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Thread: Singapore Housing Hangs on Thin, Worn Thread: Andy Mukherjee

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    Default Singapore Housing Hangs on Thin, Worn Thread: Andy Mukherjee

    Singapore Housing Hangs on Thin, Worn Thread: Andy Mukherjee

    Commentary by Andy Mukherjee


    July 8 (Bloomberg) -- Singapore's housing market is proving more resilient than analysts expected it to be.

    As many as 3,000 people turned up last weekend to view Livia, a suburban condominium project part-owned by City Developments Ltd., the island's second-biggest property company.

    Not all were there to gawk at the ``affordable green residential oasis.'' A good many had brought their checkbooks. The company released 200 units, and 160 of them were snapped up.

    DBS Vickers Research analyst Adrian Chua, who has a ``buy'' rating on the City Developments stock, termed it a ``strong response.''

    ``If sale numbers continue to be sustained in coming months, it would encourage a re-rating in the property sector,'' Chua wrote in a note to clients yesterday.

    City Developments shares, which have fallen 20 percent this year, rose almost 4 percent yesterday.

    CapitaLand Ltd., the city-state's biggest developer, said yesterday in a presentation on the Web site of Singapore's stock exchange that home prices would gain 5 percent to 10 percent this year.

    It may be too early to bring out the champagne.

    Livia units sold at an average of S$650 ($476) per square foot, with the bulk of the demand coming from those upgrading from public housing. That market is strong because Singapore's economy is at full employment with a seasonally adjusted jobless rate of 2 percent in the first quarter.

    Trouble in Singapore's property market is brewing elsewhere -- in the premium segment, which requires yield-seeking financial investors to support lofty valuations.

    Falling Icons

    After surging 72 percent in the two years through 2007, the price of freehold apartments in the prime districts fell about 5 percent in the second quarter of 2008, according to DTZ Debenham Tie Leung, a property-consulting company.

    Luxury condominiums, many of which were being marketed last year as ``iconic,'' are looking vulnerable.

    Take Goodwood Residence, located at the edge of the financial district. Guocoland Ltd.'s plan to sell a big chunk of this upscale apartment complex to a fund managed by Kuwait Finance House KSC's Malaysian unit has flopped.

    According to a July 2 report in the Straits Times newspaper, Kuwait's largest Islamic bank is buying only 36 units in the project, instead of the 97 it planned to purchase in December. The investor is now paying S$2,800 per square foot, or about 13 percent less than the price it agreed on in December.

    Builders and buyers are locked in a battle of nerves. Each side expects the other to blink first.

    Battle of Nerves

    ``Developers are cautious about releasing too many units,'' Chua Yang Liang, head of Southeast Asia research at Jones Lang LaSalle Inc., wrote in a July 1 note. ``Buyers on the other hand aren't willing to participate aggressively as they are anticipating prices to moderate.''

    Government policy has also turned against the kind of speculation that drove Singapore home prices to their highest in 11 years in 2007.

    Last October, the authorities put an end to the Deferred Payment Scheme, which allowed speculators to purchase more than one apartment under construction by paying 15 percent to 25 percent of the price upfront; their mortgage payments would begin much later, when the units were ready.

    Many of these speculators may not be able to obtain bank financing for their completed properties and may have to sell their apartments at below-market prices, Barclays Capital regional economist Wai Ho Leong said in a report in May.

    Inflation

    The other reason investors may not want to hold on to their apartments is because inflation is making a big hole in real returns from lease rentals.

    The average net rental yield on Singapore's main island is 2.3 percent, according to a report this month by Colliers International. The annual inflation rate in May was 7.5 percent.

    Not only are rental yields low, they may falter for existing homeowners even more if the influx of foreign workers, who account for much of the city-state's private housing demand, slows.

    ``Companies are increasingly cautious in hiring expatriates and are less generous with housing allowances,'' DTZ says.

    Some analysts are betting that property demand will remain firm as Singapore opens the first of its two casinos next year, creating thousands of jobs. Although that may be true for suburban condominiums, I just can't envision blackjack dealers moving into swanky Orchard Road apartments that are being constructed with bankers in mind.

    Wealth Hub

    It may be more reasonable to expect that as Singapore continues to attract the money of wealthy people from across Asia, the Middle East and Russia, the headcount in the local financial industry -- an important determinant of housing demand -- may hold up. Besides, borrowing costs in Singapore are modest.

    The 12-month interbank interest rate, which is the benchmark for mortgages at some of the city's banks, is currently 1.81 percent. That's low enough to spur many renters to turn buyers, especially if developers can get their pricing right.

    And they must. CapitaLand and three of its real-estate investment trusts have raised a combined S$5 billion so far this year. The company's cost of finance shot up 45 percent in the first quarter from a year earlier because of subprime-related jitters in the credit market.

    Raising money to carry over inventory is going to be quite tough, especially for smaller developers.

    Unless Singapore builders meet housing demand at reasonable prices, the slim thread holding property values would snap. And then the decline would be as spectacular as the increase.

    (Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

    To contact the writer of this column: Andy Mukherjee in Singapore at [email protected]

    Last Updated: July 7, 2008 14:01 EDT

  2. #2
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    Quote Originally Posted by ahlahdin
    Singapore Housing Hangs on Thin, Worn Thread: Andy Mukherjee

    Commentary by Andy Mukherjee


    July 8 (Bloomberg) -- Singapore's housing market is proving more resilient than analysts expected it to be.

    ...........................................

    Inflation

    The other reason investors may not want to hold on to their apartments is because inflation is making a big hole in real returns from lease rentals.

    The average net rental yield on Singapore's main island is 2.3 percent, according to a report this month by Colliers International. The annual inflation rate in May was 7.5 percent.

    Not only are rental yields low, they may falter for existing homeowners even more if the influx of foreign workers, who account for much of the city-state's private housing demand, slows.

    .........................................
    Just a comment... real rental yield may be low or negative due to high inflation, but the same phenomenon also means negative real interest rates for the loans taken to finance the properties in the first place. I am sure the analyst must have appreciated this fact as well, just that he chose not to mention it right here.

    Too many reports speculating on the future direction of the property market, everyone can choose their own version(s) to believe in. Ultimately it depends on how the market (buyers/sellers/developers) acts, and not the stories/reports by ANALysts. I just do not like it when they selectively report only the statistics that support their own personal stands, while leaving out the rest.

    Personally I am undecided yet, but I am guessing that the outcome would be somewhere between the extremes put forward by the different parties/stakeholders.

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    Quote Originally Posted by BV
    Just a comment... real rental yield may be low or negative due to high inflation, but the same phenomenon also means negative real interest rates for the loans taken to finance the properties in the first place. I am sure the analyst must have appreciated this fact as well, just that he chose not to mention it right here.

    Too many reports speculating on the future direction of the property market, everyone can choose their own version(s) to believe in. Ultimately it depends on how the market (buyers/sellers/developers) acts, and not the stories/reports by ANALysts. I just do not like it when they selectively report only the statistics that support their own personal stands, while leaving out the rest.

    Personally I am undecided yet, but I am guessing that the outcome would be somewhere between the extremes put forward by the different parties/stakeholders.
    It's not difficult to work the numbers. Supposing the property costs $1M, so the average rental yield is $23k per year. If the loan is 80% of $1M at interest of 2% pa, that reduces the yield to $7k on the $200k downpayment without mentioning legal costs. This works out to 3.5% rental yield, but you still have to repay the loan. Without capital appreciation, this is losing out to inflation.

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    Quote Originally Posted by BuffetForLunch
    It's not difficult to work the numbers. Supposing the property costs $1M, so the average rental yield is $23k per year. If the loan is 80% of $1M at interest of 2% pa, that reduces the yield to $7k on the $200k downpayment without mentioning legal costs. This works out to 3.5% rental yield, but you still have to repay the loan. Without capital appreciation, this is losing out to inflation.
    Oh, I don't dispute that at all. What I mean is that even if I am not spending the money on property but putting it into fixed income instruments or even holding cash, I will still be losing out to inflation nonetheless.

    In a simplified argument, as long as yield is above loan interest rates, I would be better off buying and renting out a property, ignoring other legal and transactional costs. Personally I am indifferent to either avenue (being a landlord or holding cash) based on this argument as the differences are not significant. (Anyway, rental yield would easily be around 3.5% - 4.5% now, except for really prime properties that were purchased at sky high prices, and loan interest rates will not stay this low for very long)

    What would matter is what I foresee the interest rates and rental yields to be in the future. More importantly, the capital appreciation/depreciation potential (in the near/mid/long terms depending on your investment horizon) of the property is crucial, as these changes in capital values can far exceed your gains or losses in the short term from the rental yields and/or loan interest.

    I am not supporting either side right now, just wanted to highlight the bias that some analysts have in their 'analysis'. Ultimately, just rely on your own judgement to make your own financial decisions.

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