Are there prospects for the prime residential market?

By Ong Teck Hui / JLL, The Edge Property | October 19, 2015 12:00 PM SGT
Districts 9, 10 and 11 in Singapore are considered home to the most prime residential properties on the island. Over the past few years, high-end properties have been hit hard by a series of government cooling measures. The capital value of luxury prime residential property has dropped some 20% since its peak in2011, while developer sales in prime districts fell 68%, from 1,302 units in 2011 to 422 in 2014 (see Chart 1).
Chart 1
 - EDGEPROP SINGAPORE

Source: URA, JLL

Foreigners accounted for a significant portion of private housing buyers in prime districts, but the introduction of the additional buyer’s stamp duty (ABSD) in December 2011 and its upward revision in January 2013 has slowed demand from them. In 2011, 31% of transactions of non-landed homes in prime districts were by foreigners, but they accounted for only 16% of the non-landed sales volume in 2014, having been deterred by the 15% ABSD imposed.
Over the last three years, these measures, as well as the total debt servicing ratio (TDSR), have also reduced purchases by Singaporeans and permanent residents in the prime districts, with volume falling 50% to 55%. Both local and foreign investors have been significantly affected by the cooling measures, resulting in a considerable fall in prices and transaction volume in the prime districts.
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Unsold stock significant, but expected to ease gradually
The slow demand and low transaction volume arising from the cooling measures have led to an oversupply of residential units in the prime districts. Slow developer sales have meant that many new projects are completed with unsold stock. This has led to the number of completed but unsold units almost doubling from 715 units in 2Q2012 to 1,420units in 2Q2015 (see Chart 2). However, the moderation in new launches has kept the 1,221 launched but unsold units in 2Q2015 quite similar to the 1,194 units in 2Q2012.
Chart 2
 - EDGEPROP SINGAPORE

Source: URA, JLL

The lack of collective sales since 2012 and the focus of government residential land sales on non-prime locations have reduced the number of potential new developments in prime districts. Consequently, the number of units with sale prerequisites that are yet to be launched has almost halved, from 4,047 units in 2Q2012to 2,044 units in 2Q2015. The current unsold supply, comprising completed and unsold units, units launched but unsold and units with sale prerequisites yet to be launched, amounts to 4,685 units. It is a considerable quantum compared with the take up of 422 units in 2014, but appears manageable if the market eventually normalises at the 10-year average take-up of 2,196 units per annum.
A soft rental market deters investors
In the past few years, there was a trend towards a higher number of new completions in the prime districts. The number of units completed between 2011 and 2014 was 22% higher than that in the preceding four years. This widened the supply for leasing significantly, while rental demand from expatriates has been stagnating. For example, the number of employment passes issued by the Ministry of Manpower increased only marginally by 2% from175,400 in 2011 to 178,900 in 2014,owing to policy tightening on the intake of foreign workers. The consequence is a decline in rents during this period, with prime-market monthly rents dropping about 25%, from $5.23psf in 2Q2011 to $3.93 psf in 2Q2015.The challenging leasing market and reduced rental returns would be another deterrent to investors looking at the prime residential market.
Prime residential prices in Singapore have become more attractive relative to other global cities
As Singapore globalised, many investors were attracted to its prime residential market, taking into account sound economic fundamentals, political stability, a reliable legal framework and market transparency. This has led to the city-state being compared with London, New York, Hong Kong, Tokyo and other global cities as potential destinations for real estate investment. We compared high-end residential prices in these four cities with those in Singapore from 2007 to2015, in US dollar terms (see Chart3). In 2007, prices in Hong Kong were41% higher than those in Singapore, but the gap in 2015 has jumped to165%. In 2007, before the global financial crisis, the price gap between prime central London and Singapore properties was 70%, but it narrowed to 34% in 2010, as the British pound weakened during that period.
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Chart 3
 - EDGEPROP SINGAPORE

Source: URA, JLL

However, in the past few years, the prime central London market strengthened, while Singapore’s prime market weakened, leading to prices in the city-state lagging those in London by 92%. In New York, prime residential prices were 48% higher than those in Singapore in 2008, but with the downturn in the US, they dropped to slightly below prime prices in Singapore in 2011. However, a recovery in the New York market in the past few years led to its prices leading Singapore’s by 82%. On the back of a stronger Japanese yen previously, Tokyo prime residential prices were on average about 30% higher than Singapore’s between 2009 and 2012.A weakening of the Japanese yen in the recent few years narrowed the price gap to 14% in 2014.
Outlook
Demand in the prime residential market will continue to be impeded by the cooling measures, while the economic slowdown and the rise in interest rates could be additional dampeners. The soft rental market is another negative factor, as investors will be deterred by challenging leasing conditions and weak rental returns. Prices are expected to soften into 2016, although they could stabilise when the cooling measures are relaxed. While the oversupply in the prime segment is significant, owing to the recent low level of transactions, it appears manageable when the market recovers and take-up normalises. A comparison with other global cities shows the price gap between the prime residential market of Singapore and those of Hong Kong, London and New York has widened significantly.
Prime residential prices in Singapore have become relatively more attractive, but investors remain wary, as the ABSD raises the cost of entry and there is limited scope for price appreciation while the cooling measures remain in place. However, should positive outcomes arise from policy changes, a recovery in the prime residential market could yield good investment returns, considering the extent that it has been suppressed.
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Ong Teck Hui is national director, research & consultancy, JLL Singapore. He can be reached at teckhui.ong@ap.jll.com.
This article appeared in The Edge Property Pullout, Issue 699 (October 19, 2015) of The Edge Singapore.