ONG TECK HUI says Singapore is faced with a looming under-supply situation in the prime and mid-prime segments
Published September 23, 2010
ONG TECK HUI
THE residential property market roared back to life in the second half of 2009 with both transaction volume and prices surging upwards, following a year of relative inactivity due to the global financial crisis. Against this backdrop, buyers flooded the market again and developers were busy replenishing their land banks so as to capitalise on the growing demand. The recently announced measures to cool both the HDB resale and private housing sectors may change certain dynamics in the market for enbloc sites so it may be timely for a quick review
Prime shortage looming?
As the market became more buoyant, transactions in prime district residential properties picked up. Buyers are attracted by their central location, ability to command better rental yields, investment appeal, and other reasons.
During the first half of 2010, prime residential properties accounted for nearly one-third of primary market sales. Interest in the prime districts has been picking up in the last couple of years - in 2008, 23 per cent of primary market sales were attributable to prime properties while in 2009, there was an increase to 25 per cent.
Year-to-date, developers have poured more than $2.5 billion into residential sites (excluding executive condominium or EC sites) offered under the Government Land Sales programme (GLS).
Most of the GLS residential sites cater to mass suburban housing where the bulk of housing demand lies. It is certainly a sub-market which no housing developer can ignore. Furthermore, GLS sites are large, offering economies of scale in the entire investment chain for a developer, including site search, acquisition, planning, design, development, marketing, and sales.
While the GLS programme caters more to the suburban sector, demand for prime and mid-prime residential properties are generally met by sites offered within the private domain, including those under collective sales.
Year-to-date, developers have spent some $1.3 billion on private residential sites, with prime district sites accounting for 33 per cent of that value. Over the total amount invested in both GLS and private sites, it accounts for just 11 per cent. This seems to suggest an under-investment in prime district sites. The amount invested in mid- prime sites is also low, at 14 per cent of the total.
At this rate there would be a shortage of supply of prime and mid-prime residential properties. Barely 300 units will be generated by the prime sites transacted thus far while mid-prime sites would yield about 700 units.
In contrast, GLS residential sites would result in well over 7,000 suburban housing units being developed. It is noted that as at the second quarter of 2010, there are 10,997 units with pre-requisites for sale but not yet launched and 39 per cent of that supply is from the prime districts. However, that quantum is barely equivalent to demand in a good year and we need to address the needs of the market beyond that time horizon.
Fallout from new measures
We now consider the recent measures to cool the market in our review. The increased holding period for Sellers' Stamp Duty (SSD), reduced loan limit of 70 per cent, and increased upfront cash of 10 per cent for buyers with one or more outstanding mortgages would deter speculators and short- term investors, and encourage greater financial prudence amongst buyers in general. This should result in some calming effect on the market.
The HDB measures, on the other hand, have been designed to cool the HDB resale market.
The higher income ceiling for Design, Build, and Sell Scheme (DBSS) flats, increased supply for executive condominiums and DBSS flats, longer minimum occupation period (MOP) of five years for resale flats, and ban on concurrent ownership of HDB resale flats and private housing during the MOP - these are expected to moderate HDB resale activity.
As HDB households ride on a buoyant resale market to upgrade into the suburban housing market, we believe this housing segment will feel the effects of the market moderation more than the upper market segments. The prime and mid-prime residential markets appear to be more insulated from lower end market risks and could be more resilient.
While the suburban housing market appears set to have more challenges, it does not mean that it is to be avoided by developers. At realistic price levels, buyers would surely bite and any housing developer would strive to maintain an adequate suburban land stock to realise such opportunities.
However, good investment is about balance and ability to manage exposure and risks. It is timely for housing developers to review their portfolios and to re-balance if necessary. We are faced with a looming under-supply situation in the prime and mid-prime segments while the suburban market is more amply supplied.
Collective sales trends
During the course of this year, residential collective sales activity has been gradually picking up with increasing interest from buyers. In Q1, $141 million worth of collective sales were done. The quantum rose to $505 million in Q2 and registered $586 million in Q3 to date.
The outlook is for this trend to continue for the rest of this year into 2011. As suburban residential sites are likely to face more challenges from the new measures, we see a likely shift by developers toward collective sales.
An additional trend is toward increased investment in collective sale sites in prime locations. Year-to-date, only three out of 20 successful collective sales have occurred in the prime districts, accounting for 31 per cent of total collective sales value. As developers realise the under-investment in prime as well as mid-prime sites and a potential shortage of supply from these locations, they are expected to focus more on these segments.
Demand for collective sale sites will be met by more than 80 sites awaiting sales launches. Nearly half of these are in prime districts and a good number are in mid-prime locations. The stage is set for a change in market play in collective sales - all that is needed is for the players to act
The writer is executive director, research and consultancy, Credo Real Estate
Source: http://www.businesstimes.com.sg
