Thursday, July 10, 2008


Continued weakness comes amid caution caused by inflation and bleak outlook


RECENT developments in the local property market have sent conflicting signals to investors. Several developers have indicated willingness to delay launches as residential property prices show signs of weakness, while others are pointing to still-strong demand. Meanwhile, market data from the Urban Redevelopment Authority (URA) has indicated that the pace of increase is slowing down. In fact, the second quarter increase is the slowest rate of increase since the third quarter of 2004.

Market analysts have also downgraded their ratings on property stocks in view of the slowing demand, with certain segments more susceptible to further downward price revisions. While the delay in property launches looks negative at first glance, it is actually a good move to regulate the supply of units coming onto the market and should not be viewed wholly as a negative move.

Residential property prices stayed resilient in the first quarter of 2008, with the property price index up 3.8 per cent from a quarter ago, but this eased to a growth of a mere 0.4 per cent quarter-on-quarter in the second quarter, based on the latest URA flash estimate, pointing to likely weakness.

Transaction volumes have been declining since the second quarter of 2007, plunging to a low of 762 transactions in the first quarter of this year. Such a trend points towards an inevitable correction in prices as historically, a price correction would follow about one to five quarters after transaction volume has peaked in a rising property market.

A sharp recovery in transaction volume over the near-term may avert a price correction, but is unlikely to occur in view of present global woes resulting from record high oil prices and high inflationary fears.

First, foreign interest in local properties is waning, as foreign buyers turn cautious over subprime issues and the credit crunch. Secondly, the recent en bloc fever, which fuelled part of the demand for housing by the displacement of en bloc sellers, has slowed in recent months. Lastly, the withdrawal of the deferred payment scheme has taken out the speculative transactions in the property market, as seen from the declining number of subsale transactions.

I would also caution against using property as a hedge against inflation, as there is no conclusive evidence of the correlation between inflation and property prices. Properties are cyclical in nature and are subject to market sentiment. As such, inflationary pressure is unlikely to have any positive impact on property prices, as buyers are likely to exercise greater caution in light of the weakening sentiment in the property market.

The recent release of the sites under the Government Land Sales programme for the second half of this year further confirmed the weakening sentiment in the residential property sector. The number of residential sites under the confirmed list for the second half of this year has been halved, from eight sites released in the first half of this year to four sites planned in the second. Recent bids for government sites had also came in below market expectations, another sign of cautiousness among developers.

Going forward, we expect to seefurther weakness in residential property prices. Sentiment is likely to remain cautious against the backdrop of a weaker economic outlook, tighter credit market and rising inflation. This should deter buyers from spending on big ticket items. With the prevailing cautious market sentiment, and if prices trend lower, smaller developers with comparatively lower holding power are likely to offload their units onto the market to reduce gearings and holding costs.

The high-end segment of the property market is also likely to be at risk to price correction, as this segment has been the driving factor for the run-up in property prices since the beginning of 2006. With foreign investors turning wary, this could result in lower demand. For the mass market, a surge in launches in the first quarter of this year may have caused buyers to be more cautious, but we expect the take-up rate for mass market properties to move up once concern of over-supply eases. In addition, prices for the mass market segment have not moved up as rapidly as those for the high-end segment.

The writer is head of research atOCBC Investment Research.