Worst case scenario: Residential vacancy rates and unsold stocks may shoot up next year

Looks like a valid reason to worry about the growing imbalance in residential supply and vacancy rates, don’t you think?

In one of our stories published recently, DBS noted that takeup of residential properties moderated due to slower economic activity. Therefore, "vacancy rates increased to 5.8% from 5.1% in previous period." DBS added that at the end of 3Q, an additional 76,255 private residential units are scheduled to complete over the next 5 years but 39,111 are still unsold.

So there seems to be a growing supply but moderating demand. What could be the best explanation for this?

Dato’ Eric Cheng, CEO of ECG Group of Companies noted that vacancy rate has increased due to factors such as an unstable global economy and speculation measures implemented in Singapore for the last three years that has affected the consumer market. “In the next few years, there will be more than 100,000 units available. In real estate history, Singapore government has placed good policies to measure density of the country. Singaporeans generally invest in property as an investment tool and own more than one property,” he added.

The ‘unstable global economy’ that Mr Cheng mentioned about could well be defined as the economic woes in Europe and US.

Mr Ong Kah Seng, Director of R’ST Research noted that there is a slowdown in demand for private residential properties, largely due to the US and EU economic crisis which became pronounced from July. “For the case of Singapore, an impactful set of cooling measures were implemented in January but it did not totally rein property sentiments as there were subdued periods but followed by some pent up demand in 1H 2011,” he added.

Dr Chua Yang Liang, Head of Research & Consultancy, Singapore at Jones Lang LaSalle agreed as he noted that the economic uncertainty from the Eurozone has dampened market sentiment coupled with seasonal slowdown as we get closer to the year-end festivities.

But why, in the first place, has residential supply grown so rapidly? Mr Ong explained that the growth in future supply, particularly in the number of private residential units scheduled for completion in the next 5 years, was due to a ramp up in land sales principally from Government Land Sales Programme in the past two years. 

So is it possible that more residential units will remain empty given the moderate demand and increasing vacancy rates?

Mr Ong noted that there should be some concern over a rise in vacancy but the overall vacancy is still considered moderate. The real concern will have to be when it consistently increase over the next quarters, if the global economic uncertainties persist or worsen and drag the economic growth of Singapore although the region economy has increasingly decoupled from US and Europe. 

“The worst case scenario is that there will be a prolonged significant rise in vacancy rates and unsold stock in next year, leading to significant price or rental cuts, and yet there isn’t sufficient takers,” he added. 

Consequently, Dr Chua noted that typically as physical stock completes, vacancy should rise marginally. However should this vacancy rise on the back of further weakening in occupier demand especially from foreigners, then this could be the sign of a softer market to come.

But as a sigh of relief, Mr Ong mentioned that the increase in vacancy in the current quarter reflected some easing in the demand for completed residential properties, where some of the units either were unoccupied or remain unsold but this may not be a worry unless it is consistently brewing and the persistent contraction, over about 2 quarters at least, eventually results in softening of residential rents and prices.

“The more likely scenario is that there will be opportunistic buyers and perhaps tenants, for overall private housing aspiration is indeed buoyant and will emerge at opportune timings such as when property re-pricing occurs (and that’s when properties are more affordable),” he added.

So, there may be rising vacancies at present, but property analysts still have a positive outlook for the market given the potential demand that foreigners and expatriates may bring plus the growing desire for private homes and potential home buyers.

The better part of the story is that overall desire for private residential purchases and renting is still fairly strong although seemingly latent at the juncture as the sudden economic woes put many buyers on the sidelines, noted Mr Ong. “If there is some downward re-pricing of private residential properties due to persistent contraction in demand, it may attract opportunistic buyers, typically those who have indeed been waiting for a good time to enter the residential market,” he added.

With careful town planning, the vacancy rate will not increase to more than 6%, noted Mr Cheng. “Growth of expatriates and skilled workers will be present in the next few years thus it will generate demand and supply,” he added.

On the other hand, Dr Chua explained that a short term market rebalancing is not unimaginable given the expected level of physical stock completion and the debacle in Eurozone. “However the long term outlook remains positively bright. Singapore will continue to attract immigrants to this country and that would support the residential market going forward,” he added.