It’s time to get real

July 9, 2011

After three rounds of cooling measures, what’s next for Singapore buyers, asks Tan Kok Keong

Recently, I was on a panel discussion at Bank of America’s Asian Stars 2011 conference. The topic that day was “Regional Housing Policy: How Bad Can it Get?”, and panelists included the head of research of Centaline Group, the vice-chairman of Hong Kong Housing Society and the vice-president of Malaysia Property Inc. What was apparent from the panel was that despite strong government action, private residential property prices in major cities in Singapore, China and Hong Kong have continued to spike. As a result, governments face increasing pressure from middle- and low-income groups to ensure housing remains affordable. Thus, in Singapore as elsewhere, the prospect of more cooling measures should be taken as a given.

The current property boom is a result of a potent mix of massive wealth creation in Asia over the past decade, the availability of cheap credit in recent years and a rapid inflow of people and businesses from the West in search of better opportunities.

This is best illustrated from our experience in Singapore. Singapore has drawn in a large number of foreigners over the past five years, bolstering the rental market. In fact, the occupancy rate of private apartments in the Outside Central Region reached 97.5 per cent in the first quarter of this year.

With a strong rental market, it is hardly surprising that the much anticipated “firesale” did not come about following the Government’s cooling measures. If we look back, average private residential property prices rebounded within two to three months after each round of Government market cooling measures. Thus, it remains to be seen whether Government measures are sufficient to turn the tide, especially if economies in Asia continue to prosper. Even then, as the Government contemplates even more market cooling measures in the coming months, investors are worried and some have chosen to explore other investment options.

What next?

As investors switch out of private residential properties, property prices of other real estate asset classes have started to increase sharply. Prices of retail, office and industrial properties have fared better than private residential property prices over the past year.

Multiple-user factories increased by 8.6 per cent in the first quarter of this year, which makes price growth in the segment the fastest in the quarter.

Concurrently, many overseas developers have flocked to Singapore over the past year. Now, over most weekends, buyers have a wide choice of properties from United States, Australia, New Zealand, Malaysia, England, for example. Many of these projects offer compelling propositions: Guaranteed returns, capital guarantee, high gearing, sale and leaseback schemes, among others.

Based on what we have observed at marketing events, many first-time investors venturing overseas overly focus on the real estate dynamics – that is, trying to determine whether they are buying at the peak or the trough of the real estate cycle.

Get the big picture

While we agree that real estate cycles are important, we think that buyers should also take a broader view. We suggest that buyers try to get a better understanding of the underlying economic drivers that are pushing up property prices. Evaluate whether these drivers are sustainable over the long term.

Even if you are unlucky and buy at the top of the current cycle, other economic factors could mean there is a chance that in future, property prices could recover or even surpass your purchase price.

Another very important consideration is the execution capability of the developer that is offering the project for sale. Ownership of an uncompleted project even in the best area might not be worth the headache that it could cause. Buyers might also want to question whether is there any party they could rely on to sell or rent their property once completed.

At the end of the day, as more buyers venture into other asset classes or overseas in search of higher returns, we urge all to recognise that the investment conditions and rules might not be as transparent as the private residential property market in Singapore and, thus, be more cognisant of the risks that are associated with the higher returns.

By Tan Kok Keong – head of research and consultancy at Orange Tee.