2015 to see a new level of pain?

January 26, 2015 12:34 PM SGT

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SINGAPORE: For property industry players, 2014 is a year they would much rather forget.

Things could worsen next year before they get better.

Pundits who are usually optimistic have succumbed to pessimism, and are projecting how much prices might fall next year.

On a Saturday morning in mid-November, Song Seng Wun, regional economist of CIMB, in his signature suspenders and bow tie, was asked to give his take on the property market.

“If we have an orderly deleveraging, we are looking at a 10% to 15% drop in prices,” he said.

“What could change that is an external shock, like a sudden jump in interest rates or a war somewhere, something to cause a crisis of confidence like we saw in 2008, then you will see a steep fall [in prices].

Better to buy property stocks than physical property for investments.” The fear is yield compression with prices cratering and rents plunging at a faster rate, particularly in the top end of the residential market.

According to Alan Cheong, Savills Singapore’s head of research, yields in the Core Central Region (CCR), namely in Marina Bay, Sentosa Cove and the traditional prime districts of 9, 10 and 11, have fallen to about 2.5% to 3%.

Sinking rents To illustrate, rents of condominiums and apartments in the Ardmore Park/Draycott area are now hovering at $14,000 a month, with a recent transaction at $12,000.

This is down from $18,000 a month just six to nine months ago, says Cheong.

Of the new supply coming up in the CCR, about 50% is expected to end up on the leasing market, which will put further pressure on rents, reckons Ong Choon Fah, chief operating officer of DTZ.

Even the top-end of the landed housing segment has not been spared the rout.

Anecdotal evidence is that an owner had posted a monthly asking rent of $51,000 for his Good Class Bungalow (GCB).

It sat empty for six months before the owner adjusted the asking rent to $45,000.

There were still no takers, and the asking rent is now $40,000.

Based on the overall private residential property price index, the fall in prices is just 3% from 4Q2013 to 3Q2014.

Resale prices, on the other hand, have seen greater volatility, notes DTZ’s Ong, and have corrected between 5% and 12% this year.

The overall private property rental index showed a weakening of just 2.1% from 4Q2013 to 3Q2014, with the rental sub-index for CCR seeing a bigger correction of 2.6%, and for detached houses by 3.1% over the same period.

This year is only a foreshadowing of an even bleaker 2015, says DTZ’s Ong.

She expects private residential property prices to decline another 5% to 10%, with rents plummeting a further 10% to 15% next year.

More downside risks are expected across the board, including the luxury segment, she warns.

“However, not all will be similarly impacted.” In previous property cycles, prices in some developments fell in line with the rest of the market, but there were no units available for sale, continues DTZ’s Ong.

Meanwhile, Sentosa Cove is an example of how prices are not just location specific, but project specific as well.

In July, two units at Turquoise that were mortgagee sales, were sold at prices of $1,397 psf and $1,450 psf, which set a benchmark low for the waterfront enclave this year.

At end-November, developer Simon Cheong of SC Global Developments sold two units at his exclusive Seven Palms condo project for $4,131 psf apiece, setting a new high for the project as well as for Sentosa Cove.

Rising vacancy However, vacancy in the private housing market (including executive condos) continues to mount, from 6.2% in 4Q2013 to 7.1% in 3Q2014.

According to URA data as at end-3Q2014, about 20,852 units (including ECs) are expected to be completed by year-end, with another 23,769 units in 2015.

“No doubt, rents will continue to head south, with over 23,000 new units coming up next year, tightening immigration policy, coupled with expatriates’ lower housing budgets,” says Donald Han, managing director of Chesterton Singapore.

Landlords have to contend with the fact that it is a tenants’ market, and it will take longer to find a tenant, notes Eugene Lim, key executive officer of ERA.

Those who are not able to hold on to their property may be forced to offload them in the resale market, he adds.

Owing to the total debt servicing ratio (TDSR), which has a cap of 60% on mortgage payments as a ratio to total monthly household income, coupled with the additional buyer’s stamp duty (ABSD), the sweet spot for bargain hunters in the resale market is properties in the ballpark of $1.5 million.

Such properties, which are typically compact two-bedroom apartments in the CCR or three-bedroom apartments in the suburbs, tend to find buyers more easily, notes ERA’s Lim.

In recent years, many investors who have bought into 99-year leasehold suburban mass market condos may not have anticipated a rental downturn, reckons Ong Teck Hui, national director of research at JLL.

“If mortgage repayments are affected by falling rents, selling pressure could worsen,” he says.

In the suburbs, most landlords of private condos are competing for tenants in the $2,500 to $4,000 monthly rental bracket.

This will put pressure on larger HDB flats trying to find tenants at rents above $2,500 a month, says ERA’s Lim.

The years 2013 and 2014 may have marked the era of the shoebox apartments, but 2015 could see demand swtching to two- and three-bedroom units if landlords are willing to work harder to rent out each individual bedroom in order to preserve their yield, says Savills’ Cheong.

Some young expatriates coming to Singapore may not be able to afford a rent of $2,000 to $2,500, he adds, which is what shoebox apartments in the Geylang, East Coast and Telok Kurau area are asking for.

The option is to share a two- or three-bedroom apartment, for which rents range from $3,000 to $4,000, for example at Le Crescendo in Paya Lebar.

A room in one of these private condos can be rented for $1,500 to $1,600 a month, with the master bedroom commanding rents of $1,800 to $1,900 a month, as it has an attached bathroom, says Cheong.

Even so, the leasing market is going to be more challenging in the OCR and the CCR segments, notes JLL’s Ong.

He sees condo units in the city fringe or Rest of Central Region (RCR) faring better.

“The city fringe area is close enough to the city, and yet more affordable,” he says.

“Rental decline in the RCR so far has been the mildest.”

How meaningful a fall? Developers have made repeated pleas to the government to relax some of the property cooling measures.

The response from Khaw Boon Wan, the Minister for National Development and Tharman Shanmugartnam, deputy Prime Minister is that they want to see “a meaningful correction”.

Since then, there has been intense speculation by pundits attempting to guess how much prices would need to fall before some of the measures will be lifted.

DTZ’s Ong reckons that a further correction of 8% to 12% next year will lead to a rollback.

On the other hand, JLL’s Ong is looking at a 10% to 15% price correction before any measures will be eased.

What both agree on is that it will not be completely lifted, but it will be in stages, “a careful recalibration”.

With the exception of a few projects with unsold stock, by and large, developers are continuing to hold on to their prices, notes Savills’ Cheong.

Some developers of new launches in the OCR have found that they only needed to offer a 5% discount on their selling price to lure buyers back.

However, in the CCR, the discounts had been steeper, in the range of 10% to 15%, on account of the overall quantum price.

“Demand is still very elastic,” he says.

“Pent-up demand is building up, with people on the sidelines waiting for the right time to jump in.” At the top end, or the CCR segment, JLL’s Ong foresees the pain continuing as long as the measures remain.

“What brought the prime market down was the cooling measures,” he says.

“It is unlikely that this segment can bottom out and recover unless the cooling measures are eased or removed.”

This article appeared in the City & Country of Issue 658 (Dec 29) of The Edge Singapore.

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