Friday, March 20, 2009

Some Bleed From Subsales But Most Come Out Ahead

Source : The Business Times, March 19, 2009

Deals that run up a loss double in H2 as market worsened

In a tough property year, an overwhelming 95 per cent of those who sold private apartments and condos in the subsale market last year had managed to turn a profit.

But the number of subsales that chalked up losses more than doubled from 24 in first-half last year to 52 in H2, reflecting the deteriorating market conditions, especially in the fourth quarter.

For those who took a loss, the average loss per unit also rose, from about $138,000 or 7 per cent in H1 2008 to $188,000 or 12 per cent in H2 2008.

But there were happy stories. One owner at The Sail, for instance, chalked up a gain of some $6.7 million after having held on to the property for about three years.

Savills Singapore's analysis of caveats showed that the number of loss cases rose as 2008 rolled along, from six in Q1, increasing to 18 in Q2, and stabilising somewhat at 20 in Q3, before jumping to 32 in Q4.

'There were more owners cutting losses in the subsale market in H2 2008, especially in Q4, following the Lehman fallout and the global meltdown. Sales trickled and more people sold at losses,' said Savills director (investment) Steven Ming.

And while there was an increase in the number who suffered losses on their subsale deals, the number of subsales that produced profits fell 16.8 per cent from 757 in H1 to 630 in H2. The average subsale gain per unit shrank steadily through the year, sliding from $425,000 or 37 per cent in H1 to $288,000 or 28 per cent in H2.

On the whole, the finding was that it is more rewarding to hold one's property for a longer period. On average, the biggest gains of $785,000 per unit were pocketed by those who bought in 2004 and sold in H2 last year, followed by those who had picked up their properties in 2005 and divested them in H1 last year, collecting an average gain of nearly $666,000.

The largest average loss of $210,000 was incurred by those who had bought in 2006 and sold in H1 2008.

Around 90 per cent of the 76 investors who suffered a loss in the subsale market for the whole of last year had bought their units in 2007 during the market peak.

Knight Frank executive director (residential) Peter Ow notes that usually an investor would cut losses in the subsale market when it is time to pay the developer. 'An investor exposed to a few properties bought on deferred payment scheme (DPS) may want to cut losses on the first one or two to improve his cashflow so when it is time to pay up for the third one, he can afford it,' he said.

Mr Ming points out that in addition to multiple property owners who may find it difficult to get sufficient bank loans to complete their acquisitions, those taking a hit in the subsale market may include 'savvy investors seeking to diversify their investments and allocating a part of the exposure to other undervalued asset classes'.

Savills calculated profit or loss as the difference between sale and purchase prices and did not take into account agent fees and other expenses. The analysis was based on a total 1,761 subsale deals of non-landed private homes captured in the URA Realis system as of March 9, 2009. Of these, it could trace and match previous caveat records for 1,463 units. Savills then compared the latest subsale price of each unit with the earlier price paid by the seller to work out the profit or loss.

Subsales, often seen as a gauge of speculative activity, are secondary market deals in projects that have yet to receive their Certificates of Statutory Completion. This may be anywhere from three to 12 months after the project receives Temporary Occupation Permit (TOP).

Savills's analysis also showed that the proportion of subsales done below $1 million per unit rose from 38.3 per cent in H1 last year to 45.9 per cent in H2, as affordability became important.

Projects with the highest number of subsale transactions for 2008 were The Sail @ Marina Bay (78 units), Citylights (77 subsales), Varsity Park Condo (59 units), City Square Residences (57 units), The Sea- view (52 units), The Esta (49 units) and Park Infinia at Wee Nam (48 units).

Some of these projects also saw the most number of subsale losses for the whole of 2008, for instance City Square Residences (six units), Citylights (four units) and The Sail (four units). In addition, The Cosmopolitan and Watermark Robertson Quay each had four subsale loss cases last year.

In H1 2008, Citylights saw the most subsales, at 60. In H2, The Sail was the top subsale project, with 40 units changing hands.

'Anecdotally, there appears to be a higher number of subsales that take place for projects that were approaching TOP. For example, the 1,761 subsale transactions in 2008 included 52 projects that received TOP in the same year,' Mr Ming said. Projects that obtained TOP in 2008 included The Sail, part of City Square Residences, The Sea View and The Cosmopolitan. Icon, City Lights and The Calrose were among the projects that received TOP in 2007.

Mr Ming said that with 10,000 homes expected to get TOP this year, 'we expect subsale transactions to remain active and the sell pressure will keep up this year, unless debt markets open up and financing for investors eases'.

The Sail Generates Top Gains In Subsale Deals

Source : The Business Times, March 19, 2009

Largest windfall of $6.7m achieved for a unit above the 60th floor

TRANSACTIONS at The Sail @ Marina Bay last year topped the subsales deals that generated the highest gains, both in absolute as well as in percentage terms, a caveats analysis by Savills Singapore shows.

The Sail @ Marina Bay: In all, there were 74 instances of gains generated from subsale transactions at The Sail in 2008

In absolute dollar terms, the biggest gain of $6.66 million was achieved for a unit above the 60th floor of the 99-year leasehold project. It was bought for $8.8 million or $1,508 psf in November 2005 from the project's developer, and sold in the subsale market for $15.5 million or $2,650 psf in August last year.

The top percentage gain of 178 per cent was generated by a 49th floor unit at The Sail that was sold for $1.42 million or $2,400 psf in the subsale market in May last year. The seller had picked up the unit for $510,400 or $862 psf from the developer (a joint venture between City Developments and AIG) in December 2004.

Two other units at The Sail also yielded subsale profits of 176 per cent and 175 per cent; the sellers had bought their units from the developer.

In all, there were 74 instances of gains generated from subsale transactions at The Sail in 2008. Market watchers noted that this was because the project's launch in two phases in 2004 and 2005 was 'perfectly timed' before residential property prices shot up in 2006 onwards.

As for subsale deals that produced losses last year, the biggest loss in absolute quantum, $1.03 million, was suffered for a unit around the 20th floor at Scotts Square. It was sold in November last year for $3.7 million or $3,050 psf; the seller had bought it up in the primary market in August 2007 for nearly $4.8 million or $3,890 psf.

The largest percentage loss (36 per cent) was incurred by the owner of a 26th floor unit at Tribeca on Kim Seng Road who had paid the developer $885,800 or $1,553 psf in February 2007 and sold his unit at $570,000 or $999 psf in December last year.

Looking ahead, Savills Singapore director Steven Ming said: 'It's reasonable to expect that subsale losses may increase this year, unless macro and global economic problems are ironed out and financing eases,' he added.

Knight Frank executive director (residential) Peter Ow notes that what would usually make an investor cut losses in the subsale market is when it is time to pay up the developer. 'An investor exposed to a few properties he has bought on deferred payment scheme may want to cut losses on the first one or two to improve his cashflow, so that when it is time to pay up for the third one, he can afford it,' he added.

In the event that a buyer has difficulty getting a bank loan and footing the bill for a chunk of the purchase price to the developer when the project receives Temporary Occupation Permit (TOP), some developers may be prepared to repudiate the sale and purchase agreement and forfeit the 20 per cent initial payment collected from the buyer and proceed to resell the unit.

But other developers may sue the buyers and force them to complete the sale and purchase agreement at the contracted price. 'Most buyers wouldn't want to take the risk of defaulting because they don't know the position of the developer and risk being sued and even bankrupted,' Mr Ow said.

For projects completing in 2011/2012, most investors will tend to hold their units as there is a possibility of a property market recovery, he predicts. 'But for projects receiving TOP, say, this year, investors will have to weigh risks of whether they have the financial means to pay up. If not, it may be better to cut loss,' Mr Ow said.

Mr Ow estimates that most investors would be prepared to cut a loss of up to 20 per cent on their purchase price (assuming they have already paid an initial 20 per cent to the developer) since they will then not have to take a further hit.

However, if they subsell the property at, say, 70 per cent of their purchase price, they would have to fork out a further 10 per cent to the developer before the developer agrees to transfer the title to the new buyer.

Occupancy Cost Of Offices Falls In Singapore

Source : The Business Times, March 19, 2009

But it still ranks as third most expensive city in Asia-Pacific, says Colliers

GRADE A office occupancy cost in Singapore dropped 22 per cent from an annual average gross rent of US$125.06 per sq ft in the first half of 2008 to US$97.07 psf in the second half.

But Singapore remained the third most expensive city in the Asia-Pacific, according to a report by Colliers International.

Occupancy cost is defined as the annual average gross rent of central business district (CBD) Grade A office space. Hong Kong and Tokyo retained their first and second spots, with respective average gross rents of US$177.86 psf and US$128.40 psf.

Worldwide, Singapore was ranked the sixth most expensive city, while Hong Kong was the most expensive.

Tay Huey Ying, director of research and advisory at Colliers, said: 'Despite the fact that Singapore's CBD Grade A office rents registered a 22 per cent decline in H2 2008, it has retained a high position in the regional and global ranking.

'This is because office rents in almost all other cities have been similarly pressured down by the global financial crisis.'

Colliers' report shows that nine of the major Asia-Pacific cities surveyed registered rental declines exceeding 20 per cent. Brisbane and Perth experienced the steepest declines of more than 28 per cent.

While Singapore remains expensive, Ms Tay believes cost competitiveness has improved slightly, particularly against other key financial cities like Hong Kong and Tokyo.

She noted that Singapore's office occupancy cost is now 45 per cent cheaper than Hong Kong's, widening from 41 per cent in June 2008. Compared with Tokyo, occupancy cost here is now 24 per cent cheaper, versus just 3 per cent in June 2008.

The Grade A office vacancy rate in Singapore rose 1.4 percentage points to 8.9 per cent in the second half on 2008. The 8.9 per cent figure is high compared with Hong Kong and Tokyo, both with 4 per cent.

Seoul had the lowest vacancy rate at 0.7 per cent, while Guangzhou had the highest vacancy rate at 23 per cent.

Ms Tay said: 'The growing vacancy rate in Singapore is due to the interplay of dwindling demand and surging supply.'

Colliers says demand for office space here shrank for the first time in four-and- a-half years in December 2008.

New supply, on the other hand, was about 1.4 million sq ft in 2008 - the largest amount since 2002 and exceeding the cumulative net new supply of office space from 2003 to 2007 by almost 1 million sq ft.

Ms Tay said that in line with the economic contraction, demand for office space in Singapore is set to slide in 2009 and the vacancy rate is set to rise.

'On the supply side, 2.9 million sq ft of office space is estimated to come on stream in 2009, on top of the bumper crop of net new completion amounting to 1.4 million sq ft seen in 2008,' she said.

The situation will be aggravated by the supply of 2.5 million sq ft of new hi-spec industrial space due for completion in 2009, as well as a rise in shadow space.

Although close to 50 per cent of the new hi-spec space has been pre-committed, Ms Tay believes the remaining space is likely to compete with the office sector for tenants.

In addition, shadow supply is expected to grow in 2009 as companies downsize or relocate to cheaper premises prior to lease expiry.

Worse In Store For US Commercial Property

Source : The Business Times, March 19, 2009

(NEW YORK) The US commercial real estate market is bad and investors expect it to get a whole lot worse, according to a closely followed survey by PricewaterhouseCoopers.

No takers: Store closings rose 50.1% to 6,913 last year and forecasts call for more than 8,000 closings in 2009

'As investors painfully watch the value of their assets decline, many feel troubled knowing that the ills of the US economic recession have yet to fully impact the commercial real estate industry,' starts the first- quarter Korpacz Real Estate Investor Survey of more than 100 investors from real estate investment trusts, pension funds, private equity firms and insurance and mortgage firms.

Many investors are struggling with ways to preserve the value of their investments and maintain ownership in the wake of restricted debt sources, declining tenant demand, and falling values, the survey said.

Investors do not expect the commercial real estate sector to rebound until well into 2010 at the earliest.

'Investors are not expecting this recovery, when it does happen, to be a sharp recovery where it hits bottom and bounces up,' said Susan Smith, a director at PricewaterhouseCoopers in the real estate group and the survey's editor. 'It's going to be a very slow sluggish recovery,' she said. 'There are just too many things right now that are impacting the industry to make investors very confident about what's going on,' she said.

Some property owners are lowering rental rates and increasing concessions, which results in lower revenue.

Compared to a year ago, the average amount of free rent landlords are offering has increased to six month in several major office markets, such as Boston, where it rose from 2.15 months; Manhattan, where it grew from 41/2 months and San Francisco, where it rose from 31/2 months.

One investor in the survey suggested 'making the best deal you can today because tomorrow's deal will be worse.' Investors believe that the overall cap rates, or returns, for US commercial real estate over the next six months will rise by an average 0.47 percentage points from 7.49 per cent in the first quarter 2009, the survey said. When cap rates rise, prices fall.

In the retail real estate arena of malls and shopping centres, investors expect power centres, home of the big box stores, to lose value by the greatest amount, with cap rates rising by an average of 0.744 percentage points from 7.63 per cent, according to the survey. They see cap rates for regional malls rising 0.65 percentage points.

Investors expect rent and occupancy for retail properties to continue to decline in 2009, the survey said. Last year, store closings rose 50.1 per cent to 6,913 and forecasts call for more than 8,000 store closings in 2009, according to the survey.

Most investors said they expect the eroding fundamentals to press values down by 10 per cent to 26 per cent from the 2007 peak, with the most pessimistic investors seeing declines of about 40 per cent, the survey said. - Reuters

Property Transactions With Contract Dates Between March 2nd - 7th, 2009