Is optimism in the Singapore property market justified?

SEP 15, 2017


ON the morning of July 11, 15 developers converged on the 10th storey of the URA Centre to submit bids for a government land site at Woodleigh Lane.

By 8pm, the results were out: a consortium led by Chip Eng Seng, a mid-sized developer, won with the highest bid of S$701 million. The price jolted the market; it was almost 40 per cent above the price per square foot paid for a nearby site at Raintree Gardens just 10 months ago. But the winner was not alone. Real estate heavyweights - CapitaLand, City Developments and Keppel Land - all submitted bids less than 3 per cent shy of its offer.

Since local authorities revised seller stamp duties in March this year, green shoots have vigorously sprouted in Singapore's property market. In addition to fast-rising land bids and en-bloc activity, sales volumes are also up and share prices of developers have rallied.

Yet, doubts about the optimism remain. Officially, Singapore property prices are still in a bear market. The URA housing price index declined 0.1 per cent in the second quarter of 2017. Weak rents, economic uncertainties and rising interest rates also weigh on the prospects of a property recovery.

Is the optimism in the Singapore property market justified?

We believe it is, for three reasons.

First, residential rents will begin to recover next year. From 2014 to 2017, the increase in home completions exceeded the needs of Singapore's population growth, driving vacancy rates up by three percentage points from 5 per cent to 8 per cent. As a result, rents fell 13 per cent over the period.

This situation will reverse in 2018. Due to fewer launches in recent years, the annual rate of housing completions will decline by around 40 per cent over 2018 to 2020. This falls below the needs of population growth based on the government's projections, which will reduce vacancy rates and drive a rebound in rents.


Second, two major fears of real estate bears today - the risk of a recession and rising rates - are overwrought. With the global economy charting a reflationary path, the risk of a recession in Singapore over the near- to medium- term is low.

The Chinese government has shown considerable success in engineering a soft landing for its economy. In the major developed economies - the United States, EU and Japan - signs of higher growth are being sustained by fundamental improvements in the labour market and strengthening household demand.

Rate hikes act as a critical countercheck to potential overheating, but central banks are understandably cautious about removing the punch bowl too early given the painstaking efforts taken to nurse the burgeoning recovery.

With this in mind, the pace of rate hikes from the US Federal Reserve is expected to be measured, rising slowly from 1.25 per cent currently to 3 per cent in 2019. From historical analysis, the Singapore property market will take this in its stride.

Third, a rising trend of collective sales reinforces fundamentals. While the market usually debates whether aggressive purchases by developers are backed by fundamentals, the fact is that en-blocs themselves exert powerful trickle-down effects on demand and supply.

After an en-bloc transaction, the process to vacate the original estate and complete the redevelopment typically takes four to seven years. Over this period, the physical stock of homes available for occupancy in Singapore is reduced. In the initial years of a rising collective sales cycle, more homes are taken out of the physical stock by en-bloc transactions than those added back in, exerting downward pressure on vacancy rates and boosting residential rents.

At the same time, those who sold their homes to developers through an en-bloc often enter the property market rapidly to re-establish their exposure, flush with new cash and borrowing headroom. Many also help fund home purchases for younger family members who may be subject to less stamp duties. This adds buyers into the market and increases demand.


In addition, developers typically launch new units for sale after one to two years.

While there are usually more units in the redevelopment than in the original estate, they will be sold at significantly higher prices per square foot, which tend to drive up property valuations in the area. Looking back at history, it is no surprise that en-blocs had similarly risen sharply at the turning points of the last two property cycles in 2004-2005 and 2009-2010.

In 2017 to date, total collective sales in Singapore have hit S$3.1 billion, already far surpassing the S$1 billion in 2016.

The writer is a vice-president and senior investment analyst at OCBC Investment Research. He was ranked the top earnings estimator in Asia for the real estate sector in the 2017 Thomson Reuters Analyst Awards.