Property 2008: The Business Times Supplement

Published March 27, 2008

A time for reflection and planning

No panic mood this time round and developers are financially stronger unlike during the Asian crisis, but a lot depends on Singapore's growth, construction bottlenecks and costs, and investors' pricing power, writes KALPANA RASHIWALA


AFTER two years of exuberant growth, Singapore's private housing market has come to a virtual standstill. Property launches and sales have slowed as local buyers adopt a wait-and-see attitude while foreign buyers, including institutional investors, are taking a similar approach in the wake of the sub-prime crisis.

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The Sail at Marina Bay: Established players have already made nice profits in the past couple of years and appear to be keeping their cool despite the current lack of activity in the property market.

Despite a paucity of transactions, prices have not weakened. Ask most industry players and they will say that the fundamentals of the local property market are still intact. Veteran developer Kwek Leng Beng, executive chairman of City Developments, says: 'Today, the mood is not one of panic, unlike during the Asian financial crisis in 1997. We are not in recession today, but rather, we are the victims of our own success. Because we did not anticipate that our economy would be firing on all cylinders, we have a shortage of almost every type of property today.'

Not only is the Singapore economy still growing, but the remaking of the Singapore story is still intact. Singapore's transformation into a global city and its evolution into the mother of all hubs - financial/wealth management, tourism, education, healthcare, research & development, etc - are coming along nicely.

That and the development of two integrated resorts with casinos and the Republic hosting the Formula One race have served to boost Singapore's profile among overseas investors, keen on parking some money in Singapore, including in its property sector.

Most developers appear to be keeping their cool despite the current lack of activity in the property market. After all, the established players have made nice profits in the past couple of years and have strong balance sheets. Most have stopped buying high-end residential sites for some months.

The effective cost of borrowing for developers today is 3-5 per cent, nowhere near the highs of almost 20 per cent seen during the darkest days of the Asian crisis a decade ago.

These days, developers reckon they can hold off new property launches, for some months at least. The strategy is that if they don't launch projects, then they don't need to drop prices to entice potential buyers. Thus, developers hope they can keep their hold on pricing.

Analysts say one major factor that could weaken developers' pricing power is specu-vestors who bought multiple units in projects on deferred payment schemes earlier. The deferred payment schemes typically run out when the projects are completed, which is when buyers have to cough up big instalments. To avoid facing such a situation, and be forced to run around town looking for multiple housing loans - which they may or may not get - specu-vestors who bought multiple units may seek to offload their units, at below market prices if necessary, as the projects near completion. If significant numbers of specu-vestors dispose of units at lower than market prices, that may set lower price benchmarks for the overall market.

Another factor that could potentially cause weaker prices could be smaller and newer developers, who may prefer to price their projects more competitively to draw buyers - rather than wait.

Confidence will also hinge on macro factors - for instance, whether Singapore's economic growth remains in positive territory and employment is secure. Construction bottlenecks and higher construction costs are also eating into developers' margins.

Already, some private investors are understood to have formed informal 'consortiums' among friends, hoping to scoop up some good buys when property prices fall.

Some developers last month were saying the sub-prime crisis could clear by the first half of this year and that things will pick up in the local property market in the second half. Now, that view sounds optimistic, given the ongoing carnage in global financial markets, with no end in sight to the US sub-prime debacle. The staring match between buyers and sellers in the residential property market will continue. Who will blink first?

In the office market, prime office rents nearly doubled last year after rising about 50 per cent in 2006. Despite tight office supply in the immediate term, resistance from occupiers to higher rents is expected to put the brakes on landlords' ability to achieve steep rental hikes this year. As well, the various projects on 15-year leasehold transitional office sites are expected to be completed within the next 12-15 months and should provide some short-term relief to the office crunch. If major financial institutions scale down their operations in Singapore, demand could take a hit. Post-2010, supply of completed Grade A office space will start increasing again. All these point to more competitive office rentals in Singapore in future.

Investment sales of office blocks have slowed, on the back of tighter bank financing. Even for residential development sites, relatively unseasoned players are finding it tougher to secure funding, because of tighter liquidity brought about by limited appetite in capital markets. With developers sated with prime freehold sites and given weak home sales, the collective sales market has also gone into slumber. Hopefully, there will be fewer en bloc fights among neighbours. Singapore property investment sales this year are expected to come in at about half of last year's record $54.5 billion, CB Richard Ellis estimates.

All in all, we look set to have a quieter year in the property market. After the heady growth in the past two years, a consolidation will hopefully provide a time for reflection - and for planning the next move.

Published March 27, 2008

En bloc: Importance of being earnest

New rules can't prevent fights led by greed but tussles should be less explosive, writes KARAMJIT SINGH


THE year 2007 will go down as the most spectacular in the 13-year history of Singapore's en bloc market. It was a story of massive fortunes made and lost. A record number of deals changed hands at a frenetic pace. Prices shot through the roof as it was a period when the perception of Singapore's prospects had changed dramatically and local property prices appeared cheap relative to the major global cities that Singapore started being associated with. Funds and investors from overseas poured in, and developers and local speculators bought feverishly.

To be precise, it was the first half of 2007 that was truly phenomenal for the en bloc market. In just those six months, 58 en bloc deals involving 5,500 owners took place at a staggering value of $10.8 billion. That amount was close to the value of deals in the previous four years put together!

In 2007, several other records were broken too. Farrer Court created history by being the biggest en bloc deal ever sold. It was the first and only transaction to cross $1 billion. The 618 units at Farrer Court also made the largest pool of en bloc sellers to be successful. Fittingly, Singapore's largest listed developer, CapitaLand, led the consortium that purchased it. They are proposing to build possibly Singapore's largest condominium project comprising 1,500 units. (The current record stands at just over 1,200 units at Melville Park in Simei.)

The Westwood Apartments deal set the benchmark for being the most expensive residential site traded. It was sold in November 2007 at a land rate of $2,525 psf per plot ratio (ppr) to Malaysian developer YTL Corporation. As an indication of the extent to which prime land rates have surged, just 18 months before Westwood was sold, the nearby Beverly Mai was bought for less than half its rate - at $1,184 psf ppr. If Westwood had been sold 36 months earlier, chances are that it would have fetched only a quarter of the price it secured.

Amid all the exuberance were negative voices raised against en bloc sales, as well as legal tussles between owners and purchasers involved in collective sale developments. There were calls to restrict or ban such sales, especially for projects with heritage or architectural value.

There were also numerous complaints about how the process was handled, claims of bad faith and the railroading of minority interests. Above all, there were several high-profile legal tussles involving the purchasers, consenting sellers, non-consenting owners, and some owners who had consented but sought ways to rescind their sales agreement.

The vigour with which legal tussles were fought in some cases seemed to be correlated with how quickly property prices shot up after their sales took place. Many relied on technicalities as potential loopholes, while others were simply a case of minority owners being dead set against the sale.

The dissenting voices of the minorities in many en bloc projects - sold or not, irrespective of their motives - created the impression that the en bloc laws that had worked well for eight years needed an overhaul. On one hand, there are certainly areas where the rules could have more clarity. On the other hand, the voices were not totally representative, as the vast majority tend not to be vocal.

Recognising this and balancing various views, the government introduced a new set of laws in October last year that raised the standards on governance and disclosure. At the same time, some redundancies in the application process to the Strata Titles Board (STB) were removed and STB's powers were enhanced to disregard non-prejudicial technicalities.

The market largely welcomed the new laws. Some, however, wondered if certain new provisions were really needed, like allowing owners who sign a collective sale agreement to withdraw their consent within five days. It also increases costs for en bloc sellers and makes the exercise more long drawn out.

By this time last year, 25 deals had taken place. So far this year, only one small deal has been reported. Such is the extent to which the en bloc market has slowed with the onset of the US sub-prime crisis in August last year. This points to the cyclical nature of such deals.

En bloc sales take place when developers are confident of the market, and the prospects of profits are high. When the outlook is cautious or uncertain as it is now - or worse, bearish - developers refrain from buying land or en bloc sites. Moreover, with tidy gains made in the bull market of the past two years, developers here can afford to sit on their land stock for a while longer until market sentiment improves.

This market lull will remain as long as the mood is cautious or there is no confidence in the health of the market. However, the expected growth in population due to immigration and the withdrawal of housing stock through last year's en bloc sales mean demand and supply are still out of sync and it could take a while before they find equilibrium again.

Then there is the slew of exciting projects taking shape like the integrated resorts and hosting of the Youth Olympics. This points to latent activity in the Singapore property market.

When the sub-prime cloud clears, demand for land from developers should pick up and en bloc sales will be back on track. Activity in this round is unlikely to mirror 2007, as it would be taking off from a higher price base.

En bloc sales are the main source of prime freehold land. They will continue to play an important role in urban renewal in Singapore as they help revitalise the property market by stimulating demand.

Disputes in such sales are not likely to go away, even with the introduction of the new laws, as no amount of legislation can prevent disagreements or actions led by greed or dishonesty. However, the market is unlikely to see a repeat of the spectacular price rise of 2007 anytime soon. As such, tussles should be less explosive.

Karamjit Singh is the managing director of Credo Real Estate.

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Published March 27, 2008

Seven tips for buying a second home

There are still pockets of new developments in Singapore that are priced below $1,000 per sq ft, writes PETER OW


HOUSE hunting can be challenging at a time when sellers are holding firm despite a quieter property market while buyers are expecting a steeper discount based on weaker sentiment from the US sub-prime woes.

Those on a strict budget should note, however, that the record prices were achieved mainly by new launches in the first 10 months of 2007. This is also true in suburban locations as buyers pay more for new developments under construction. Nonetheless, there are still pockets of new developments in selected parts of Singapore that are priced below $1,000 per sq ft such as Bedok and Jurong.

Well, it may be the right time to start looking for a second home as an investment. Given the more cautious economic climate and rising inflation, price naturally becomes the most significant factor for a property purchase as that would have an impact on initial cash outlay and the long-term mortgage financing of the property. Here are seven key tips to note when shopping for a second residential property for investment. Before buying, ask yourself the following questions:

# Is the price reasonable?

# What are the prospects of getting a tenant?

# Can you possibly stay there yourself?

# Can you get financing and service the monthly instalments?

# What is the expected return on the investment?

# How long will you hold your investment?

# Is the tenure important?

Price: While price is a key consideration, nobody can predict when prices will hit rock bottom. Thoroughly research the locations you are interested in, walk around the area and check out the resale values. This is probably the best time to negotiate when nobody is interested in buying as there will be less competition.

Location: Location, location, location, that's what property is all about. We have to ask ourselves: Is this a location where expatriates like to stay? Districts 9, 10 and 11 will readily satisfy the criteria of convenience and proximity to the CBD. Outside these districts, a development near an MRT station, suburban shopping centre, or good views of the sea or waterway have great potential. For such locations, regardless of good times or bad, one will be able to find a tenant. Getting the wrong location might result in vacant periods when the economy is not doing well.

Returns: When buying primarily for investment, yield or return on investment is the key thing to consider. If the financing cost is low and the returns are much higher, then the second residential property purchase will, indeed, be an asset and a financial nest egg. A savvy investor might find that investing in equities offers higher returns. But equities are also riskier. Any property that gives you a gross return of 4-5 per cent is considered fair, while 6-7 per cent is good. Rentals are usually fixed for two years which gives you security of tenure.

Under current conditions, an investment in property will be better than putting money into bonds or fixed deposits, where yields are relatively low. However, when shopping around do not get the notion that high-end or luxury properties always give better returns. Keep in mind that not many expatriates have a rental budget of $30,000 to $40,000 a month. You may be surprised to find that an HDB flat near an MRT station will give you a higher return (possibly 10 per cent) than most private properties.

Financing: Look for a financing package that suits your needs. Most banks offer packages without a lock-in period at higher interest rates while those with lock-ins have a lower rate. However, early redemption or refinancing can be costly. If you are an investor with a long-term view, go for a package that offers the lower interest rate so as to reduce your costs as much as possible.

You must also consider how affordable your monthly repayments are. As a guide, they should not exceed 30 per cent of your disposable income. Most of us use our CPF to pay part of the purchase price or the monthly instalments. The prudent approach is not to do that. One should keep enough money in the CPF to pay instalments for a one-year period. This is a defensive strategy so that should you be out of work for a year, the loan can still be serviced.

Time frame: Property is an illiquid asset - it takes time to get in as well as to sell out. Thus, we should look at a longer time frame for property investment, preferably a three- to five-year holding period. Property prices go up and down, but if you look back over 30 years, the new peak has always been higher than the previous one. This leads us to the next consideration.

Can you stay in the property?: It is good to take this into consideration because if there is a need you can move into the property, be it for downgrading or upgrading. So if you have a family of four, it is advisable to buy a three or four-bedroom apartment. You will also have a choice of which property to rent out and which to occupy. You may want to rent out the unit that gives you the better return.

Tenure: Is a freehold property better than a 99-year leasehold? The answer is no because the rentals of both will be the same since the tenant will not bother about the tenure. Leasehold properties, being cheaper, will give a comparatively higher yield. Every investor has his own criteria for investment, thus a property suitable for one might not be suitable for another. However, bear in mind that the less risky the investment, the lower the likely return. Also, with any property investment, it is best to take the long-term view.

Peter Ow is executive director (residential) at Knight Frank

Published March 27, 2008

Home prices surpass 1996 levels

Even if the US sub-prime problem drags on, mid and mass market homes would still see price increases this year, says HAN HUAN MEI


RESIDENTIAL property prices in Singapore saw phenomenal growth in 2006-7. Robust economic growth of about 7-8 per cent in the past three years, a growing number of millionaires and anticipated spinoffs from the integrated resorts ignited the high-end segment before finally filtering down to the mid and mass markets in the second quarter of 2007.

By the end of 2007, prices in dollar terms had surpassed the levels in 1996, although the Urban Redevelopment Authority (URA) private residential price index had yet to hit the peak of 181.4 points achieved in Q2 1996. This is especially the case for new projects. For example, units in luxury projects like Cliveden at Grange, Hilltops and The Orchard Residences were selling at above $3,500 per sq ft compared with those in Ardmore Park, which were selling above $1,800 psf in 1996.

In the mid-tier segment, units in projects like Aalto, Jardin and Zenith were selling above $1,600 psf in 2007, compared to 1 King Albert Park and Trellis Tower, which were sold at $900-$1,100 psf in 1996. As for mass market projects, 2007 saw units in projects like Fontaine Parry, Hillvista and Oasis Garden being sold at $850-$1,000 psf while in 1996, units in Hazel Park, Ballota Park and Sherwood Condominium were sold at $680 psf-$850 psf.

In the last two years, the URA price index showed that prices of landed homes rose by 32 per cent while those of non-landed homes (apartments and condominiums) rose by 47 per cent. Furthermore, within the non-landed segment, prices of uncompleted homes (mostly new launches and developers' sales) grew by 53 per cent whereas those of completed homes (existing stock, resale transactions) rose 45 per cent.

Based on URA price indices by region for uncompleted non-landed properties, the Core Central Region (CCR, districts 9, 10, 11 and Downtown Core and Sentosa) took the lead with a 67 per cent growth followed by the Rest of Central Region (RCR, Central Region outside the core region) with a 41 per cent growth and the Outside Central Region (OCR), with a 35 per cent growth.

For non-landed homes in the resale market, the price increase was 45 per cent over the last two years, driven mostly by transactions in the CCR. Prices there rose by 43 per cent, followed by 31 per cent for those in the RCR and 28 per cent for those in the OCR.

A comparison of median prices in Q4 2007 showed an interesting geographical shift across the island from Q4 2006. For simplicity, we have confined our analysis to non-landed homes.

For the new homes sold as at Q4 2006, the highest price band was $1,500-$2,000 psf for properties in districts 1, 2 and 4. Examples of new projects in these districts in 2006 would include Marina Bay Residences, Lumiere, and The Coast and The Oceanfront at Sentosa Cove.

Properties in the lowest band - below $700 psf - were found in districts 5, 8, 12, 13, 14, 16, 17, 19, 22, 23, 6 and 27. Examples of new launches at that time included Ferraria Park, One St Michael's, The Infiniti, The Quartz and The Stellar. Most of these are 99-year leasehold projects catering to the mass market. However, by Q4 2007, the highest price band moved up to over $3,000 psf for properties in districts 9 and 10 for projects like 8 Napier, Cliveden At Grange, Scotts Square and The Orchard Residences. Similarly, the lowest band was raised to $700 psf to $1,000 psf for projects in districts 3, 5, 8, 12, 13, 17, 19 and 22, reflective of prices of Casa Fortuna, Fontaine Parry, Oasis Garden and The Lakeshore.

As for properties in the popular East Coast area, their prices have moved up from $700-$1,000 psf to $1,000-$1,500 psf for district 15. In district 16, they moved from below $700 psf to $700-$1,000 psf over the same period.

In the resale market, there was a lag in price growth because this sector involved basically older properties which lacked the aesthetic appeal and quality of new properties. As at Q4 2006, among the properties that were sold, only those in district 9 made it to the top of the range for the price band of $1,000-$1,500 psf. These included properties like Aspen Heights, Cairnhill Crest, The Claymore and The Pier At Robertson. However, a year on, the price band moved up to $1,500-$2,000 psf. Transactions in district 10 joined this category, involving units in Ardmore Park, Draycott Eight and The Tessarina.

With the exception of districts 4, 9, 10 and 11, resale transactions in the rest of the island were largely below $700 psf in Q4 2006, the price band for mass market properties. Similarly, in Q4 2007, property prices in the more popular districts (1, 2, 3, 5, 7, 8, 12, 15, 16 and 21) moved up to the $700-$1,000 psf price band.

Notably, prices of properties in districts 1 and 3 as well as 11 moved up to the $1,000-$1,500 psf band in Q4 2007 from previous price bands of below $700 psf and $700-$1,000 psf respectively.

Last year ended on a cautious note as the sub-prime mortgage crisis in the US had a somewhat negative effect on global financial markets and the economy. Most home buyers have been infected by the current mood and have turned cautious. Should the US enter a mild recession in the first six months of 2008 and the sub-prime problems clear up so that sentiment improves after June this year, the private residential market should continue where it left off in the third quarter of 2007.

Luxury prices would remain firm, mid-market homes would be expected to rise by 5 to 10 per cent while mass market home prices could grow by 10 to 15 per cent in 2008, once the situation becomes more positive.

In the worst case scenario, where the US sub-prime problem drags on to the end of the year and beyond, prices of luxury properties may ease marginally, while mid- and mass market homes would still see price increases, albeit at one to 2 per cent and 3 to 5 per cent respectively.

Han Huan Mei is an associate director, CBRE Research, CB Richard Ellis.

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Published March 27, 2008

Prices and rentals of landed homes set to rise

Land scarcity in Singapore should ensure sustainable capital growth in landed housing in the medium to long term, write STEVEN MING and AVIN SEOW


LANDED homes saw their strongest price rise last year since 1994 but they have yet to catch up with their non-landed counterparts, leaving room for more capital as well as rental growth in 2008. Prices of landed homes rose 23.4 per cent last year, going by the Urban Redevelopment Authority's (URA) index of landed private residential property island-wide. This growth rate reaffirmed the upward trend, especially compared with the negligible growth in previous years - 0.6 per cent in 2004 and 2.4 per cent in 2005.

For landed homes in the suburban areas, average prices rose to $636 per sq ft, an increase of 45.1 per cent year-on-year. Landed homes in the prime districts of 9, 10 and 11 enjoyed healthy capital growth of 24.3 per cent to reach $961 per sq ft in 4Q 2007.

Good Class Bungalows (GCBs) were the star performers in 2007. According to URA numbers, average prices of GCBs surged 58.7 per cent year-on-year to $763 psf from $539 psf in 2006. The average cost of a GCB stood at $13.8 million in 2007, compared to $10.3 million in the preceding year. The trend of some GCBs being sold and resold within 12 to 18 months continued into 2007.

An example of this trend is a GCB at First Avenue that was sold for $10 million in September 2007, only to be resold at $12.5 million in October 2007, and then resold again at $16 million in December 2007. This is a whopping increase of 60 per cent in just four months.

Boasting a unique waterfront lifestyle, new 99-year leasehold homes on Sentosa Cove have redefined luxury landed living since their emergence in 2004. Expatriates and overseas investors have since lent much support to the capital growth in this segment. Average prices climbed 20.8 per cent to $1,463 psf by end-2007.

Another trend which we have observed is the increasing popularity of cluster housing. Since it resurfaced in 2000, this lifestyle concept has become ever more popular, especially among younger home owners and permanent residents. Cluster houses, offering shared facilities, blend the elements of landed property with condominium style living. Known as strata landed housing, these developments may be bungalows, terraced or semi-detached homes. Some developers have added more exclusivity to their projects by including a private swimming pool in each house. Notable launches last year were Dunsfold 18 and 8 @ Stratton in Stratton Green, both of which received good sales response.

There are several reasons for optimism across all landed housing segments this year. We believe that more capital gains can be expected this year since the price index of landed homes remains some 25 per cent below the peak of 2Q 1996. Landed homes have yet to see the sharp price rises of their non-landed counterparts. Emerging from a relatively low base, landed properties may be more appealing to investors this year.

Secondly, landed housing will always be considered a luxury in land scarce Singapore. This inherent scarcity should continue to lend support to the landed housing market. As such, GCBs look poised for yet another good year of capital value growth. It would not be surprising to see average GCB land prices cross $900 psf in 2008, due to the scarcity of such bungalows (there are an estimated 2,500 of them) coupled with the rising transacted prices on Sentosa Cove.

Similarly, landed homes on Sentosa Cove should continue to trend higher. Unlike those on the mainland, these houses have a broader market. There are no restrictions on foreign ownership of landed homes on Sentosa Cove. The continued influx of expatriates, together with the growing appetite of the rich for something unique and exclusive, is likely to fuel prices of these luxurious homes.

Rental yields are an attractive component of property investments, providing landlords with regular and stable income. Landed properties have become increasingly popular with tenants, with rents rising at their fastest pace in seven years. As at 4Q 2007, average rents of terrace houses and semi-detached houses climbed to $1.87 and $2.22 psf per month respectively, up 52 per cent year on year, while rents for detached houses rose by 23 per cent to $3.09 psf per month.

Rental growth is clearly outpacing capital growth for landed homes, and with the expectation that landed home prices will catch up this year, landed properties could offer an investor both healthy rental and capital gains in 2008 and beyond.

Given the above factors, the landed housing market should be able to attain capital gains of 10 to 20 per cent this year, notwithstanding the continued US credit turmoil. Singapore's property market remains fundamentally sound, backed by a robust job market and an expanding economy. Perhaps the most fundamental fact is the scarcity of land in Singapore which should ensure sustainable capital growth in landed housing in the medium to long term.

Steven Ming is director at Savills Prestige Homes and Avin Seow, analyst, Savills Research & Consultancy.

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Published March 27, 2008

Don't overpay for your home loan

With over a hundred home loan packages available in Singapore, DENNIS NG discusses how to pick the right one


WHAT interest rate are you paying on your housing loan? If you are paying 3.5 per cent or more, you might be overpaying. With the US Federal Reserve cutting interest rates, the Singapore Inter-bank Offered Rate, or Sibor, has been on a downward trend. Sibor is the rate at which banks lend to one another. Currently, the three-month Sibor has fallen to about 1.4 per cent, down from about 2.5 per cent last year.

Banks have started lowering interest rates offered on housing loans to as low as 2.08 per cent. Thus, if you're paying an interest rate of 3.5 per cent or more, it might make sense for you to refinance your housing loan to enjoy interest savings.

For example, if your outstanding loan is $500,000 and you're currently paying 3.5 per cent interest with a remaining loan period of 20 years, the total interest savings for the next three years from refinancing can work out to $13,831.38. After factoring in the cost of refinancing, the net interest saving still works out to $13,331.38. Thus, by refinancing, you can be 'richer' by over $10,000.

Floating rate vs Sibor/SOR pegged packages: Each bank will usually set its own board rate and after deducting a 'discount factor', arrive at the floating (adjustable) interest rate charged to clients. The problem is that each bank will set its own board rate arbitrarily and there might be occasions when Sibor rates fall, and banks don't reduce the interest rates charged on floating (adjustable) rate packages. Thus, in a bid to increase the transparency, some banks have recently introduced housing loan packages with interest rates pegged to Sibor or Swap Offer Rates (SOR).

The advantage of such packages is that as and when inter-bank offer rates move up or down, your interest rate would be adjusted as well - it would not be at the bank's discretion. Currently, Sibor/SOR have fallen below 1.4 per cent and interest rates charged on such loans can be as low as 2.08 per cent.

With the US expected to continue cutting interest rates in the next few months, Sibor is expected to remain low or even fall further in the next six to 12 months. Thus, if consumers hold the view that interest rates are likely to fall, choosing a housing loan package pegged to Sibor would enable them to automatically enjoy lower interest rates as Sibor moves lower.

Beware: Fixed rate packages typically come with lock-in periods. Some banks recently also adjusted interest rates charged on their fixed rate packages downwards to an average of 2.58 per cent for the first three years. However, such packages come with a penalty period of three years. Thus, such packages might not be suitable for consumers who intend to sell their property within the next three years, as they are liable to a penalty fee.

Should you apply for a housing loan now for properties purchased on a deferred payment scheme? You might have purchased a property on a deferred payment scheme and only need to take a loan when the project gets its Temporary Occupation Permit (TOP), which might be in 2009 or 2010. Should you apply for a housing loan now?

By applying for a loan now, you eliminate the risk of loan rejection should there be any adverse change in your financial situation in future, for instance, a pay cut or job loss when the property is ready. You also eliminate the risk of banks granting a lower loan quantum should the property market turn and prices fall. To safeguard your interests, you can choose a loan package that allows you a free loan conversion so that you can switch to a better package should one be available nearer TOP.

Cash in on your property without selling it: With property prices having gone up in the past three years, you might now own a property whose value has doubled. In that case, your current debt-to-asset ratio might have fallen considerably.

For instance, say you bought a $1 million property three years ago and took an 80 per cent loan, or $800,000. Currently, the loan outstanding is about $750,000, while the current value of this property might have gone up to $2 million. This means your current debt-to-asset ratio is only 37.5 per cent.

How can you benefit from the rise in the property price without selling your property? You can consider taking an equity loan on the property. For instance, in the above example, subject to your credit score, banks might grant you an additional equity loan of up to $850,000. To be conservative, you can consider taking up a lower equity loan of, say, $450,000, bringing your debt-to-asset ratio to a comfortable 60 per cent. You can use the $450,000 equity loan granted by the bank to start a business, or even to invest in another property. The interest rate on equity loans in Singapore is very low and can be as low as 2.2 per cent currently.

Should you pay off or reduce your housing loan?: The Singapore government has projected the inflation rate in 2008 to be about 5 per cent. On the other hand, the interest rate on housing loans is about 2.2 per cent. Thus, we have a rare scenario of negative interest rates, that is, a person who takes a housing loan is actually ahead of someone who saves money in bank deposits because of the shrinkage of money from inflation.

On the other hand, interest rates on bank deposits have fallen to about 1.5 per cent. With inflation at 5 per cent, it means that a consumer is losing 3.5 per cent a year by putting money in bank deposits.

Instead of paying down your housing loan which charges low interest rates of less than 3 per cent, you can consider investing your cash in a stable investment that is not subject to large price fluctuations and offers higher returns than fixed deposits. One example is UK-traded endowments, which have a guaranteed cash value and generate annual returns of 6-8 per cent.

How to choose a suitable housing loan?: There are over 113 different housing loan packages available in Singapore at any one time. Each package has its own unique features, with its own pros and cons and different terms and conditions. Consumers might be confused by the wide array of choices. In the last few years, with the emergence of independent mortgage brokers in Singapore, home loan shopping and comparison have been made easier.

Basically, an independent mortgage broker who knows your requirements can help you zoom in on the most attractive home loan packages suitable to your needs. You typically do not have to pay for the service of a mortgage broker as banks pay them a fee.

In more advanced countries such as the US and Australia, people usually apply for home loans through a mortgage broker rather than go to the bank directly. In Singapore, many people are still unaware of the services and benefits of engaging a mortgage broker, but things are likely to change with public education and increasing awareness.

Dennis Ng is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003.

Published March 27, 2008

Residential rents seen rising further

En bloc sales and population increase caused by influx of foreigners will continue to fuel demand, writes LEONARD TAY


RESIDENTIAL rents bottomed out in 2004, recovering until 2007 when they staged an extraordinary rise, surging by more than 40 per cent within the year. This was the highest rate of increase in Urban Redevelopment Authority's private residential rental index since the index started in 1990.

And 2008 is likely to see continued strength in rentals, although growing at a more modest pace of 5-10 per cent.

Rents rose a negligible 0.2 per cent in 2004, and then a stronger 3.1 per cent in 2005, according to the URA private residential rental index. But as the residential sector recovered strongly from 2006 onwards, rental values rose more steeply.

The non-landed residential segment, which forms the bulk of the leasing market, chalked up rental growth of 15 per cent in 2006 before sky-rocketing 43.1 per cent in 2007.

A key reason for the supernormal growth in rents was the population increase as a result of immigration. Singapore's total population rose from 4,401,400 in 2006 to 4,588,600 in 2007, an addition of 187,200, of which Singapore residents made up 57,200 while foreigners constituted 130,000. This is a 14.8 per cent rise year-on-year and is the largest increase in the number of foreigners seen in over seven years. The foreign population refers to professionals, workers, students and their family members. This is the first time the total has crossed the one-million mark. The increase in 2006 was 9.7 per cent.

Main attractions

The positive run in the economy, growth prospects for the country and an attractive living environment brought many here, leading to the surge in demand for housing accommodation. The foreigners chose Singapore because of the job opportunities here and its connectivity to other major cities in Asia. Generally, they formed the bulk of the tenant pool and the prime districts (Orchard, Holland and Bukit Timah areas) were their favourite locations. However, due to the recent escalating rents, more expatriates have opted to move out of the prime districts for cheaper accommodation elsewhere. Some have even gone ahead to buy their own homes instead of renting.

The swelling demand was further fuelled by the number of residential projects that were sold on the collective sale market. A number of displaced home owners have rented in the interim while waiting for their new replacement homes to be completed.

While rents have increased islandwide, some regions are ahead of the pack. Rents in the Core Central Region (districts 9, 10, 11, Downtown Core and Sentosa) lead the market with a median rent of $3.86 per sq ft per month, going by URA's median rent numbers at end-2007. This is followed by the Rest of Central Region with a median rent of $2.74 psf per month and the areas Outside of Central Region with a median rent of $2.01 psf per month.

Using CBRE Research's basket of properties for the luxury, prime and island-wide segments of the leasing market, average rents have reached even higher levels. The average rent for luxury residences ended 2007 at $6.10 psf per month, having risen 36 per cent during the year. Properties in this luxury class include the top 10 to 15 completed condominiums located in the prestigious areas around Orchard Road.

Average rents for prime residential properties were $4.50 psf per month, having increased by 55 per cent in 2007, while islandwide rents were $2.65 psf per month, after rising 33 per cent in the same period.

As rentals at prime and popular locations become more expensive, both local and foreign residents have been moving further out; first to the city fringe and eventually along the east-west axis of the MRT lines to the suburban areas. A comparison of non-landed median rents from the URA's Realis system in December 2006 and December 2007 shows that the most significant increases have not been restricted to the central areas, but have been seen in the eastern and western parts of the island.

It should be noted that although districts 9 and 10 remain the most popular among expatriates, these districts have a range of old and new residences, leading to a relatively lower median rent compared with those in district 4. The residential landscape in district 4 (Telok Blangah/Harbourfront) is generally more homogenous and comprises newer developments that can fetch a premium.

Outlook for 2008

The leasing market is expected to remain firm in 2008 and rents will continue to rise, albeit at a more moderate pace in line with the less aggressive growth projected for the economy. The same phenomenon experienced in 2007 will continue into 2008 as fringe and suburban areas become more sought after by occupiers who find the higher rents in the prime central areas prohibitive. The spillover from the central area would cause rents to rise in other parts of the island and lead to overall growth in the leasing market.

At the same time, as Singapore continues to attract the well-heeled from around the world, rents for luxury and city living condominiums in the popular areas around Orchard Road and the CBD will continue to move upwards. Average residential rents are expected to increase by about 5-10 per cent this year.

Leonard Tay is a director of CBRE Research

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Published March 27, 2008

Eclecticism is the new home mantra

The new aesthetic in interior design dictates that the next time you buy a table, it doesn't have to match your chairs, learns SARA LIM

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HOMES these days are displaying an intriguing mixture of influences from different cultures and time periods, instead of sticking to a rigid theme like Zen minimalism or European classicism.

'We're moving towards eclecticism,' declared William Ong, executive director of Axis.ID, the firm that has designed showflats for high-end property like St Regis Residences, The Pier at Robertson and Oceanfront @ Sentosa Cove.

The St Regis showflat, for instance, was a blend of Eastern and Western influences in a classic setting, accented by artworks, both modern and period. According to Mr Ong, different materials, lighting and accessories were combined in perfect proportions for the right feel.

Eclecticism is a trend that has been gathering steam all over the world. The next time you visit a posh Manhattan apartment, don't be surprised to find an Asian-inspired lamp or Colombian priest statue alongside an intricate classical mirror from Spain.

As Singaporeans become increasingly well-travelled and exposed to different cultures, their homes are also reflecting more global tastes.

Describing his recent work on local bungalows and penthouses, Jason Ang, managing director of Oser Design, offered: 'When you come through the door, you might see a set of Oriental-style armchairs, since we're Asian. But in the living room, the sofas are always Italian - plush and comfortable. In the dining area, the console or sideboard can be in Indian or even Mongolian style.'

The new aesthetic dictates that the next time you buy a table, it doesn't have to match your chairs.

'In the past, everything had to match. If you had a piece in cherry (wood), everything had to be cherry, cherry, cherry. If it was oak, then oak, oak, oak. But nowadays, the focus is on relating, not matching,' said Mr Ang.

Designers now ask themselves if individual pieces can 'relate' to each other. Traditional, squarish sofas are paired with armchairs in organic shapes and textures, while Ming dynasty chairs are tucked into a modern lacquered table.

As designers throw the rules out the window, homeowners are also trying to create an individual statement. Many personalise their living spaces by installing artworks like paintings and sculptures. Needless to say, these pieces are often cultural artefacts culled from their travels.

'Everyone is a collector now. It's fashionable to collect, be it furniture, artworks or antiques,' said Mr Ong, who often places artwork from his private collections on loan at showflats.

He ventures that there are no boundaries in interior design nowadays. What drives and inspires design is the homeowner's lifestyle - what he owns and how he wishes to live.

Homeowners who do a lot of entertaining, for instance, request for open-concept kitchens which double up as showpieces. As the kitchen is separated from the dining area only by a low bar counter, it allows the host to chat with guests while preparing meals or uncorking a wine bottle.

The latest material to grace kitchen counters is silestone, a quartz- based surface with anti-bacterial features. 'Its high resistance to scratches and heat outperforms any solid surface or granite top. Such a revolutionary material certainly has a huge potential in the 21st century home,' said Tan Kay Sing, director of The Builder's Shop.

Other homeowners may want the sanctuary of a spa or wellness centre in their homes, elevating the status of the humble bathroom.

'People want their bathrooms to be spacious and full of natural light. It's a norm now to install raindrop showers, knock down walls to create large ensuite walk-in wardrobes and room-sized bathrooms,' said Mr Ang, who once converted a courtyard into a spa room with a $15,000 bathtub and a skylight that could be opened to reveal the stars at night.

Fortunately for those looking to spruce up their homes, you need not empty your wallets for a fresh new look. Advising those on a tight budget, Mr Ong said: 'All it takes is to re-arrange your furniture, change some of the accessories, place them at different angles - all these can work wonders in making your place feel new.'

Jay Wee of Anthropology Homeware pointed out that accessories are a lot cheaper and easier to source compared to furniture. He recommends practical, flexible items like shelving units which can be used as a side table or a feature wall with plenty of display space for art pieces.

Those with slightly bigger budgets could consider investing in designer lighting to infuse new life into a space.

'You may have a very rundown, industrial-looking place but once you install the right designer lights, the spatial quality is completely transformed,' said Mr Ang.

High-end Italian furniture and lightings store Le Mercier's reports that the luxurious chandelier is seeing a strong comeback.

'We have been telling clients for years that chandeliers are a very important statement in a home. We deal with the top lighting companies in Italy and we are very excited by the way they have reinvented their designs and use of materials,' said Leon Le Mercier, director of Le Mercier's Fine Furnishings.

To make spaces appear bigger, stick to simple designs and monochromatic colour schemes, rather than pattern-filled ones. Pieces with clean lines and a glossy finish, such as the Louis Ghost armchair by celebrity designer Philippe Starck, might fit the bill.

For a modern tropical look, consider incorporating live plants and pieces in tropical woods or woods with strong grains. As warmer tones become fashionable again, dark wenge wood, popular in the late 1990s, has given way to grey oak and teak as the material of choice.

Those concerned about sustainability and environmental issues can now enjoy eco-friendly living with furniture made of recycled weave at local furniture brand The Life Shop.

When faced with today's plethora of choices, designing your dream home may seem like a daunting task. Ultimately, homeowners should design their house the way they like, rather than look to trends, according to furniture specialist Andrew Pang, vice-chairman of the design development committee of the Singapore Furniture Industries Council.

'After all, today's trend is tomorrow's history. Buy things which reflect your personality. It's a matter of personal taste.'

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Published March 27, 2008

Changing home investment scene

Non-landed residential market most likely to gain from influx of foreign talent, say CHUA YANG LIANG and JACQUELINE WONG


SINGAPORE'S non-landed residential market put in a strong performance last year, sub-prime notwithstanding, driven by the luxury and prime segments whose resale capital values saw stunning year-on-year growth of 51.7 per cent and 50.6 per cent respectively.

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Lights, camera, action: Key projects and events, including the Marina Bay Sands integrated resort (above), the Singapore Formula One Grand Prix and the Singapore Youth Olympics in 2010, will push Singapore up a notch on the tourist destination list and also increase the expatriate work force and demand for housing

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The buoyant buying sentiment coupled with high global liquidity helped propel high-end condominium prices beyond the $4,000 per square foot mark, with one new development reportedly closing at $5,000 psf - a historic milestone.

Spurred by the large gap of around 35 per cent between resale and new residential launch prices in prime districts (9-11), investor interest was at a crest in 2007. There was $8.5 billion worth of collective sales transacted by institutional investors and developers. This is 18 per cent more than the value of en bloc deals done in 2006 and 2005 put together ($7.2 billion).

With the new en bloc regulations introduced last October, overall costs of collective sale deals have risen and coupled with the overall cautious sentiment, the level of en bloc transactions will be more moderate in 2008.

The euphoria in the non-landed residential market is an unexpected by-product of an enlarged foreign population that catapulted leasing demand to a new level and changed the residential investment climate. While the clouds brought on by the US sub-prime debacle remain in the short term, the long-term outlook is positive.

Shifting buyer demographics

As the birth rate of the indigenous population is below replacement level, immigration is necessary to sustain the continued growth of the local economy. In 2007, the total population stood at 4.59 million with foreigners making up well over a million. This is an increase of 33 per cent from the 750,000 foreigners recorded in 2000.

Naturally, the residential market feels the impact of this sudden influx. The ratio of Singaporean buyers in the Core Central region today is less than half while foreigners of non-resident status have edged up to a quarter of the total buyers. Although less pronounced in the Outside Central region, foreign ownership (excluding companies) has also increased by some nine percentage points.

Continual government efforts to attract foreign investments and immigration-friendly policies to support this long-term economic growth will benefit the residential market tremendously.

Last year, the Economic Development Board brought in more than $16 billion worth of commitments in fixed-asset investment. These are expected to create some 28,600 new jobs and add $11.6 billion per year to Singapore's GDP. This strong job creation benefited both locals and foreigners - local employment grew by 92,100 while foreign employment jumped by a remarkable 144,500. As a result of the slower growth in Singapore's indigenous work force and a faster increase in employment opportunities, one out of three of the 2.73 million people employed in Singapore is a foreigner.

Continual population growth is essential to fuel our economic engine. The estimated population of 6.5 million is projected to be met in 40 to 50 years' time, predominantly through immigration. These foreigners do not qualify for subsidised public housing and require ministerial approval for the purchase of any landed properties. So the non-landed residential market is likely to feel the bulk of this demand.

Just in 2007 alone, foreigners and permanent residents (PRs) chalked up 8,884 units in sales (some 77.8 per cent higher than 2006), which accounts for 29.1 per cent of total private non-landed residential transactions. This sales figure is the highest in 13 years and is likely to rise further over time.

While foreign purchasers are still predominantly from our neighbouring countries - Indonesia, Malaysia and Thailand - the buyers are increasingly becoming more diversified. The next emerging groups are South Koreans (7 per cent), mainland Chinese (7 per cent) and Indians (12 per cent). Notable countries making their first foray into the Singapore market include Myanmar, the Middle East, Russia and Ireland.

Return of corporate buyers

Another rising trend is residential investments made by property funds and financial institutions since 2003. Attracted by yields above 4 per cent between 2003 and H105, these foreign institutional investors snapped up residential units to inject into their yield-focused investment portfolios. In the last 12 months, although yields have compressed to below 4 per cent, interest from Middle Eastern funds and opportunistic funds has been strong.

Out of the total $2.6 billion worth of non-landed residential developments, 42 per cent was transacted by these funds, and included anything from several units to whole condominium blocks and even development sites. These investors include Macquarie Global Property Advisors, Kuwait Finance House and US-based Wachovia Development.

Institutional investors remain optimistic about the upside potential of the Singapore residential market. Many of these investors are looking at total return, that is, including capital appreciation rather than just income yield. The majority of the investors have pumped these projects into their investment portfolio.

The minority have exited by riding on local capital growth or price differential when these properties were marketed in the home country of these foreign funds. This trend of institutional buyers in the residential market is likely to remain. Their interest is fuelled by the remaking of Singapore where several new developments and initiatives have been slated to transform it into a global city.

New lifestyle

With tourism a key component of GDP, two massive integrated resorts are now under construction - Marina Bay Sands, located at Marina South (completion in 2009) and Resorts World at Sentosa (completion in 2010). Other key projects and events include the Singapore Formula One Grand Prix and the Singapore Youth Olympics in 2010. The completion of these projects and events will push Singapore up a notch on the tourist destination list and also increase the expatriate workforce and demand for housing.

Pro-business environment

Singapore's strength lies in its corruption-free government, socially and politically stable climate, sound economic fundamentals, favourable tax policies, and a well-regulated and robust financial sector. Singapore has always been perceived as a safe, pro-business environment that is supported by a well-respected government with transparent and consistent policies that protect companies' physical and intellectual property (IP) investments.

Investors can also enjoy the benefits of an extensive global network of free trade agreements, avoidance of double taxation agreements and investment guarantee agreements. No longer seen as a little red dot on the global stage, Singapore has transformed itself into a global hub for business and investment. In the 2007 World Competitiveness Yearbook, Singapore was ranked second to the US as the most competitive economy globally.

While the banking and insurance-related services still constitute the largest component of financial sector GDP, several emerging financial clusters have contributed increasingly to its growth. These include the sentiment-sensitive industries of wealth advisory, brokerage and treasury clusters. Collectively, these sectors all contribute towards the growth of Singapore as an internationally competitive financial centre.

Singapore's multicultural and racial base also offers the corporate world a platter of business platforms conducted in a choice of languages other than English.

The network and cultural connections that the indigenous population has with its neighbouring countries make Singapore the ideal melting pot where deals are made between Asia and the rest of the world. Coupled with a well-educated and highly skilled work force, and a world-class network of air, sea and IT infrastructure, it is not surprising that capital, enterprise and talent have been attracted to this island city-state.

Consequently, more than 26,000 international companies have made Singapore their base camp as well as a gateway to the region.

Hubs of hubs

Singapore is also recognised as one of the premier asset management centres in the Asia-Pacific. Its pro-business regulatory framework and competitive tax framework also spearheaded its success as a Reit hub.

The operation of Changi Airport's Terminal 3 along with the proposed Seletar Aerospace Park has enabled the city state to consolidate its status as a regional aviation hub as well as an aerospace maintenance, repair and overhaul (MRO) hub.

Ranked the best in Asia by the World Health Organisation, Singapore has also established itself as a multi-faceted medical hub serving Asia and the world and is earning a global reputation as a medical convention and training centre.

More than 400,000 international patients visit Singapore for a whole range of healthcare services annually. It has also attracted many world renowned medical professionals to work in the internationally accredited hospitals and specialty centres located here.

Besides priding itself on an international standard education system, Singapore has also attracted world-class institutions with strong industry links to set up centres of excellence in education and research. They include respected names such as Insead and University of Chicago Graduate School of Business.

To meet the rising demand for quality schools for expatriate children, the list of international schools has also been growing. The NPS International School, part of a pioneering group of educational institutions headquartered in Bangalore, India, opened its Singapore campus in January 2008, while United World College of South-east Asia has announced plans to set up a second campus.

With such accolades and continual developmental growth in each economic sector, Singapore continues to attract a global pool of investors and talent. Incoming talent will not only bring their unique expertise but also put demand on the housing market. Eventually, some of them will bring their families and possibly even consider permanent residency.

All these developments have collectively positioned Singapore high on the list of many global investors and given them the confidence to continue investing in the Singapore residential market.

A global city in the tropics

With Singapore being a base for many regional and international conglomerates, it is also now home to a myriad of global talents and their families. Singapore is indeed transforming itself into a global city in the tropics, possibly close to being on par with London and New York in the West.

The economic rise of Asia, especially China and India, has filtered through to a buoyant economy in Singapore, resulting in a surge in demand for both office and housing space. Both office rents and housing prices have escalated over the past year. Nonetheless, prices remain highly competitive when compared to global cities such as London, New York and Hong Kong.

Singapore's strategic placement between two rising global economic engines of India and China makes it a popular choice of relocation, if not as a base for a second home for expatriates.

The non-landed residential market will continue to benefit further from the influx of these foreigners. The demand pool for the non-landed residential market, which traditionally came from the local population and residents of neighbouring countries - Malaysia and Indonesia - will become ethnically more diverse with buyers from China, India, Korea and corporate entities increasing their share.

Its multiculturalism and tolerance of diverse ethnicities support the quick and smooth assimilation of new immigrants into the larger society - a sociological strength that favours Singapore greatly. This attribute will continue to attract expatriates as well as residents of other Asian cities to Singapore.

In the longer term, the foreign ownership of residential properties in Singapore will become increasingly more cosmopolitan than that of Hong Kong, which is likely to remain dominated by mainland Chinese. The level of foreign ownership will continue to rise and eventually resemble what is found in London today - making Singapore the first global city of the tropics.

Chua Yang Liang is head of research, South-east Asia, Jones Lang LaSalle; and Jacqueline Wong is head of residential, Singapore, Jones Lang LaSalle

Published March 27, 2008

HDB resale buzz set to continue

But increasing buyer resistance and and an expected surge in supply may take away some sheen, says EUGENE LIM


HDB resales prices accelerated their climb in the second half of 2007 for a full-year gain of 17.5 per cent, on the back of a strong economy, brighter job prospects and supply-demand factors. The HDB Resale Price Index (RPI) rose 6.6 per cent in the third quarter and 5.7 per cent in Q4, after 1.3 per cent and 3 per cent increases for the first and second quarters.

The 17.5 per cent jump in resale prices last year was dramatic compared to just 2 per cent in 2006. But it was still much less than the 34.3 per cent surge seen in 1996. At 121.7 points, the RPI at Q4 2007 is just 11 per cent shy of the peak of 136.9 points recorded in Q4 1996. As the economy improved, more buyers were upgrading to larger flats. The government's target for an eventual population of 6.5 million has seen increasing numbers of permanent residents (PRs) in Singapore. The latter typically buy their HDB homes from the resale market as they do not qualify to buy new flats directly from the HDB.

The surge in private property prices last year priced out a segment of would-be upgraders, who had no choice but to buy their homes from the HDB resale market. Also, the booming stock market and the spate of collective sales in the private property market have unleashed a group of cash-rich house hunters, many of whom are opting for high-end resale HDB units. This group is willing to pay top dollar for flats that fit their criteria.

The increased demand, coupled with the stronger purchasing power of some of these buyers, helped steepen the resale market price curve in the second half of 2007.

In November 2007, it was reported in the media that a 32-year-old five-room flat in Marine Parade with a full sea view was sold for $730,000. That trumps the previous record of $720,000, set in June by a fairly new five-room flat in Kim Tian Place. Apparently, the buyer did not even bother to wait for the flat's valuation and bought it simply because he liked it.

In January this year, a 20-year-old 'penthouse' executive maisonette in Bishan changed hands for almost $100,000 cash over valuation (COV). The buyers, who had been house-hunting for almost nine months, were willing to pay top dollar because there are limited numbers of such flats. There are no more than two dozen of these units in Bishan. On top of making the large cash outlay, the buyers are planning extensive renovations to create their ideal lifestyle home.

Such highly publicised transactions have kept the HDB resale market in a state of euphoria since the middle of last year. Many hopeful sellers hiked asking prices overnight, with some demanding as much as $200,000 COV.

The COV is the amount that is paid over and above the valuation of a flat and cannot be paid from a home loan or monies from the Central Provident Fund (CPF). The higher the COV demanded by sellers, the more cash is required of the buyers.

Cash component

With the high COV demanded by sellers of centrally located HDB resale flats, buyers who do not have or are not willing to part with so much cash have been turning to outlying HDB estates like Sengkang and Punggol. These areas, which were shunned several years ago, have become increasingly popular among those looking for better value. According to HDB's Q4 2007 numbers, the median COV for a five-room HDB resale flat in Sengkang was $23,000; compared to $79,000 for a similar flat in centrally located Queenstown.

To avoid having to pay high COV in the resale market, many buyers who are not in urgent need have been attracted to new flats that are built or marketed by the HDB and private developers. This is because these buyers would have to foot at most 5 per cent of the purchase price if they are taking a bank loan to finance the purchase. Those who qualify for an HDB loan would be fully financed by CPF monies together with the loan from the HDB. Very little cash, if any, is needed; hence, these flats are crowd pullers whenever they are put on sale.

Centrally located projects - those in established estates under the recent HDB bi-monthly sale of surplus flats and privately developed City View @ Boon Keng - saw overwhelming response. Recent HDB Build-To-Order (BTO) projects, mainly in Sengkang and Punggol, are also seeing good response although they have yet to be fully taken up.

With the increased demand, the HDB's unsold stock of surplus flats, currently estimated at 2,000 units, is depleting. The HDB is now stepping up its building programme via the BTO scheme and will be launching some 4,500 units in the first half of this year. However, as the new flats will take several years to build, the BTO programme is a longer term solution and will not be able to cater to those with immediate housing needs.

As such, in the interim, we can expect continued strong demand in the resale market. However, as the majority of resale flat buyers depend on financing, there is a limit to how high COV transactions can go. Sellers that demand more than $50,000 cash may find it difficult to secure buyers. In January, it was reported by the HDB that 25 per cent of resale transactions were completed at prices no higher than $10,000 above valuation.

Resale volume

Though sentiment was good in 2007, the total resale volume of 29,436 units was a shade lower than the 29,723 units closed in 2006. However, the number of five-room and executive flat transactions increased in 2007 over 2006.

There were 7,275 five-room resale transactions in 2007 compared to 6,421 units the previous year. This represented a 13.3 per cent increase. Similarly, for executive flats, there were 2,627 transacted in 2007 as compared with 2,229 in 2006; or a 17.9 per cent increase in transaction numbers.

Five-room and executive resale flat transactions now account for 25 per cent and 9 per cent of total transactions; up from 2006's 21 per cent and 7 per cent respectively. This preference for larger flats is likely to continue for the rest of the year. That will be good news for the developers of mass market condominium projects as the support for their projects has traditionally come from buyers staying in the larger HDB flats.

Outlook

Despite worries of a US-led global recession hitting Singapore, our economic fundamentals remain strong. The buzz in the HDB resale market is expected to continue in 2008. However, with the increased number of new flats coming on stream, some demand will be taken away from the resale market. As such, we may see resale volume stay at around 30,000 units for the whole year.

Resale prices are expected to continue to rise but possibly at a more measured pace of 5-8 per cent in the coming months due to increasing buyer resistance and more new supply coming on stream.

Eugene Lim is assistant vice-president, ERA Realty Network Pte Ltd.

Published March 27, 2008

Retail rents unlikely to soften

But Singapore's retail operators finding it tough to sustain their businesses, writes SHERENE SNG


SHOPPING seems to be in the psyche of every Singaporean but how will the dynamics in the retail sector - rising rents in particular - reshape our favourite pastime? First, let's look at the current situation, where retail space has inched up by less than 2 per cent between 2003 and 2007 - from 34.07 million sq ft to 34.64 million sq ft at end-2007.

That has been followed by retail rents around Singapore rising 33.9 per cent in the same period. The island-wide shop space rental index grew from 86.9 in 4Q 2003 to 116.4 in 4Q 2007.

All segments of the retail market saw rental increases. For example, in Orchard Road (central), average monthly gross rental at end-2007 was $45.45 per sq ft per month (psf pm), up from $36.88 psf pm at the beginning of 2005. Average monthly gross rental for suburban areas rose to $28.98 psf pm, up from $26.35 psf pm three years ago.

At these levels, they are still some way behind prime retail rents in Hong Kong ($86.40 psf pm), London ($126.61 psf pm) and New York ($142.77 psf pm).

But prime rents in Kuala Lumpur and Bangkok are lower than in Singapore. The comparisons are made with rents of typical shops in prime retail locations, that is, situated on the ground floor and with good frontage.

What is the impact of rising rentals in shopping malls and how does it impact the shopper?

Retail business cost is largely made up of rent, salaries, training, advertising and promotion (A & P) and for some retailers, backroom support. When rent goes up, and revenue does not rise to a similar extent, retailers will spend less in other areas. Over time, they will cut spending on A & P or training as a way to rein in costs.

For some retailers, especially small and medium-sized companies, profits are reduced to the point that they maintain business for the sake of keeping it going, that is, their shops stay open only as long they can cover costs.

Do retailers feel that they are being squeezed out of the market?

One retailer told me that rents have become too high and many of them are feeling the pinch. If it were not for the fact that he had bought his own shop, things would be hard for him. He felt that many tenants are facing tough times and finding it difficult to sustain their businesses.

It does not help that retailers find it difficult to control other operating costs, including staff salaries and, in the case of food and beverage operators, food costs. In the case of a fashion retailer, staff costs typically make up 10-12 per cent of his sales. This is higher than, say, Hong Kong, where staff costs may range from 8-10 per cent of sales.

By and large, retailers want to be in business for the long term. However, in order to justify investment in business, they need security of tenure. If they are uncertain how long they will be in a particular mall, they would be reluctant to put in a lot of investment. It wouldn't make sense to train staff and build up a customer base, only to close after three years because of high rents.

All this impacts the consumer. When shopping centres are mainly tenanted to retailers with deep pockets, shopping centres will see a duplication of such tenants and this will result in less variety for shoppers. For retailers that operate on lower margins, for example, electronics, electrical and technology shops, bookshops and large format supermarkets, there is concern that one day they may no longer be found in shopping centres.

To differentiate themselves from the competition, landlords look for new shopping concepts for their malls. Fresh concepts will be a draw, but retailers may be reluctant to bring in new brand names because of the high setup costs involved. Licensees and franchisees have to pay a lot of money for rights to set up new brands in Singapore. High rental costs make retailers think twice about testing new concepts because of the risks involved. One way to get around this would be for landlords to charge such operators lower rent to help them get a foothold in the market. Consumer behaviour is another bugbear of retailers. Singaporeans are viewed as thrifty and with less disposable income. A large number of them enjoy taking budget flights overseas to shop and eat. However, figures from the Singapore Department of Statistics and Knight Frank Research show that retail sales value (excluding motor vehicles) has risen over the last five years to $22.53 billion in 2007. This is an increase of 9.02 per cent from the previous year.

Similar increases for retail sales per square foot of retail space and retail sales per capita have been observed. In 2007, retail sales of $650.50 psf of total retail stock was captured, an increase of 9.57 per cent year-on-year. On a per capita basis, retail sales were $4,814. This means that each square foot of retail space is churning out more sales every year. And each person in Singapore is also generating more sales each year. Along with the yearly increase in tourist arrivals, retails sales will certainly be boosted.

Last year, Singapore successfully secured the rights to host the Formula One race for five years, starting with the inaugural 2008 Formula One SingTel Singapore Grand Prix. This, together with upcoming projects like the two integrated resorts, the rejuvenation of Orchard Road, development of Gardens By The Bay and the Sports Hub will put Singapore on track to achieve the Singapore Tourism Board's 2015 goal of $30 million in tourism receipts and 17 million visitor arrivals. In 2007, the figures were $13.8 billion and 10.3 visitor arrivals respectively.

Finally, will there be a slowdown in rental increases as retailers hope? Will we face a supply overhang in the next few years?

Between now and 2010, about 6.8 million sq ft of retail space is expected to come on stream. That actually works out to fewer feet of retail space per person than currently: There will be an estimated 6.89 sq ft of retail space per capita of population, down from 7.4 sq ft in 2007.

It appears that the hoped-for softening of rents may not materialise. So what can consumers look forward to? Will they bear the brunt of retailers' high operating costs should these be passed on to them? That's the last thing they want.

What shoppers want is to visit malls where the landlord and tenants act together to produce a fresh and vibrant retail mix. Where they can find familiar brands and know that when they come back, these names will still be there. Where shops are well-stocked and sales staff are knowledgeable about the merchandise.

However, retail operators take their lead from their customers. To a certain extent, our shopping habits shape the retail environment. No doubt, Singapore's market is relatively small but if shoppers send a clear message about the goods and services that they really want and spend their money accordingly, then the spectre of rising rents will not be as disheartening as it appears.

Sherene Sng is head, retail, Knight Frank Pte Ltd.


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Published March 27, 2008

Office rents could peak this year

Tenant resistance will ease pace of rental growth, and office take-up may slow over 5 years, writes MORAY ARMSTRONG


IT WAS a year of new records for the Singapore office market in 2007. Rents were driven to new highs in terms of growth rates - prime rents surged a staggering 92 per cent year on year - and in terms of rent levels that far exceeded previous market cycle peaks. Vacancy rates dropped to unprecedented lows. Meanwhile, the sheer size of many leasing transactions was also on an unparalleled scale.

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Shortage of space: Office leasing deals are still happening in spite of worries over the state of the US economy and the financial markets

All in all, a performance that made landlords, developers and property funds fairly content. In contrast, there was growing anxiety in the occupier community over fiercely rising office costs and a critical shortage of available space to accommodate business expansion. This was a consistent theme heard most vocally among various chambers of commerce.

The cries for help had, in fact, already been picked up early in the proceedings and government policy reaction was in full swing. Office development parcels and vacant state buildings were quickly offered to the private sector and 11 government land sale sites were awarded in 2007 (no office sites were awarded the previous year).

The concept of transitional office sites offered on short 15-year ground leases was tested successfully. The lower land premium levels (versus more traditional 99-year leases) reduce the developer's cost and allow space to be leased out at lower rents. Furthermore, the government identified a number of departments located in the CBD that could potentially relocate to decentralised areas, thereby releasing available office space for the private sector to lease.

So where does the office market go from here? Will Singapore's office market pitch from critical shortage of space to a glut? What should tenants budget for when leases are due for renewal (and just how do you explain to the head office a fourfold increase in your rent in Singapore when there is financial carnage at home base?) We have set out below a few observations and our thoughts on the market outlook.

Supply

From our tracking we can identify a total confirmed five-year (2008-2012) office supply of 10.18 million sq ft (of which almost two-thirds is attributable to government land sales), the bulk of which will be delivered only after 2010. This supply figure grew dramatically through 2007.

The volume of supply does not in our view appear excessive. An average 2.03 million sq ft per annum is lower than the average 2.21 million sq ft per annum delivered to the market through the 1990s. Bear in mind that the total office stock in Singapore today (70.33 million sq ft) is 186 per cent greater than the total office stock in 1990. Also note that there is a healthy level of occupier pre-commitment in many of the new developments.

Notwithstanding the above, a factor that should be taken into account is the prospect of secondary office stock (availability in existing office buildings) increasing, particularly after 2011 when some major occupiers will move to new CBD developments and some support functions are relocated out of town. Keep an eye out also for potential sub-lease space increasing if there is a greater economic downturn.

As matters currently stand, our sense is that secondary stock is not likely to impact significantly. Bear in mind that most corporates in Singapore right now are desperately short on space and are not holding much 'fat' in either their headcount or real estate.

Demand and take-up

Deals are still happening in spite of worries over the state of the US economy and the financial markets. It is noteworthy that the strong tenant interest in decentralisation (Tampines, Changi Business Park, Harbourfront and Mapletree Business City are favoured destinations) has carried forward from last year.

As these commitments are usually financially compelling, it is perhaps unsurprising. Pre-lease momentum for prime buildings may slow in the short term as financial institutions grapple with other issues. We are, however, still actively seeking immediate expansion space for many of our banking clients.

Over the past two years office take-up averaged 2.23 million sq ft. Going forward, we anticipate that take-up may fall back to 1.6 million sq ft on average over the next five years. It is notoriously difficult to accurately call the level of office demand, but in order to build some office occupancy modelling, we have adopted this take-up figure and our assumptions here suggest that overall islandwide occupancy could remain above 90 per cent over the next five years. Hardly over-supply conditions.

Rents

The tightness of availability and excess of unsatisfied occupier demand is likely to drive (selectively) further rental growth. Early last year, we suggested that the pace of rental growth would modify going into 2008. Our preliminary Q1 2008 figures seem to bear this out: Grade A rents advanced 8.7 per cent quarter on quarter to $18.65 per sq ft a month and average prime rents rose 6.7 per cent to $16 psf a month.

While market fundamentals remain highly favourable to landlords, we expect sentiment and a healthy dose of tenant resistance to higher rents will further ease the pace of growth and rents could well peak this year and then stabilise. Greater competition from 2010 onwards suggests that rents could ease downwards. Expect certain landlords with older buildings to moderate rent expectations through this period. Tenant retention will be higher on the agenda.

Policy and land sales

The planners appear to have made a telling contribution over the past couple of years and a welcome increase in supply is now visible. Hard-pressed occupiers already have relief in sight. It may be a timely moment to ease back on priming supply and monitor how the demand side holds up in the light of more cautious times ahead.

Moray Armstrong is executive director (office services), CB Richard Ellis

Published March 27, 2008

Shophouses star at auctions

By GRACE NG


IT was a stellar year for the Singapore property market in 2007, and auction activity, a barometer of market confidence, did well in tandem.

Auction sales hit a record $407.43 million in 2007, the highest in eight years and a shade below the figure achieved in 1999 when the market was recovering from the Asian financial crisis.

The record figure was mostly due to a vibrant residential market in the first half of 2007 where sales were dominated by high-end condominiums and old apartments with en bloc potential. The other sectors which had contributed to this remarkable result were shops/shop houses and development sites.

Owners are increasingly turning to auctions to sell their property. In fact, their numbers have been doubling every year since 2005. Last year, the number of properties put up by owners hit a 10-year high, with 810 properties auctioned with a value of $264.7 million. This compares with $129.54 million for 2006.

The transparency of the auction method is the chief reason for its popularity. This assures sellers that they are getting a good price for their properties. Its popularity extends beyond individual owners to companies that are looking to divest or restructure their property portfolio.

The auction market this year is likely to see a 25 per cent drop in value transacted to $300 million, as we expect fewer high-end homes and old apartments with en bloc potential to be put under the hammer.

However, those sectors that have yet to experience sharp price increases are likely to see more activity this year. One such sector would be commercial properties like shophouses. According to Urban Redevelopment Authority numbers, residential prices climbed 31.2 per cent in 2007, while the retail sector only gained 13.2 per cent.

Spotlight on shophouses

Last year, a total of 527 shops/ shophouse units were put up for sale via auction by both individual owners and companies. A total of $78.1 million worth of such units were sold under the hammer, against just $28.75 million in 2006. That's a jump of 172 per cent!

The sale value of shops/shop houses is expected to moderate to $50 million this year due to the cautious mood in the market.

With the US sub-prime debacle crimping sentiment in the property market this year, particularly the lacklustre residential sector, savvy investors could consider turning their attention to strata titled shops, private shophouses or HDB shops.

Shophouses, like other types of property, are assets that can hedge against inflation, enabling investors to benefit when the capital value appreciates in times of rising prices. Additionally, for owner occupiers, the shop/shophouse acts as a hedge against rental increases. By purchasing a unit, owner occupiers are typically converting their monthly rent to mortgage payments, which could turn out to be much lower.

Auctions are a good avenue to source for shops/shophouses that are affordable, strategically located, limited in supply and have attractive yield or en bloc potential.

Many strata titled shops were successfully transacted at auctions at affordable prices, many of them below $500,000. Such a price range is considered a bargain, particularly when some of them are located in the heart of town or next to future MRT stations.

For instance, two strata titled shops at Excelsior Hotel and Shopping Centre located at Coleman Street, near the City Hall MRT station, were sold for $318,000 and $340,000, respectively. Additionally, several shop units at Grandlink Square, near the future Paya Lebar MRT interchange, were sold at prices ranging from $51,000 to $226,000.

There are also many attractive picks among HDB shophouses put up for sale by mortgagees at auctions and such properties are usually attractively priced. These shophouses consist of shop space on the ground level and living quarters, often a three-room flat, on the upper level. Considering the high cash over valuation done on some HDB flats, HDB shophouses priced between $600,000 and $700,000 are some of the attractive options appearing at auctions. Some successful transactions include HDB shophouses located in Chai Chee and Bedok North Avenue 1, which were sold for $640,000 and $700,000, respectively.

Investors and business owners see shops and shophouses as alternative office space, which is facing a current supply crunch. Shophouse units located near or within the CBD are in high demand and they are usually near MRT stations. For instance, a three-storey shophouse unit with dual frontage at Stanley Street was sold for $4.21 million last year. Similar properties include shophouse units located at Outram Park and South Bridge Road, which were successfully auctioned off at $2.73 million and $2.6 million, respectively.

HDB shops/shophouses located in high pedestrian traffic areas like the town centre, MRT station or bus interchange are in demand and can fetch record prices at auctions. For example, a shop unit at Heartland Mall in Hougang was sold for $8.5 million, while another shophouse at Upper Changi Road, which is situated beside an upcoming mall and near the Bedok bus interchange and MRT, was sold for $7 million at an auction last year.

Similarly, an HDB shop at North Bridge Road was sold for $528,000 last year, while a shop at Crawford Lane located opposite a future hotel at Victoria Street, was sold for $495,000 this year.

Limited supply

There are a limited number of strata titled shop units available in the market as the majority of shopping centres in Singapore are owned by Reits like CapitaMall Trust, Frasers Centrepoint Trust and Macquarie MEAG Prime Reit.

For new developments like the Icon at Tanjong Pagar, the developer would usually hold on to the commercial component for lease instead of selling the individual units.

Conservation shophouses are popular with investors due to their limited supply and architectural characteristics. Last year, a three-storey conservation shophouse located in the Kampong Glam conservation area and near the MRT station was sold for $2 million. Another shophouse at Prinsep Street, opposite the future Singapore Art School, was sold at an auction for $3.78 million.

Attractive yield

One compelling reason why investors are keen on shops/shophouse units is because such properties can generate a yield of 4-6 per cent. The yield attained from such investment exceeds the paltry interest rate of fixed deposits which is currently under 2 per cent.

En bloc potential

Shop/shophouse units that are located within old developments usually attract keen bidding at auctions. Investors would have explored the possibility of such old developments being sold collectively in future. Last year, two shop units in Katong Plaza, which had en bloc potential, were successfully auctioned for $225,000 and $325,000, respectively.

Grace Ng is deputy managing director and auctioneer at Colliers International

Published March 27, 2008

Rising demand for Built-to-Suit space

With CBD office rentals continuing to increase, companies are looking for cheaper alternatives, write CHRIS ARCHIBOLD and TAHLIL KHAN


WHILE demand for central business district (CBD) office space remains very strong, some significant trends have emerged in the way a number of multinational companies view options in terms of location and type of premises for future occupation.

This has come about from Singapore's drive towards a knowledge economy as well as current market dynamics. Historically, the Singapore economy was largely based on trading and labour-intensive manufacturing industries. In the 1990s, there was a significant drive towards the information technology (IT) sector which grew as a result of the dotcom era. During the late 1990s and early 2000s, there was a concerted effort to encourage R&D activity and more recently, the government has been encouraging various sectors. That notably includes positioning Singapore as a regional financial hub.

The growth of the financial services sector in Singapore has had a marked effect on the economy and on the accommodation demanded by global financial players. Many of these large financial houses have now reached a critical mass whereby they are looking to split their operations into both front and back offices.

The Singapore office market bottomed out in the second half of 2004 and saw a rental rise of 23 per cent in 2005 followed by 63 per cent in 2006 and a further 67 per cent in 2007 with fourth quarter Grade A CBD rents at $16 per sq ft a month. This dramatic increase in rents has been fuelled by lack of supply and unprecedented levels of demand from many MNCs, most notably from the financial sector.

The high-tech sector has also seen increases in rents of 12.5 per cent, 11 per cent and 97 per cent in 2005, 2006 and 2007 respectively. While 2007 saw a virtual doubling of high-tech rents, the increases from the bottom of the market till today have been nowhere near as dramatic as the office market which has trebled. We have a scenario today where there is a significant gap between office and high-tech rents.

The gap between average CBD core office rent and rents for high-tech space has widened from 140 per cent in the second half of 2004 to about 200 per cent in the fourth quarter of 2007. This is because of the higher increase in CBD core office rentals as compared to high-tech rents during this period.

With CBD core office rentals continuing to increase, companies began looking for cheaper alternatives. Some major financial institutions have chosen to relocate their backroom operations to high-tech space, thus pushing up high-tech rentals. The strong demand for such space at the tail end of 2007 and beginning of 2008 has resulted in high-tech rentals increasing at a faster rate than CBD core and decentralised area office rentals, narrowing the rental gap between office and high-tech space.

Nevertheless, compared to office rents, high-tech rents are more compelling than ever before from an occupational cost perspective. Given that all MNCs are looking to lower occupational costs, and with a disparity of around $11 - $13 psf per month between core CBD rents and high-tech rents, there is an opportunity to make substantial savings which makes a compelling case for corporate real estate managers (CRE) and chief financial officers (CFOs).

Given the above, we are witnessing unprecedented growth in the demand for high-tech business park space from both traditional occupiers and financial institutions. There are a number of reasons for this recent phenomena, including the following:

# Cost savings,

# Consolidation of operations,

# Critical mass,

# Diversification of locations (business continuity).

The current supply of high-tech space is extremely limited and hence the emerging trend for forward thinking MNCs is to enter into built-to-suit (BTS) projects. This can be either owner-occupied by the MNC or leased from a BTS developer on a long-term basis. It is worth noting that for a BTS project to be financially viable (for both occupiers and the developers) they generally have to be of a certain scale, approximately 100,000 sq ft and above.

The major considerations for MNCs looking at BTS projects in decentralised locations are as follows:

# Good corporate image with modern office-like facade and landscaping,

# Strong supporting amenities such as food courts and ancillary retail,

# Competitive rentals,

# Efficient transportation systems including access to MRT, buses and taxis,

# Greenmark certification as a minimum - many MNCs now have corporate mandates that dictate Corporate Social Responsibility (CSR),

# Ability to create a quality working environment. Our surveys on the workplace environment have demonstrated that a quality working environment increases productivity. Lower rents per sq ft enable MNCs to dedicate more area for staff facilities and welfare. In the main, the areas that are considered by MNCs for BTS projects fall into four preferred locations: Changi Business Park (CBP), Jurong East including International Business Park (IBP), One-north and Science Park.

Market talk indicates there are likely to be other locations which may be designated as high-tech locations such as Paya Lebar. The reason the above locations are favoured is the current availability of quality sites that meet MNCs' requirements. Recently, the 15-year leasehold transitional office sites (such as those in Newton, Mountbatten and Tampines) have provided occupiers with attractive propositions in terms of affordable rents in good locations which will facilitate BTS developments. The BTS trend has been borne out in a number of recent well-publicised acquisitions. In terms of the financial sector, these include acquisitions of substantial back office BTS facilities by DBS, Citibank and Standard Chartered Bank. OCBC is also rumoured to be in discussions on a BTS scheme in Changi Business Park. Recent BTS acquisitions by non-financial services companies include Tolaram Group in IBP and IMC Shipping in Changi Business Park.

There are numerous other corporates that are in discussions for BTS projects that will go live in 2008. Jones Lang LaSalle (JLL) is currently advising a number of large occupiers in various industries on their long-term strategies for Singapore. Table 2 details the industry profile of the occupiers that we are currently advising with regards to the potential acquisition of BTS facilities.

An interesting point to note is that based on JLL's current instructions, the two most active industries looking at BTS schemes are financial institutions and IT companies. A lot of the interest has centred on Changi Business Park as one of the key advantages, besides the availability of greenfield sites, is the direct land allocation process which provides corporates with line of sight in terms of costs and certainty in terms of timing.

Given the current and increasing future importance of CSR, BTS facilities are giving major corporates an opportunity to reduce their environmental impact and impress shareholders with their drive to be good corporate citizens. Almost every recent commitment to a BTS project has incorporated at least the minimum level of greenmark certification. Some of the occupiers are aiming to achieve Gold Plus or even Platinum levels of certification.

Our house view is that Singapore will see a continuing trend of BTS facilities over the next couple of years, with the likely takers of BTS projects being full relocations (including front office operations) for the IT, consumer products and manufacturing industries and back office operations for financial institutions.

This will continue to be driven by current influencing factors, ie, rents and the lack of supply. In the case of financial institutions, this will also be driven by the fact that many now have the critical mass in Singapore required for a split front and back office location.

The impact of these BTS schemes on the office market and high-tech market remains to be seen and is very much dependent on the scale of BTS commitments over the next 12-24 months. Equally, this is also dependent on the percentage of space that is taken up as expansion requirements compared to take-up that is pure relocation from current buildings.

Chris Archibold is regional director, head of markets, Jones Lang LaSalle; and Tahlil Khan is associate director, head of industrial, Jones Lang LaSalle

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Published March 27, 2008

S-Reits alright for long-term gains

Investors with capital to deploy should take advantage of the high yields on offer, and get paid by waiting, says MARK EBBINGHAUS


OVER the past few years one of the greatest drivers behind the positive performances of the region's market was liquidity. Now, following a change in the financial environment, which began around August 2007, the negative market performance that the markets are experiencing is being driven, in part, by illiquidity. As a result there has been an increase in volatility in Asia's equity markets, with the S-Reit market being one of the sub-sectors significantly affected by these changes. And despite the volatility lasting for over seven months, there is still a lack of clarity as to when this is likely to abate.

In the first seven months of 2007 there were net capital inflows in excess of US$20 billion into Asia's equity markets but this abruptly ended towards the end of July, with a significant reversal of market liquidity. Since then we have seen over US$40 billion of net outflows from Asia's markets, after a period of near record equity issuance. As a result, liquidity has been sucked out of the system and markets have become extremely volatile.

We are now in an environment where volatility, as measured by the volatility index (VIX), is at record highs. In addition, risk aversion is also running at high levels, as measured by the emerging markets bond index (EMBI) plus sovereign spread.

From the data, it's clear that the market is firmly in bearish territory, having moved rapidly from the previous years' bullish sentiment. Much of what has occurred has been out of the region's control, being driven instead by global capital markets and the significant re-pricing of risk. However, the knock-on effect has been that those markets perceived as being riskier, including the S-Reit market, have suffered a lot over the past seven months.

Not since the early days in the development of the S-Reit market, which was established in July 2002, have we seen distribution per share (DPS) yield spreads widen to over 350 basis points, which compares to the market's peak in July last year where the spread was closer to 100 basis points. For some individual S-Reits we have seen the spread blow out far wider, with many S-Reits trading at a high single digit/low double digit DPS yield compared to the long bond in the mid two per cent range. That's among the widest spreads in the world.

'Institutional investors are sitting on near-record cash weighting and at some point we will see a tipping point where the global financial malaise washes through the system and investors regain confidence to deploy capital. When this occurs, we are likely to see a run of funds flow into the region and with it a significant rally in the markets.'

The perplexing issue for many is that we have not seen a deterioration in earnings quality of the mainstream S-Reit sector. What we have seen, however, is significant price volatility. It's probably fair to say that the sector is not currently being driven by fundamentals but more by momentum. It's probably also fair to say that momentum was largely what led the sector to all-time highs last year and that the sector probably ran too hard too fast. Today, to some extent, the S-Reit sector is paying the price for the excess in-flow of money in prior periods, combined with more discriminating investor appetite that is looking for value in many places, but wary of the illiquidity induced volatility.

Looking at the global Reit marketplace it really depends on what your reference point is in assessing value opportunities and justifying activity or inactivity alike. If your benchmark reference point is discount to net asset value (NAV) or absolute earnings yield then the S-Reits do not look particularly cheap. However, if you look at the distribution yield spread to the long bond or notional risk free rate, then the S-Reits look like some of the best value opportunities in the world, particularly when you combine this with base earnings stability and strong earnings growth prospects. When the market was attracting a lot of attention last year, investors were willing to factor in yield, organic growth and, importantly, acquisitive growth into their required rate of total return from an S-Reit investment. S-Reits were required to have an identified asset pipeline, if you didn't you would not get credit for acquisitive growth. For those with a pipeline the market drove down the DPS yield in part due to the high earnings accretive effects of acquisitions. This resulted in an increase in the accretion of the growth.

Today's pipeline is not viewed as positively by investors, mainly because it's all about funding and if you have a pipeline the first thing an investor will ask is how you are going to fund your acquisitions. So, to some extent, S-Reit investors' total return expectations have not changed significantly in the last year, but today the requirement is to deliver it through yield and organic growth only, excluding acquisitive growth. As such, the yield has had to effectively compensate for this, which has driven this metric up to near all-time highs, despite the risk-free and debt rates actually moving in the other direction, widening spreads on both counts.

This brings us to debt. Many investors feel - and there is sympathy with this line of thought - that in some instances capital management practices in the sector have been behind the pace in a rapidly changing global credit market environment. We have seen gearing levels gradually rise from the low 20 per cent range to over 30 per cent and we have seen debt providers become a lot more cautious in terms of refinancing and extending debt facilities.

Reit investors have witnessed real estate in the western world, notably the US, UK and Europe, revalued downwards, in some cases significantly, resulting in gearing levels increasing beyond what could be considered prudent and in some situations this has been deadly.

In a market where investors often shoot first and ask questions later capital management has been a major focus and another trigger issue significantly influencing investors' trading activity. In short, illiquidity and capital management have combined to be major influences on the performance of the S-Reit sector, currently being driven - at least in trading activity - by generally non-traditional Reit investors, exacerbating volatility levels.

In the main, the fundamentals of the S-Reit sector are in reasonably good shape. There is very limited earnings risk and there are promising organic earnings growth prospects. The demand and supply metrics in the physical asset market remain generally sound and there are unlikely to be any significant shocks to the system from that quarter. It's generally not so much about earnings but the pricing is being driven by illiquidity and increased global risk premia.

Having said that, there are a number of messages that institutional investors are sending to S-Reits, with the bottom line being: 'If you do not listen to us we will not buy!'

Institutional investors are sitting on near record cash weighting and at some point we will see a tipping point where the global financial malaise washes through the system and investors regain confidence to deploy capital. When this occurs we are likely to see a run of funds flow into the region and with it a significant rally in the markets.

In the meantime, for those with something longer than a monthly investment horizon and wishing to deploy capital, buy S-Reits, take the high yields on offer and effectively get paid to wait for the rally.

At the end of the day, quality investments are likely to yield the right results over the longer term. However, in the case of S-Reits, both asset and management quality are paramount and getting this right from an investor's point of view is critical.

Mark Ebbinghaus is managing director, head of real estate, lodging and leisure, Asia, UBS Investment Banking Department


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Published March 27, 2008

Wait-and-see stand in property plays

The impact of the US economy would play a big part in deciding the course of the property market here this year, says CHUA CHOR HOON


PROPERTY markets in Asia-Pacific were largely insulated from the US sub-prime fallout last year, basking in strong economic growth and sustained demand.

Going into 2008, market conditions appear stable and the region's economies are holding up well. Still, much will depend on how the problems in the United States play out.

With the attraction of lower prices and growth opportunities, investor interest in regional property was high last year. This translated into investments worth US$118 billion for Asia-Pacific. Singapore attracted the highest quantum of investments, followed by Australia.

Singapore's investment sales last year stood at a record $41.5 billion, 68 per cent more than in 2006. In the first nine months alone, sales had already surpassed that of 2006 by 38 per cent. This was due mainly to the robust economy, good property market performance and active collective sales in the first half of 2007. Although there was a 30 per cent quarter-on-quarter decline in investment activity in the fourth quarter of 2007, local factors seemed to hold more sway in investment decisions than the US sub-prime crisis.

For example, in the office sector, prices of prime space in Raffles Place have more than doubled, leading to yield compression. In the residential sector, prices in prime districts have also risen more than 50 per cent. The withdrawal of the deferred payment scheme added to the cautious mood.

Collective sales, which drove the investment market in the first half of 2007, also slowed due to a tightening of regulations which lengthened the process of putting a development up for tender.

Among Asian countries, Singapore's office rental grew the most due to strong demand, mainly from the financial sector, coupled with limited supply. Hong Kong and Shanghai were the next strongest markets. Prime residential rentals in Singapore saw the biggest jumps too, due to high expatriate demand amid a reduction in supply as many developments in the prime districts underwent collective sales. In contrast, prices of luxury units in Kuala Lumpur and Shanghai fell due to oversupply. Retail rentals were stable for most Asian countries, except for Shanghai which saw tremendous growth of almost 120 per cent. Singapore's prime retail rents rose moderately by 6.6 per cent.

2008 outlook

For now, market conditions seem stable and most of the Asia-Pacific economies are holding up well. However, if the sub-prime fallout persists and the US and European Union economies continue to slow, both export-driven economies and tertiary economies will be affected. The GDP growth rates for the Asian countries are forecast to fall slightly, with the exception of Thailand which is likely to see better GDP growth now that the elections are over. In the Asia-Pacific region, China and India are expected to be most immune to the sub-prime crisis as they have strong domestic demand to buffer the fall in export demand.

There is evidence that European and US funds are directing their attention to this region where they see growth opportunities in countries such as China, Vietnam, India, Thailand, Hong Kong and Singapore. With rising affluence and a wealthier middle class, there is strong domestic demand for housing in China, India and Vietnam. Vietnam's official accession to the World Trade Organization (WTO) in 2007 will pave the way for a more open market economy and attract more foreign investments. Thailand's property market has not risen as much as other Asian markets in the last two years due to its political situation and prices are relatively attractive.

Hong Kong and Singapore are still attractive despite higher prices and rentals because of their more developed infrastructure and connectivity. On the other hand, some Asian funds are also looking at Europe and US now that their prices have become more competitive.

On the whole, there is increasing investor interest from Japan, Korea, China and the Middle East. The Japanese are reviewing options to lift restrictions for Japan real estate investment trusts (J-Reits) to invest in overseas real estate. The rise of sovereign wealth funds from Asia and the Middle East will also contribute to the investment market.

The fundamentals supporting the Singapore property market are strong, with low interest rates and many exciting events and economic investments coming on stream. These would bring in more tourists and jobs. However, for the moment, many property investors and developers are adopting a wait-and-see stance. Developers in Singapore are holding back launches and some funds are holding off making investments at least for the first half of 2008, before the extent of the slowdown in the US economy and its impact globally are clearer.

The impact of the US economy would therefore play a big part in deciding the course of the property market this year. Although fundamentals are strong, sentiment plays a big part.

Nevertheless, there is a silver lining to the caution brought about by the sub-prime problem. Many property markets around the world are in bubble territory on the back of strong economic performance and many investors are getting carried away with the notion that prices will keep rising. If the sub-prime woes had happened later, prices and rentals would have continued to rise. And any fall, happening much later in the property cycle, would have been more painful.

Chua Chor Hoon is senior director at DTZ Research, Singapore


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Published March 27, 2008

Vietnam's strong economy underpins property sector

By HENG HUA THONG


VIETNAM'S property market, underpinned by strong economic fundamentals, will remain a bright spot among the regional markets. In 2007, its economy continued to attain one of the highest growth rates in South-east Asia, with GDP growth of 8.48 per cent. This was largely bolstered by foreign direct investments which topped US$20.3 billion in 2007, up from US$9.9 billion in 2006. The top nationalities to invest in the country were Malaysians, Singaporeans, South Koreans, Japanese and Taiwanese. Moving forward, new market players are likely to come from Russia, India and the Middle East.

Private real estate capital from regional and global investors has been pouring into Asia in recent years and Vietnam, which is considered a strong emerging market, will be on the radar screens of many regional investment funds. With the slowing US economy, developing countries have become the next best target for funds and investment houses to spread risk and diversify their portfolios.

There are still rich opportunities for investment and growth, especially with Vietnam's entry into the World Trade Organisation and the subsequent deregulation process.

Offices

The office sector saw strong demand, with barely any vacancies as space is quickly snapped up by tenants. There is a long waiting list for prime office space and vacancy rates currently average less than 2-5 per cent across the major areas of Ho Chi Minh City and Hanoi. Average rentals have surged by over 25 per cent and 33 per cent year-on-year, to stand at US$50 and US$55 per sq metre per month for Grade A buildings in Ho Chi Minh City and Hanoi, respectively. This is clearly a landlord's market. The tight supply situation is likely to ease with the completion of new prime office buildings. But due to construction lag, it is likely that tight supply will persist at least until new supply comes on stream in late 2009 and 2010.

Retail

The retail sector has also been active and will be interesting to watch, particularly with the deregulation of the local majority partnership rule. The total space available in the market is about 113,500 sq m. It is expected that the retail space available will double to 250,000 sq m by 2009. In both Ho Chi Minh and Hanoi, occupancy levels are extremely tight at 98 per cent and 95 per cent, respectively. The lack of prime retail space has caused the widening gap between average and prime retail space which stands at US$50-US$80 psm per month and US$120-US$180 psm per month in Ho Chi Minh City, respectively and US$25-US$30 psm per month and US$50-US$80 psm per month in Hanoi, respectively.

Now is an opportune time for local retailers to expand, as competition is still restricted with regulations in place. This is set to change with deregulation slated to take effect on Jan 1, 2009 when wholly-owned foreign subsidiaries will be allowed to operate in the country. This will no doubt herald the entry of new foreign retailers. There will be expansion at all levels of retailing from luxury brands to food and beverage as well as supermarket operators to big box retailers. Ho Chi Minh City's retail sector alone is forecast to be in the region of US$16.5 billion by 2010.

Residential

There is active construction activity in the Vietnam residential market. About 100 projects are under construction or are in the planning stages and a large number of these are expected to come onstream over the next three to four years. A significant number of these new residential projects are being undertaken by foreign developers, particularly from Indonesia, Malaysia, Singapore and South Korea. Some of these big names include Kumho Asiana and Daewon from Korea, Keppel Land, CapitaLand and GuocoLand from Singapore and Ciputra from Indonesia. Prices of high-end residential properties in Ho Chi Minh City and Hanoi have escalated by over 30 per cent year on year to around US$3,000 to US$5,000 psm and US$2,000 to US$3,000 psm in each of the cities, respectively.

Meanwhile, the under-supply situation and increasing influx of business travellers and expatriates have pushed the average occupancy of prime residential properties to about 90 per cent. This trend is expected to persist till new supply comes onstream.

Industrial and logistics

An improving legal environment, particularly with the adoption of investor-friendly policies such as the recent extension of land leases from the previous 50 years to the current 70 years, places Vietnam in one of the top positions for consideration by investors looking for long-term investment opportunities in this region.

On top of a more accommodating legal environment, the development of infrastructure will pave the way for a well-developed industrial and logistics sector which has been one of the star performers in terms of FDI injections.

Currently, approved FDI projects account for nearly 50 per cent of industrial investments, reflecting possible increases in demand for industrial space in Vietnam. Although not as sophisticated as other regional industrial markets, the rapidly improving Vietnamese industrial sector, backed by a young, well-educated population, is set to challenge its regional rivals when manufacturing firms seek suitable production bases.

In the key northern and southern economic zones, there are currently just over 20,000 ha of industrial land available. The current rental for 30-year leasehold industrial land stands at around US$35-US$80 psm while occupancy rates at most industrial parks range from 70-90 per cent. With most of the industrial parks experiencing high occupancy and rapid leasing activity, the government hopes to develop additional industrial space to reach some 70,000 ha by 2015.

Investment Quality grade investment properties available for transaction are lacking as reflected by limited en-bloc investment deals over the past few years. In the near term, it is likely that investors will look to other investment modes which work hand-in-hand with their investment and portfolio strategies such as development and joint-venture partnerships with strong local entities. With the lack of properties available for investment, investors are having to take on more risks by going into development rather than putting equity into completed or partially completed projects.

Hospitality-tourism The hospitality-tourism market is another interesting sector and can be lucrative for a developing country. Demand in this sector has largely been driven by business travel as well as increasing domestic and international tourists. Today, hotels in both Ho Chi Minh City and Hanoi achieve average occupancies of 80 per cent. However, during peak times these can often hit 100 per cent which in turn drives room rates to as high as US$300-US$500 per night from an average of US$100-US$220 per night.

There is still limited supply of quality hotels in the country. Vietnam still offers much beach front and resort development potential. Locations expected to receive attention in the next few years include Phu Quoc and Ha Long Bay and the smaller untouched provincial beach towns.

Vietnam's sound economic fundamentals will continue to attract more capital.Its advantage compared to regional markets - particularly closest neighbour Thailand - is its political stability and a strong economic outlook.

Heng Hua Thong is executive director, DTZ Debenham Tie Leung (SEA) Pte Ltd

Published March 27, 2008

KL office sector continues to shine

Interest in Malaysian real estate assets is high given their relatively attractive pricing. PAULINE NG reports


WITH Kuala Lumpur office rentals still hovering at 1995 prices, it's little wonder that the Malaysian capital remains one of the cheapest places in Asia to base an office.

It costs employers just US$3,120 annually to establish a workstation per employee, according to a DTZ survey on global costs. That's five times less than in Singapore where it costs US$16,220, and nearly nine times less in Hong Kong where US$27,540 is needed.

While inflation has taken its toll on just about everything else, there has hardly been any change in Kuala Lumpur's prime rental values for more than a decade.

In 1995, new office space amounted to 2.7 million square feet. Given that it was the go-go years of the 1990s, the take-up rate was strong at 2.58 million sq ft. Data compiled by real estate consultants Williams Talhar & Wong (WTW) shows almost full occupancy as the vacancy rate then was a mere 2.38 per cent. The average rent was RM5.60 (S$2.45) per sq ft.

The strong economy prompted a heady rush of development and in 1997 an additional six million sq ft of office space was added. A total of 13 office buildings were completed that year, including Kuala Lumpur's iconic twin towers. Because the take-up rate was 2.8 million sq ft, or less than half the supply, the vacancy rate shot up to 12 per cent.

When the Asian financial crisis hit in 1998, rents dropped sharply as many multinational companies shuttered their offices while some local set-ups scaled down by moving to cheaper shop lots. Rentals in Kuala Lumpur fell to RM4.30 psf, declining the year after to RM3.90 psf.

By 1999, the take-up rate had contracted significantly; consequently, the vacancy rate rose to over 17 per cent, prompting the Kuala Lumpur City Council to impose a building freeze which was only lifted a few years later.

That helped ease oversupply problems and rentals rebounded in 2000. Over the next seven years, rents gradually inched up, breaching RM5 psf in 2007 - with premium buildings fetching as much as RM7.80 psf.

Currently, the Kuala Lumpur Central Area (KLCA) has an estimated 37.24 million sq ft of office space, some 16.48 million sq ft of it in the Golden Triangle.

An additional 3.45 million sq ft of investment grade office space was added last year, with another 3.78 million sq ft to be completed this year, according to statistics compiled by WTW. Over the next three years, Kuala Lumpur can expect another 9.69 million sq ft to come onstream.

WTW managing director Goh Tian Sui does not consider the coming supply as too much - at least in the coming year. The additional supply last year was well absorbed, with the vacancy rate in the KLCA hovering under 11 per cent, and below 8 per cent in the Golden Triangle. With rentals rising and take-up rates still strong, demand continues to be healthy. More liberal policies have also been a boost.

Mr Goh said the commercial sector is becoming increasingly important because of the demand for Real Estate Investment Trusts (Reits), as well as for existing Reits to continue to expand their portfolios.

The growth of Reits continues to have a positive impact on the industry. In a recent poll of CEOs by WTW, 72 per cent said the expansion of Reits was expected to impact the industry this year while 65 per cent said it would impact price movement. Only 21 per cent believe the commercial sector has peaked.

Over the three years from 2005 to 2007, Reits accounted for 35 per cent of the RM6.07 billion in major office transactions. Locals made up 37 per cent and foreigners the remaining 28 per cent. There are now some 13 Reits in Malaysia with a market capitalisation of RM4 billion to RM5 billion.

Last year, foreign buyers made up 44 per cent of total major office transactions valued at RM2.33 billion. That's a far higher percentage than in 2006, when they accounted for 17 per cent of total transactions worth RM2.75 billion.

Interest in Malaysian real estate assets is high given its relative cheapness. The expected strengthening of the ringgit is another pull factor for foreigners.

The two major office transactions so far this year have been foreign. German-based Union Investment Real Estate AG bought en bloc an uncompleted 41-storey office tower in the city from Bandar Raya Development for slightly more than RM439 million. The other was by Kuwait Finance House, one of the most aggressive foreign players in the Kuala Lumpur property market. It agreed to buy half of the yet to be built 45-storey Menara YNH from YNH Property for RM920 million, setting a new benchmark of RM1,230 psf. The deal with Kuwait Finance comes on the heels of aborted talks between YNH and CapitaLand, after the latter baulked at the RM1,000 psf asked for by the Perak-based developer.

'Investors are still actively looking to buy into Malaysian assets,' Mr Goh said, but with so much capital chasing so few assets, yields are expected to dip from about 6 per cent net at present - still decent by most standards. But even at current returns, building owners are holding out for more.

An example is YNH. So confident is its founder and chairman Yu Kuan Chon of the allure of his development - considered prime owing to its location in the Golden Triangle - that he believes he can dispose of the remaining parts of Menara YNH to two other foreign buyers he is in talks with - but for some 20 per cent more.

Demand will continue to be fuelled by booming commodity prices and a strong services sector. 'People have to put their money somewhere,' Mr Goh observed, adding that in the smaller towns, incomes have doubled owing to the windfall from rising commodity prices.

Zerin Properties chief executive Previndran Singhe agrees. Malaysia's economy grew 6.3 per cent last year and he believes new businesses - particularly those in financial services, oil and gas, and oil palm-based firms - will be looking to come in.

Also, Malaysia is one of the few countries in Asia that allows foreigners to acquire freehold land, and its property laws are transparent, he said. 'Moreover, we don't have a peaking problem. Malaysian real estate is more sustainable - it doesn't drop much and increases are more incremental on a year-to-year basis.'

In light of the stunning inroads made by the Opposition coalition at the recent general elections, which handed it control of five out of 13 states including the industrialised states of Selangor and Penang plus the national capital of Kuala Lumpur, Mr Singhe believes more equitable policies 'will drive more investments into the country'.

Published March 27, 2008

London's property market risky investment for now

By NEIL BEHRMANN
IN LONDON


THE London and UK residential property boom is well and truly over. In the past few months prices have begun to slip in what has become a buyer's market.

The slide has been especially evident in north England and the Midlands as a sizeable increase in new apartments on the market have failed to attract new buyers and tenants. In cities such as Manchester and Leeds, estate agents and residents have reported that a sizeable proportion of new buildings, with one and two-bedroom apartments, is empty. Aspirant landlords who were hoping to let the flats have been trying to sell the apartments as the mortgages on some of these properties are in many cases 90 to 100 per cent of the value.

Hometrack, a property information group, has reported that house prices in England and Wales fell for a fifth month in a row in February. Other surveys also report a fall. The only difference in opinion is the extent of decline.

The London property market has also begun to sag in tandem with the stock market slide, the pricking of the private equity and hedge fund bubble and an end of the mergers and acquisitions boom.

Adding to the problem, changes in non-domicile taxation for wealthy foreigners and international employees in London have led to a decline in demand for prime property in popular areas such as Chelsea, Kensington and St Johns Wood. Previously 'non-doms' were not taxed on income and capital gains on assets held outside the UK. Now the latest Budget rules that if a taxpayer wishes to remain 'non-dom' they must pay an annual levy of £30,000 (S$82,750). The levy has also created uncertainty that non-dom levies and taxation may increase in the future. Thus, some of these foreigners have begun to sell houses and apartments.

'The global credit crisis and consequent financial market volatility have taken their toll on prime central London property,' notes estate agent Savills in a report. 'Compared with the third quarter of 2007, values in the final three months of 2007 fell by 2 per cent. This was the first fall in three years.'

Savills estimates that gross average rental yields are only 4 per cent, about 1.5 to 2 per cent below the level of current mortgage rates. Now that capital values are either stagnating or declining, landlords are losing money. If the trend continues as several economists predict, owners of these so-called 'buy to let' properties will be forced to sell, adding to the supply and pressure on prices.

Prospects for the city sector and the wider global economy are currently uncertain, notes Savills. This uncertainty is likely to deplete rental demand from corporate tenants and suppress rental levels going forward. In 2007, half of London's tenants worked in the finance sector and as many as 70 per cent in central London. With the extreme volatility in financial markets, weak investment bank results and possible redundancies, it seems likely that corporate tenant demand will be reduced, adds Savills. On the other hand, rental demand could increase as families delay buying houses and apartments. Overall rental increases are expected to be subdued in 2008.

Mortgage approvals and asking prices are both key indicators of future market conditions. Asking prices have been falling in London and wider UK regions for several months. This illustrates the change in market sentiment and contrasts with heady buying in the first half of 2007, when buyers were recklessly overpaying for properties in what had become a real estate bubble.

The failure and nationalisation of Northern Rock has precipitated much more conservative lending on the part of banks. Mortgage lenders have become more selective about their customers and turnover in the property market has fallen sharply. In December, gross lending declined to its lowest monthly figure since May 2005. The Bank of England says that mortgage approvals fell from 81,000 in November to 73,000 in December, the weakest lending rate since the middle of 1995. Shrinking lending has continued in the first few months of the year.

'The housing market faces its greatest period of uncertainty since the early 1990s,' notes Richard Donnell, director of research at Hometrack. But he doubts whether there will be significant price falls as owners are reluctant to cut prices. Much depends on the levels of employment in the City and the extent of owners' debt burdens. The super rich, who have been purchasing homes of £5 million (S$13.8 million) or more, are virtually unaffected by these trends. But the changes in non-domicile tax may hinder their desire for property in London.

While estate agents and property market businesses and consultants are cautious, they are relatively sanguine compared to City economists who are experiencing the dangerous and broadening credit crunch. Goldman Sachs, ABN Amro and Dresdner Kleinwort are all predicting UK property price declines in 2008 and 2009. This is hardly surprising. London property prices have almost doubled in the past two to three years and are exceedingly expensive for both local and international buyers. According to the Land Registry index of houses and apartments traded, average prices in Kensington and Chelsea are £856,000, City of Westminister (£612,000); Tower Hamlets, near the financial centre of Canary Wharf (£376,000); and favoured areas such as Richmond ( £455,000); Islington (£450,000); Barnet (£355,000); and Camden, including Hampstead for £538,000. But these are averages of properties ranging from small apartments to semi and detached houses. In practice, house prices in Chelsea and Kensington tend to trade above £2.5 million with prices of £2 - 4 million in areas surrounding Hampstead, St Johns Wood, Islington, Richmond and Wimbledon. Two-bedroom purpose built apartments in these areas can fetch between £400,000 and £800,000.

London real estate, at current prices, is thus a risky investment for Asian investors, especially since the British pound is at historically high levels and is vulnerable to a decline. Far better to wait for better value in two to three years' time.


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