A buyer’s market - 21% of sellers in high-end segment made a loss
The proportion of unprofitable transactions for private non-landed homes continued to trend up since the implementation of the Total Debt Servicing Ratio (TDSR) in June 2013, the measure that single-handedly reversed price growth. Unprofitable transactions accounted for 1% to 2% of sales pre-TDSR days. The figure has crept up to 3%% in 2H2013, 6% in 2H2014 and 8% in 1H2015 (see Chart).
Chart: Proportion of unprofitable transactions on the rise post-TDSR
The high-end segment witnessed the highest proportion of transactions in the red (21%). This percentage was markedly smaller in the city fringe (7%) and the mass-market (4%). Among the unprofitable cases, sellers in the high-end segment also incurred the highest losses averaging $647,776 (17%). The average loss was $145,027 (9%) in the city fringe and $92,326 (8%) in the mass-market (see Table 1). This trend might be reversed should high-end home prices pick up in the future.
Table 1: Gains and losses in 1H2015 by market segment
The study matched resale and subsale transactions for non-landed homes (excluding shoeboxes and enbloc) with their previous transactions, based on URA caveat record as at July 15. Profit and loss were computed based on the difference in selling and purchase prices, taking into account the prevailing SSD rate but excluding any other costs. In the study, high-end homes referred to projects located in the Core Central Region (CCR). City fringe referred to Rest of Central Region (RCR) while mass-market homes were located in the Outside Central Region (OCR).
Prices of high-end non-landed homes are now some 8% off their peak in 1Q2013 which explain the higher proportion of unprofitable transactions and bigger losses compared to the mass-market. On a more positive note, the proliferation of value deals in the high-end segment is reviving demand and buying activities. Resale volume in the high-end segment jumped 39% year-on-year (YoY) in 1H2015. In the city fringe and the mass-market, resale activities grew at a lesser pace of 25% and 18% respectively over the same period.
The question is whether the pick-up in resale momentum is sufficient to save high-end prices from slipping further. Our past study found that the affordability level, i.e. the price to income ratio in the high-end segment has returned to 2005 and 2009 levels as household income continued to rise against falling prices. It therefore suggests that the existing cocktail of cooling measures could be an overdose in a market that is saddled by economic headwinds, slower population growth and huge supply.
In the city fringe and mass-market, meanwhile, more than 90% of transactions in 1H2015 were still in the black. The profit margins in both segments were similar at around 40%. Quantum-wise, however, transactions involving city fringe homes yielded sellers a higher profit than mass-market homes, averaging $419,787.
Buy when prices are not toppish, in a market with strong fundamentals
All the units bought in or before 2005 and subsequently resold in the first half of this year resulted in a profit to the seller. Needless to say, the biggest gains accrued to units bought during market downturns such as in 1998 and 2001 to 2005, which yielded an average profit margin between 78% and 102% (see Table 2). It is every buyer’s wish to catch the bottom of a market cycle but we might recall how rock-bottom prices and a 90% loan-to value limit failed to entice buyers as retrenchment and pay cut fears crippled the market.
Table 2: The biggest gains accrued to units bought during market downturns
Alan Cheong, head of research at Savills Singapore, says “It may sound counterintuitive to recommend real estate when governments around the world are trying to cool asset prices and interest rates are gearing to rise. The caveat is investors should look at markets that are fundamentally sturdy, with a strong adherence to the rule of law, where supply is constrained by geographical factors and prices are not toppish.” Singapore real estate certainly checks out these requirements, particularly in the high-end residential sector, he noted.
The study further shows that 12 of the 14 buyers who purchased their units at 2013’s peak prices and resold it this year ended in the red. In addition, all five buyers who purchased their units in 2014 and flipped them this year got their hands burnt. Ultimately, buyers should consider their financial situations prudently and avoid overleveraging leaving themselves with no room to manoeuver when unwanted circumstances strike.
A large low-floor unit at The Claymore in the CCR topped the profit chart. The seller had bought the unit in 2002 for $3.3 million and resold it in June this year for $8.5 million, netting him a hefty profit of 158% or $5.2 million. Meanwhile, the biggest loss amounting to more than $5 million or 49%, accrued to a unit in the Seascape in Sentosa Cove, also within the CCR (see Tables 3 and 4).
Table 3: Most profitable transactions in 1H2015 by market segment
Table 4: Top losses in 1H2015 by market segment
Supersize versus superskinny
Sellers of large units took the brunt of the softer market. Around 14% of transactions involving large units of more than 1,500 sq ft resulted in a loss for the seller, with an average loss margin of 17%.
At the other extreme, shoebox units measuring less than 500 sq ft are chalking up more losses as well. The proportion of unprofitable deals for shoebox units is climbing steadily, from 3% in 1H2014 to 7% in 2H2014 and, finally, 9% in 1H2015. The average profit has also fallen below 20% from earlier years.
Shoebox units, particularly those in the mass-market segment, face competition from there- and four-room HDB flats, as the latter offer more space for a similar or lower rent, albeit without condominium facilities.
This article appeared in The Edge Property Pullout of Issue 688 (August 3) of The Edge Singapore.