the property market. Barring unexpected shocks, property prices will continue to rise for at least three years, and if the IRs deliver their performance, another five to seven years. And even if there were a downturn in the property sector beyond 2012, the authors believe that bottom prices then will still be higher than the prices of 2007.

Given the factors outlined above, what might be the opportunity cost of doubting the continued growth in this market and staying on the sidelines and waiting for it to drop?

Ku Swee Yong is director of marketing and business development; and Zeng Zhen assistant manager, research & consultancy, Savills Singapore