Nascent property recovery has legs, but en bloc fever likely to abate

Analysts' forecasts for increase in private home prices are from 3% to 15%

Mon, Jan 01, 2018

Lynette Khoo

AT long last, Singapore's property market is picking up after enduring more than three years of price declines, and its recovery looks set to continue this year, market watchers say.

But while this nascent recovery has legs to run, it is not sprinting yet. And this is why the risk of a premature end to this recovery remains low for now.

Still, analysts' price forecasts this year are broad-ranging - from 3 per cent to as high as 15 per cent. Most are expecting resales to drive the total number of transactions higher in 2018 than 2017. New home sales, however, are seen to maintain 2017's level as developers pace out launches to capture future price upside.

JLL national director of research and consultancy Ong Teck Hui noted that with the cooling measures still in place, "it is like an iron ball shackled to the foot of the prisoner that will prevent him from running too fast".

"Unlike previous recoveries, the measures act as a retardant to the momentum of the current recovery. So, we are unlikely to see prices spiking as in previous recoveries, such as the 38.2 per cent surge in prices between mid-2009 and mid-2010."

A premature end to the market recovery may happen if the government intervenes to prevent prices from spiking up or if there are external or economic shocks. But market watchers believe this is unlikely in 2018.

Savills Singapore senior director Alan Cheong pointed out that historically, the length of Singapore's private property price uptrend averages 17.6 quarters. "If this forms the base case for this new cycle, we still have a few years to go before the price upswing is exhausted," he said.

"If we see a price increase of about 5 per cent, the upcycle will have some legs past 2020. But if prices spike up 17 per cent a year, the upcycle will probably taper off by 2019."

Analysts note that the supply of some 20,000 new units for sale in 2018 to 2019 from government land sales (GLS) and en-bloc sites should also prevent prices from rising too steeply.

Though there has been perceived over-exuberance in the en bloc market stemming from developers' bullish land bids, some market watchers observe that there are initial signs that the collective sales fever may be starting to ease.

Only three of six collective sale sites whose public tenders closed last month were sold. According to laws governing collective sales, the owners may enter into a private treaty contract with a buyer within 10 weeks from the close of the public tender.

In the case of Pearlbank Apartments, marketing agent Colliers International cited concerns by interested bidders, including uncertainties arising from the pre-application feasibility study (PAFS) on traffic impact, which will affect the number of units that can be built on the site and the approach to pricing land. There was also apprehension over whether the incoming developer would be compelled to conserve the iconic development in the future.

Mr Ong cautioned that property owners' price expectations could increase at the same time that developers, whose demand for land diminishes with each site sold, become more measured in their offers.

"The price gap between en bloc sellers and buyers would impede the closing of deals and we could see this happening in H1 2018," he said.

Other consultants agree that there could be more unsuccessful collective sales down the road. Savills' Mr Cheong said there may now be more sites available for collective sales than developers who have not reached their land-banking quota.

"The number of potential collective or en bloc sales sites totals over 120 islandwide," he said. "We believe that the smaller sites may still be transacted and once these get taken up, the currently over-revving collective sales market may return to an idling state. Therefore, just as the collective sales market came to life out of the blue, it may return to sleep mode just as suddenly."

Knight Frank head of consultancy and research Alice Tan reckoned that developers' hunger for land could persist for another six to nine months "before the market achieves some equilibrium in supply and demand" as more project launches, mainly from collective sale sites, come to the offing.

"However, some risks that could quell demand for higher priced land and properties may lurk on the horizon. Higher interest rates, uneven economic performance, muted population expansion and lower-than-expected income growth are issues that may put property price escalations in check."

The soft-landing of property prices through a series of cooling measures saw private home prices fall by 11.6 per cent over 15 quarters after the third quarter of 2013, based on the official price index. In Q3 2017, prices broke the falling streak with a 0.7 per cent uptick. Rents of private homes slipped 12.5 per cent over 15 straight quarters before staying unchanged in Q3 2017.

Private residential transactions also saw a significant comeback last year. Pent-up demand for residential properties pushed total private home transactions to about 23,113 in the 11 months of 2017, compared to 16,378 for the whole of 2016. Developers racked up 10,247 private home sales, excluding executive condominiums, in the first 11 months of 2017, surpassing the 7,972 units sold for the whole of 2016 and a yearly average of 7,576 units from 2014 to 2016.

"Homebuyers feel that they are purchasing close to the trough of the market and remain optimistic of long-term capital appreciation," Mr Ong said. "As the Singapore residential market is not yield-driven, many investors may not be particularly perturbed by the current weak rentals, which they expect to stabilise or turn around with economic recovery."

While the softening rentals and high vacancies have been cause for concern, rentals are showing signs of bottoming out and analysts are expecting vacancies to improve this year as the number of new completions ease further.

Lee Nai Jia, who heads research at Edmund Tie & Company, said he expects rents to continue moderating but at a slower rate of around 1 to 3 per cent. Vacancy rate is likely to decline to about 5 to 6 per cent this year.

Dr Lee also said he expects the current en bloc fever to have a "multiplier effect" on the economy. Besides potential re-investment into real estate by owners who have sold their homes in collective sales, the property market uptrend will also help the construction sector to recover while the increase in mortgages is positive for the banking sector.

Maybank Kim Eng property analyst Derrick Heng said in a recent note that while the government's concerns over the strong supply of upcoming residential units from redevelopment projects are valid, he called this a "medium-term issue" as they will add to housing stock only in 2020-2021.

"Furthermore, even after accounting for their completion in 2020-2021, average net supply is still not excessive at slightly over 11,000 units per year.

"This is below the five-year average absorption rate of 13,200 units and also far below the 19,500 units that were added annually between 2014 and 2016."