A Time For Reflection And Planning

Source : The Business Times, March 27, 2008

No panic mood this time round and developers are financially stronger unlike during the Asian crisis, but a lot depends on Singapore’s growth, construction bottlenecks and costs, and investors’ pricing power.

AFTER two years of exuberant growth, Singapore’s private housing market has come to a virtual standstill. Property launches and sales have slowed as local buyers adopt a wait-and-see attitude while foreign buyers, including institutional investors, are taking a similar approach in the wake of the sub-prime crisis.

Despite a paucity of transactions, prices have not weakened. Ask most industry players and they will say that the fundamentals of the local property market are still intact. Veteran developer Kwek Leng Beng, executive chairman of City Developments, says: ‘Today, the mood is not one of panic, unlike during the Asian financial crisis in 1997. We are not in recession today, but rather, we are the victims of our own success. Because we did not anticipate that our economy would be firing on all cylinders, we have a shortage of almost every type of property today.’

Not only is the Singapore economy still growing, but the remaking of the Singapore story is still intact. Singapore’s transformation into a global city and its evolution into the mother of all hubs - financial/wealth management, tourism, education, healthcare, research & development, etc - are coming along nicely.

That and the development of two integrated resorts with casinos and the Republic hosting the Formula One race have served to boost Singapore’s profile among overseas investors, keen on parking some money in Singapore, including in its property sector.

Most developers appear to be keeping their cool despite the current lack of activity in the property market. After all, the established players have made nice profits in the past couple of years and have strong balance sheets. Most have stopped buying high-end residential sites for some months.

The effective cost of borrowing for developers today is 3-5 per cent, nowhere near the highs of almost 20 per cent seen during the darkest days of the Asian crisis a decade ago.

These days, developers reckon they can hold off new property launches, for some months at least. The strategy is that if they don’t launch projects, then they don’t need to drop prices to entice potential buyers. Thus, developers hope they can keep their hold on pricing.

Analysts say one major factor that could weaken developers’ pricing power is specu-vestors who bought multiple units in projects on deferred payment schemes earlier. The deferred payment schemes typically run out when the projects are completed, which is when buyers have to cough up big instalments. To avoid facing such a situation, and be forced to run around town looking for multiple housing loans - which they may or may not get - specu-vestors who bought multiple units may seek to offload their units, at below market prices if necessary, as the projects near completion. If significant numbers of specu-vestors dispose of units at lower than market prices, that may set lower price benchmarks for the overall market.

Another factor that could potentially cause weaker prices could be smaller and newer developers, who may prefer to price their projects more competitively to draw buyers - rather than wait.

Confidence will also hinge on macro factors - for instance, whether Singapore’s economic growth remains in positive territory and employment is secure. Construction bottlenecks and higher construction costs are also eating into developers’ margins.

Already, some private investors are understood to have formed informal ‘consortiums’ among friends, hoping to scoop up some good buys when property prices fall.

Some developers last month were saying the sub-prime crisis could clear by the first half of this year and that things will pick up in the local property market in the second half. Now, that view sounds optimistic, given the ongoing carnage in global financial markets, with no end in sight to the US sub-prime debacle. The staring match between buyers and sellers in the residential property market will continue. Who will blink first?

In the office market, prime office rents nearly doubled last year after rising about 50 per cent in 2006. Despite tight office supply in the immediate term, resistance from occupiers to higher rents is expected to put the brakes on landlords’ ability to achieve steep rental hikes this year. As well, the various projects on 15-year leasehold transitional office sites are expected to be completed within the next 12-15 months and should provide some short-term relief to the office crunch. If major financial institutions scale down their operations in Singapore, demand could take a hit. Post-2010, supply of completed Grade A office space will start increasing again. All these point to more competitive office rentals in Singapore in future.

Investment sales of office blocks have slowed, on the back of tighter bank financing. Even for residential development sites, relatively unseasoned players are finding it tougher to secure funding, because of tighter liquidity brought about by limited appetite in capital markets. With developers sated with prime freehold sites and given weak home sales, the collective sales market has also gone into slumber. Hopefully, there will be fewer en bloc fights among neighbours. Singapore property investment sales this year are expected to come in at about half of last year’s record $54.5 billion, CB Richard Ellis estimates.

All in all, we look set to have a quieter year in the property market. After the heady growth in the past two years, a consolidation will hopefully provide a time for reflection - and for planning the next move.