According to a report released recently by Savills, a global real estate service provider, the Singapore property market has recorded its lowest quarterly investment sales since 2009. This information confirms a declining trend that was evident for the last two years.
In the normal course, putting money into real estate is a sound investment strategy. You get a tangible asset that appreciates in value over time. It also generates a reasonable return in the form of rentals. While it is not a simple process to sell a property, it is usually possible to liquidate your investment if the need arises.
Property, therefore, has several attributes that makes it a good investment choice.
Unfortunately, the first three months of 2016 have shown that property is losing its attraction for investors.
Investment sales in Q1 2016
The data collated by Savills reveal that the first three months of 2016 saw investment property sales of only $2.38 billion, a decline of almost 53 percent from the previous quarter. Sales in the current quarter were 35 percent less than in Q1 2015.
Real estate investments that originated from the public sector accounted for $1.23 billion. The major portion of this amount came from Government Land Sales.
The corresponding figure for private properties was $1.15 billion, a precipitous drop of 66.5 percent from Q4 2015. There was a dearth of high-value transactions, the only exception being the $301.5 million purchase by Alpha Investment Partners of a 50 percent stake in 78 Shenton Way, a commercial property on a 99-year leasehold plot.
Investments in commercial properties at $574 million were 73 percent lower than the corresponding figure in the previous quarter.
The industrial segment fared no better, recording investment sales of a paltry $123 million, a drop of 84 percent from the $784 million achieved in Q4 2015.
The only bright spot was the residential segment in which investment sales stood at $1.67 billion, an increase of 26 percent from the level of Q1 2015.
The bulk of this amount came from three Government Land Sale transactions. The first was a 207,847 square foot plot for a residential site at Siglap Road. This was acquired by a consortium comprised of Frasers Centrepoint, Sekisui House, and Keong Hong Holdings for a sum of $642 million.
The other two Government Land Sale plots were sold for $419 million and $184 million.
Reasons for dwindling sales
Poor demand for new properties is the result of a number of adverse factors. The rout in commodity prices, especially oil, has negatively impacted Singapore's economy.
The country's marine and offshore engineering sectors have been hit by lower oil prices. The dearth of orders has resulted in over-capacity. In the near future, there does not seem to be any hope for increased exploration activity. Another indirect effect on the economy has been the impact on ASEAN neighbours Malaysia and Indonesia.
Turmoil in China's markets has a cascading negative effect on Singapore. ANZ economists estimate that for every percentage drop in China's economic growth, the corresponding impact on Singapore is 1.4 percent. An added disadvantage is that Singapore's local market is not deep enough to take up the slack caused by a slowdown in its trading partners.
In the recent past, Chinese consumption of raw material has shown a sharp decline. As a trans-shipping hub, Singapore has been deeply affected by this.
In addition to all these negative factors, the government has not shown signs of lifting the cooling measures that it has imposed to check the rise in residential real estate prices.
When will the market improve?
Several external factors will determine the level of investor interest in Singapore properties in the coming months. A hike in the US Fed rate could lead to money moving out of Singapore. Consequently, the real estate market could witness a further decline.
Although it is unlikely that a rate increase will take place in the Fed's June meeting, a rise in the interest rate sometime in the year is highly probable.
The other main determinant of Singapore's investment property market is the global economy, especially the level of business activity in China. If China is able to restructure itself and move resources away from the manufacturing sector towards services, its growth will resume.
But if China's businesses don't respond to changing needs rapidly enough, the recovery could be slow and painful leading to further difficulties for Singapore.
Real estate consultancy Knight Frank's Global House Price Index recently ranked Singapore at the 51st position out of the 55 housing markets that it tracks. Clearly, the residential market has a long way to go before it recovers.
The commercial and industrial sectors are similarly depressed and plagued by a lack of demand coupled with high vacancy rates and large amounts of additional floor area in the pipeline.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Istvan Loh Wye Lung is a professional FX trader. He spends his free time researching relevant investment opportunities and analysing the markets.