2013 is less than two years away. I am feeling less lonely in expressing my views about the physical completion supply of residential units. It has been five years since I started to scrutinise the total stock of residential units in the pipeline, that is, current stock plus expected completions minus demolitions from en bloc programmes.
Occasionally, people still ask: “Why look at completed supply when land sales are hotly bid and developers sell out most of their stock before construction has completed?”
Regardless of the take up of pre-sales, physical supply and demand will ultimately influence future prices, rentals and returns.
Two weeks ago, in an entry titled My Worries, National Development Minister Khaw Boon Wan cautioned in his blog (http://mndsingapore.wordpress.com) about the “massive supply that will hit the market from 2013″. As of March 31, the official supply numbers for the next four years are as in the table.
Mr Khaw’s worry is about the total 50,826 units that could be completed in 2013 to 2015. With a historical long-term average supply of 8,000 units per year, the average of 17,000 units per year of supply from 2013 to 2015 seems risky should demand from users and tenants not increase in tandem.
I have pointed out in previous commentaries in this newspaper and in my recently published book, Real Estate Riches, that there are inaccuracies in the supply data.
IPA’s own estimates are that the completions will take place earlier than what is reported by the Urban Redevelopment Authority (URA), which compiles and presents data based on submissions by developers. For our discussions in this article, let us assume the numbers above to be accurate.
Where are the areas we should be concerned about?
Almost all of the completions expected in 2013 and beyond were launched after the 2008 Lehman crisis. In fact, as the luxury home market struggles to find its feet from the depths of 2009, the mass market residential segment has taken off in terms of value and the number of transactions.
From its trough in 2Q2009, the price index for non-landed residential properties in the Core Central Region (CCR) increased 42 per cent to 204 points from 144 points. The same index for Outside Central Region (OCR) climbed more rapidly, up 54 per cent to 185 points from 120 points.
Many Singaporeans are not surprised to hear of transactions in the outskirts, such as Jurong West, Pasir Ris and Yishun, at S$1,000 to S$1,500 per square foot – even for mass market finishes on 99-year leasehold land.
In terms of the number of homes being constructed, the proportion of units in the more luxurious locations inside CCR will decline from 33 per cent in 2013 to 26 per cent in 2015.
This means the proportion of units in the outskirts (OCR) and mid-tier locations (RCR) of Singapore will rise from 67 per cent to 74 per cent. Now, the percentage rise may seem mild but in absolute numbers, we can expect 8,686 units to be completed within the OCR and RCR in 2013, 13,014 units in 2014 and 14,510 units in 2015.
For the optimistic, those numbers may still be matched by demand from strong job growth, new Permanent Residents and other pass holders – assuming a generous talent attraction programme,
However, when we include the additional supply of public housing and its accelerated pace of building, the numbers start to pile up. We can expect the 16,000 units of HDB flats launched last year to be completed in 2013 and another 22,000 (very likely more) units to be completed in 2014 and 2015.
And with Mr Khaw calling on HDB to build ahead of demand, it has effectively moved from Build-to-Order to Ordered-to-Build. So the completion of HDB units in 2015 and beyond could also be significantly ratcheted up.
Now, we know that the mature estates have limited land to accommodate new HDB units. We estimate that almost all of the 22,000 units launched this year to be completed in 2014 and, say, a ratcheted-up 28,000 units to be completed in 2015 will be in the OCR and RCR.
In terms of physical supply and demand from end users, new HDB flats in mature estates such as Holland Road (situated inside CCR) do not compete with private homes priced at well above S$1,000 psf.
However, new HDB flats – and the vast supply of them – in OCR locations such as Hougang, Bedok or Bukit Panjang will compete for attention from first-time home owners or parents who are financing their children’s first marital homes.
Therefore, I perceive the risks of the “massive supply” weighing heavily against private residential projects in the outskirts. Even riskier would be the smaller-sized apartments in the outskirts that were purchased at prices 20 to 40 per cent above the neighbourhood’s average psf prices.
Conversely, with very few residential land sales and en bloc programmes in Districts 9, 10 and 11 since 2009, we can hardly expect significant fresh supply in CCR in 2013 to 2015. A significant number of completions in CCR come from the projects delayed since the previous peak, such as d’Leedon (en bloc), Leedon Residence (en bloc) and South Beach (Government Land Sales).
While many investors may be concerned about short-term market jitters, others are looking to take advantage of the uncertainty by searching for solid long-term value buys that offer strong downside protection in the older CCR properties. Our recommendation will be to explore the larger-sized apartments of 2,000 to 4,000 sq ft that were completed before this century.
The investment search might take a lot more effort as many gems lay hidden from us and probably hidden from the risks of the impending “massive supply”.
By Ku Swee Yong – founder of real estate agency International Property Advisor. He is the author of Real Estate Riches: Understanding Singapore’s Property Market In A Volatile Economy (Marshall Cavendish).