Property's double act

The great financial recession may have knocked the economy for six, but the residential property market has seemingly defied all logic and staged a dramatic comeback.

The question for investors is why, and will it last? 2008 was certainly a terrible year for property developers and the market, with just 4,264 units bought from developers, the lowest since 1991.

The absolute bottom was January, which saw just 107 units sold in the month, the lowest since records began.

But then, as the great stock market collapse was nearing its peak, something strange began to happen.

The mass market residential properties, mainly in the east coast, started to take off as developers cut prices by up to 30 % off launch prices and offer other incentives such as absorbing stamp duty.

One real estate agent told Singapore Business Review: “The month of August really heated up. In the east coast there was a new launch at Tanah Merah and it was all sold, and people are flipping these units for a ten to 20 percent profit. It is mainly local buying and a lot of those who bought are also Malaysians.
Anything near the MRT is hot. It is crazy – I don’t know what happened, but the high end market no one is rushing in.”

The brisk level of sales has been reflected in official figures. By June over 6000 units had been sold, eclipsing the full figure for 2008.
And analysts expect that if things continue, this year could see somewhere around 11,000 units sold, which would rank second only to 2007’s record 14,811 units sold. So where are we now ?

Well, prices are down on average 21 % off the peak, with the prime districts down 24 % but mass residential faring better with just a 14 % fall.

Or looked at another way, the market is back to where it was in late 2006.
And sentiment is still strong enough that some developers have now raised prices 5 to 10 %.

But make no mistake, this property double act is still mainly taking place in the mass residential projects with Singaporeans and the usual slew of Malaysians, Indonesians and Chinese among the top buyers.

There has still not been a return of the top end luxury buyers from Hong Kong and most all transactions have taken place in properties costing below $1.5 million.
Credit Suisse Analyst Tricia Song thinks these top end buyers may come in as the price gap differential between Singapore and Hong Kong’s luxury apartments has widened to 75 %. So why did Singapore’s property market get let off so lightly during the crisis ?

No foreigner exodus
While some analysts had been predicting prices to fall as much as 60 per cent, one reason they did not is that rental demand held up stronger than expected mainly because the much touted ‘foreign talent’ exodus did not happen.

Not all the bankers were sent home, and many non bankers actually came to Singapore over the last 12 months. Where some of the direst predictions by economists had forecast up to 240,000 job losses and an exodus of both foreign workers and talent of up to 200,000, the actual numbers have hardly shifted.
Net employment fell by just 6,200 jobs in the first three months of the year, meaning the great expected expat exodus never happened. This has been echoed by British Chamber of Commerce marketing manager Sebastien Barnard who said more British arrived last year and over the first three months of this year, and the community actually grew to 25,000.

“As a chamber we have increased our membership three fold over the last 3 years and now have over 1,200 members. There are a lot of bank members, but the next biggest industry after banking is petroleum and aerospace, and then the professional services like lawyers and accountants.”

AmCham Singapore conducted its own survey of five large moing companies from March to April at the height of the crisis and found that, perhaps surprisingly, the net inflow was still higher than the outflow. “ The moving firms also estimated the netflow into SIngapore in 2009 would be 1600 people,” said Amcham executive director Laura Deal, who pointed out that Amcham had grown its executive membership base from 2663 to 3400 from August 2008 through July 2009.

So far from an exodus, it seems more foreigners are coming to Singapore, although some of those here did have to take pay cuts. Indeed, pay cuts rather than job cuts seem to have been the order of the day.

Anecdotally many people took a 15 % or more pay cut. Officially, 21,000 people were put on a shorter work week in the first three months of the year, and 43,000 people were put on job training schemes.

The public sector also went on a hiring binge, adding 10,000 people over the same time.

And again, anecdotally, many expats who were laid off chose to take up the new Personal Employment Pass which gives them 6 months to find a new job rather than 30 days to pack the bags and clear off out of Changi. The net result of the government assistance to corporations and labour market flexibility has been to keep people in, and working in, Singapore. And that has been a great help to the property market.
But property is also a supply and demand game and again factors there have helped support property prices.

Limited HDB supply
Interest rates remain low and affordability for your average apartment is currently at an all time low of 33 % , notes Credit Suisse’s Song. The other factor is supply of new housing, which is expected to be tighter than normal because there are not as many new HDB’s being built.

In fact, notes Song, housing supply in total including HDB’s will be 24,000 units a year until 2012, compared with the ten year average of 43,000. So is it all up, up and away?

Not so fast, perhaps, with one major problem still in the way of a resurgent property market. And that problem is rents, which continue to fall especially in prime districts.
Potential purchasers may find returns neutral at best under a low interest rate environment, but could be seriously squeezed once the current liquidity surge eases.
Rents have already fallen by 16 % in prime areas, which is admittedly not as much as capital values which have fallen anywhere from 20 to 44 per cent. And many analysts are expecting prime yields to fall another 30 per cent, which could force yields for prime properties as low as 2.5 %. All of which means luxury property, at least, remains a capital gains game and not a rental return game.

One suspects that the future of Singapore’s prime property prices rests as much on the stock market as it does on property fundamentals. But all in all it will be an interesting next few months to watch.