Residential Sector Seen Taking Hit

Source : The Business Times, April 22, 2008

Prices expected to fall further, with the high-end most at risk due to a lack of foreigner interest

RESIDENTIAL markets across Asia are expected to take a hit in the wake of the credit crunch in the US. While the residential sectors in key Asian cities are forecast to continue to grow strongly, as they have since the start of 2007, equity bull markets were the main contributing factor to well-received launches last year, industry sources say. 'Without the sentiment that has pushed up capital values and rents of residential property across the region, there will obviously be some slackening,' a market player says.

However, the fundamentals of the region - including Singapore - are strong, which means residential markets should not take too hard a beating, analysts point out.

Dimmed prospects: The residential collective sales market virtually ground to a halt in Q1, with just one deal - that of Ban Guan Park for $31.1 million

'The story of real estate in Asia is one of continuing investment - particularly by foreigners. Occupier demand remains in place, and with limited supply in most developing cities, the future looks fine,' property firm Cushman & Wakefield (C&W) says in a recent report.

The report notes, however, that Hong Kong and Singapore are the two cities expected to be most affected by the credit crunch and global economic slowdown

In Singapore, the impact on the residential market is already being felt, with slowing sales and price cuts.

The number of new homes sold in the first quarter of 2008 was 787, or about half the 1,449 sold in the previous quarter, official data shows.

DTZ Debenham Tie Leung, for one, points out that the numbers represent the second-lowest quarter of developer sales since Sars-hit Q1 2003.

The lacklustre performance is expected to continue, say property analysts.

'The current market sentiment is likely to continue into the second quarter,' says Li Hiaw Ho, executive director for research at CB Richard Ellis (CBRE).

Nicholas Mak, director of research and consultancy at Knight Frank, agrees. 'Sales are expected to stay thin in the coming few months due to the continuing uncertainty about the US economic outlook and financial market problems. Home-buyers, especially in the mass-market segment, are expected to remain cautious until there is a sustained recovery in financial markets and economic conditions, which would spill over to the property market.'

Interestingly, news has emerged that some developers are starting to cut their prices - a sure sign of weakening market sentiment.

A recent media report says property heavyweight Far East Organization has achieved encouraging sales for three 99-year leasehold suburban projects - after it trimmed their prices 3-5 per cent after the Chinese New Year.

'If the credit crisis or economic slowdown deepens, launches and take-up would remain subdued and prices are likely to ease,' according to DTZ. 'Some smaller developers have lowered prices to dispose of their units and this may spread as the residential property market is largely affected by sentiments.'

UBS Investment Research notes similarly that it expects mass-market projects to be launched at lower-than-expected prices. Sentosa Cove prices have also fallen - 13-20 per cent in Q1 2008, potentially wiping out the profit of Sentosa sites bought by SC Global and Ho Bee, UBS notes.

'We expect the negative news to motivate sellers to close the wide bid-ask spreads and home prices to fall further, with high-end prices most at risk due to a lack of foreigner interest,' UBS analyst Regina Lim says in a recent note.

Her research team has downgraded its residential price forecasts for 2008 and 2009 by as much as 20 per cent - expecting prices in prime and mid-range segments to fall 20 per cent and 10 per cent respectively. Mass-market prices are expected to hold steady.

Rent increases for private residential property are also likely to moderate due to budget constraints and the slower influx of expatriates, analysts say.

And residential investment sales also fell hard in Q1 2008, data from property firm Colliers International shows.

'Investment sales value dipped some 35.7 per cent in Q1 2008 to $2.27 billion, from $3.54 billion in the preceding quarter,' the firm says.

Colliers notes, in particular, that the residential collective sales market virtually ground to a halt in Q1, with just one deal - that of Ban Guan Park for $31.1 million or $871 per square foot per plot ratio. This was a big slide from $1.16 billion sealed in Q4 2007 from 10 collective sale sites, and a dramatic plunge from 41 collective sale transactions totalling some $6.53 billion sealed during the peak in Q2 2007.

Despite all the negative news, there seems to be some optimism. DBS Group Research, for example, recently upgraded its call on the Singapore property sector from 'neutral' to 'overweight'.

But many are taking a wait-and-see approach to the market, including the residential segment.

'We believe Singapore's property secular uptrend is still intact, thanks to its ongoing efforts to transform itself into a globalised city-state,' says DBS Vickers Securities analyst Lock Mun Yee. 'However, in the near term, spillover uncertainties from the credit crunch and talks of a possible US recession have affected sentiment.'

According to Margaret Thean, DTZ's executive director for residential: 'It is still too early to gauge the residential sector performance as this is just the first quarter.'