Property Sector Braces For Tougher Times In 2008

Source : The Business Times, February 22, 2008

Players feel squeeze from more credit woes and soaring construction costs

THE property market in Singapore is set to face a challenging year ahead as it continues to take hits from the sub-prime crisis in the United States and rising construction costs, industry body Real Estate Developers' Association of Singapore (Redas) said.

'Unfortunately, the sub-prime woe continues to hog the headlines,' saidRedas president Simon Cheong, during Redas' annual Chinese New Year celebration yesterday. 'Six months' ago, we were concerned with the market exuberance. This coming six months, we are wondering when the market will turn around.'

Construction cost is also spiralling upwards at an unprecedented rate, Mr Cheong said.

The property market's expected slowdown comes on the back of an exceptionally good 2007. Last year, a record-breaking 14,800-plus residential units were sold, the office occupancy rate hit 93 per cent and the hotel sector saw a occupancy rate of 87 per cent.

But this year, with more write-downs for sub-prime exposure expected from major financial institutions - which could affect home prices and demand here - and high construction costs affecting margins, developers are bracing themselves for tougher times ahead.

'We are concerned that construction costs have gone up so sharply and squeezed (developers') profit margins so much that a small decline in the the final selling price will affect developers severely,' said CB Richard Ellis' chairman for Asia, Willy Shee. 'A small increase in construction cost and a small decline in selling price will put developers in a very difficult situation.'

Minister of State for National Development Grace Fu, who was guest-of-honour at Redas' event yesterday, similarly said that the property market's prospects are dependent on how the sub-prime crisis is going to affect sentiment in the region.

Mr Cheong believes that the market will 'get some traction back' in the second half of this year.

Interest rates in Singapore are at a record low, which will encourage home ownership, he said. And the influx of expatriates at all levels coming to Singapore - on the back of an anticipated office supply of 15 million sq ft over the next three to four years - will also provide a boost to the property market, Mr Cheong said.

'Removal of estate duty also helps,' said Chia Ngiang Hong, Redas' first vice-president and group general manager of City Developments. 'The super-rich will focus on Singapore again.'

Analysts, worried about developers' prospects for this year, are already starting to recommend that investors put their money into the more diversified property companies and/or switch to real estate investment trusts (Reits).

'In the current volatile market environment, we recommend stocks of listed property companies with strong balance sheets offering multiple-sector presence and geographical diversification,' said UOB Kay Hian analyst Vikrant Pandey. Citigroup analyst Wendy Koh said: 'In the light of the current uncertainties, we retain our preference for Reits over the developers.'