One in 10 transactions in 3Q2015 were unprofitable

By Esther Hoon / The Edge Property | October 10, 2015 9:00 AM SGT
More sellers incurred losses in 3Q2015 as home prices trended down further on the back of weak sentiment. The latest study by The Edge Property showed the proportion of unprofitable transactions jumped from 6% in 3Q2014 to 8% in 2Q2015 and 10% in 3Q2015 (see Chart 1). The rise in unprofitable transactions followed the continued downtrend in prices. According to the Urban Redevelopment Authority (URA) flash estimate, prices of private homes fell by another 2% q-o-q in 3Q2015.
Chart 1

Source: URA, The Edge Property

The auction market witnessed a similar trend. A total of 21 houses were put up for mortgagee sale in 3Q2015, according to data provided by DTZ. Of the 21 units, six successfully went under the hammer. Only two, however, were sold at a profit.
“The success rate is about 11% for mortgagee sales, and most properties that are successfully auctioned have a relatively lower quantum,” says Lee Nai Jia, regional head of research for DTZ Southeast Asia. “Most of the mortgagee sales that were successfully auctioned tend to be lower than the opening price and are roughly about 6% to 10% lower than what was recently transacted in the secondary market. While there is much interest, most buyers are looking for mortgagee sales that are offered at a steep discount [of about 40%]. Hence, the success rate is relatively low,” he adds.
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The high-end segment saw the highest proportion of unprofitable transactions (20%, or 41 of 209 secondary-market transactions). Unprofitable transactions accounted for 13% (33 of 265 secondary market transactions) in the city fringe and 5% (23 of 501 secondary-market transactions) in the mass market.
In addition, high-end homes chalked up the biggest percentage loss among the unprofitable deals and the lowest profit margin among the profitable deals (see Table 1). Based on URA flash estimate for 3Q2015, prices of non-landed homes are now 9% off their peak in both the high-end and city-fringe segments, and 7% in the mass market.
Table 1

Source: URA, The Edge Property

The study matched resale and sub-sale caveats of non-landed homes (excluding shoebox units and en bloc deals) with their previous transactions, based on URA caveat records as at Sept 30, 2015. Profit and loss is computed based on the difference between the selling and purchase prices of each matched record, taking into account the prevailing seller’s stamp duty (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) whereas mass-market homes were located in the Outside Central Region (OCR).
City fringe and mass market led increase in unprofitable deals
All market segments witnessed a higher proportion of deals in the red compared with the same period a year ago (see Chart 2). The biggest hike was seen in the city fringe where the proportion of unprofitable deals surged by eight percentage points (ppt), from 5% in 3Q2014 to 13% in 3Q2015. A number of these sellers had previously bought the units direct from developers at premium prices relative to comparable developments in 2007.
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In the mass market, the proportion of unprofitable transactions rose 3ppt from 2%, to 5% over the same period. The average holding period for unprofitable transactions in the mass market was three years, compared with five years in the city fringe and six years in the high-end segment (see Chart 3). This suggests that condo buyers in the mass-market segment could be overstretching their finances to live the condo dream.
On the other hand, the proportion of unprofitable deals in the high-end segment was up marginally by just 2ppt.
Chart 2

Source: URA, The Edge Property

Chart 3

Source: URA, The Edge Property

Majority of unprofitable transactions traced to units bought in 2007 and 2011
The average gain for the profitable deals in 3Q2015 was $389,000, or 36%, while the average loss for deals in the red was $270,000, or 11%.
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Table 2

Source: URA, The Edge Property

The bulk of unprofitable transactions (27%, or 26 of a total of 97) in 3Q2015 was traced to units bought in 2007 with an average loss of more than $500,000, or 16%. All 26 units were in the high end and city-fringe segments. Prices of non-landed homes in the high-end segment are now just 2% higher than in 2007. On the other hand, prices of non-landed homes in the mass market are now 44% higher than in 2007.
A 980 sq ft low-floor unit at Sunflower Residence in Geylang was bought in May 2015 and flipped in August at a profit of $91,000, or 15%. The seller had purchased the unit at $613 psf, below the market value for similar units in the development.
The most unprofitable transaction sold in this quarter is a mid-floor apartment at Parkview Eclat, situated in the CCR. The seller purchased the unit in July 2007 for $11.4 million and resold it at a loss of $3.2 million in July this year. However, we are unable to ascertain whether the transactions were conducted at arm’s length.
Table 3

Source: URA, The Edge Property

Table 4

Source: URA, The Edge Property

Extreme sizes
Large units of more than 1,500 sq ft bore the brunt of the soft market sentiment, accounting for 41% of the total unprofitable transactions in 3Q2015 and 70% ($18.3 million) of the total money lost.
Meanwhile, the proportion of unprofitable transactions involving shoebox units increased to 5% in 3Q2015. In comparison, all shoebox transactions in 3Q2014 were in the black. Shoebox units, which typically target investors instead of owner occupiers, continue to face headwinds amid a challenging rental market and competition from three- and four-room HDB flats. However, owners of shoebox units have stronger holding power owing to their lower prices.
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This article appeared in The Edge Property Pullout of Issue 698 (October 12, 2015) of The Edge Singapore.