Published August 9, 2008

Challenges for property sector

New engines drive Singapore's property market but pitfalls remain, reports KALPANA RASHIWALA

THE Singapore property market has weathered the storm from the US sub-prime crisis, soaring oil prices and overall inflation, pretty well.

Runaway increases in property values in the high-end residential and prime office sectors seen in the past couple of years, for instance, have started to ease. But they have not dived, and panic has not set in, at least not so far.

Knight Frank managing director Tan Tiong Cheng says: 'To some, this is a welcome breather from the breakneck pace of increases recorded in the last 24 months.'

CB Richard Ellis chairman (Asia) Willy Shee too observes: 'The overall market has displayed some resilience. In the office market, there's still demand for office space with occupiers still looking to pre-commit office space in yet-to-be completed buildings.' While the private housing market is not as buoyant as last year, transaction volumes have picked up in second quarter this year with encouraging sales from mid and mass-market projects, he adds.

Market watchers feel that in the short-term, property values could head south, driven by near-term fundamentals. However, the mid-term prospects for Singapore's real estate sector are generally considered sound. As a major developer puts it: 'Population growth, global and regional wealth creation, sustained government investment in infrastructure, the perennial sharpening of Singapore's competitive edge, limited land, security and political stability, internationalisation of the property market - all these must be good for Singapore real estate prices in the long run.'

The Remaking of Singapore has helped create sound fundamentals for the local property market. The government's decision to break from the past and go ahead with developing two integrated resorts with casinos as well as its efforts to position Singapore as a leading contender in the race among global cities to attract wealth and talent have boosted the island's prominence on the radars of international property investors.

New engines for growing the Singapore economy have also been put in place and this to some extent may also help shield the island and its property market from the full impact of what's happening in the US.

Investments and job creation from the IRs, Sports Hub, expansion plans for rail network and other infrastructure projects, Singapore's policy of welcoming foreign talent to its shores, and the strategy of positioning Singapore as a hub for various industries - financial industry/wealth management, tourism, education and healthcare - are expected to provide momentum for Singapore's economy.

'The IRs, F1, Sports Hub and Youth Olympic Games surprised observers who think that Singapore is only a clean and safe place to do business but never a place where you can let your hair down,' observes Knight Frank's Mr Tan.

'What do these initiatives mean to savvy investors? They mean that we are perceptive in discerning changes in the global world, have the will to question old assumptions and have the courage to move a population to accept initiatives that can be potentially divisive.

'That the government and its people can move together to tackle challenges ahead demonstrates the inherent strength of the country as a global city to do business and a place to live,' Mr Tan added.

DTZ executive director Ong Choon Fah said: 'Wealth management industry is still a very big thing here. Wealth from high networths in Asia - China, India - is flowing into Singapore. With IRs and the F1 race, Singapore is being marketed as a playground for the rich and famous. Family offices and philanthropy are fast being added to the suite of services offered by private bankers.

'The removal of estate duty has been a major boost to Singapore's ambitions to be a wealth management hub.'

New challenges

But the road ahead for the local property market is paved with challenges. Colliers International director of research and advisory Tay Huey Ying argues that the 'mid-term optimism for the Singapore property market is underpinned by the IRs and the Marina Bay Financial Centre (MBFC). 'If these projects do not deliver, confidence may be shaken,' she warns.

To be considered successful, the IRs will have to be able to continuously attract visitors year after year and not fizzle out after the initial novelty wears off. Similarly, the MBFC can be truly considered an achievement for Singapore's aspirations to be a leading financial centre if the movement of tenants into MBFC does not create a vacuum in existing office buildings that can't be filled within a short span of time; otherwise, it may just show there's not that much depth in Singapore's financial industry, Ms Tay reckons.

In the residential property market, a short-term challenge that could materialise is if substantial numbers of home buyers who've purchased private homes on deferred payment schemes in the past few years begin to panic and dump their properties as the projects' completion dates loom closer. That would be the time when these buyers have to pay the bulk of the purchase price to developers, and if some of them think they may have difficulty finding home loans, especially if they are still holding on to several such units, they may panic and dump their properties at lower than current market prices.

Such a scenario would be a house hunter's dream, but could destroy wealth for the majority of Singaporeans who already own their own homes.

'Instead of subjecting themselves to panic selling, these property owners may wish to bear in mind Singapore's mid-term prospects and should try to hold their properties by securing a financing package or a tenancy for their property,' Ms Tay suggests.

Escalating construction costs

Escalating construction costs are another big concern going ahead. 'The high construction costs could translate into high purchase cost for buyers and investors of private property assets as well as contribute to inflationary pressure for end-users of public infrastructure,' says CBRE's Mr Shee.

'The high construction costs would also eat into developers' profit margins and hence reduce the incentive for developers to undertake new projects or acquire sites from the Government Land Sales programme,' he adds.

On the macro political front, Knight Frank's Mr Tan says an immediate challenge is the confluence of unstable political situations in three neighbouring countries - Malaysia, Thailand and Indonesia (which will have a election next year). 'Put simply, we're a good property in a bad neighbourhood,' he said.

CBRE predicts that office rentals are approaching a peak. The average monthly Grade A rental value rose to $18.80 per square foot in Q2 this year, an increase of 43.5 per cent from the same period last year. With completions of major office projects from 2010, including MBFC Phase 1 and 50 Collyer Quay, the property consultancy group predicts the average Grade A office rental will ease to $12-15 psf post-2010.

On a more optimistic note, it highlights that with all the new office developments coming up, a significant amount of future office stock will constitute world-class modern Grade A buildings. 'Around 64 per cent of the office completions in the next five years will be Grade A quality,' Mr Shee says.

For the private residential sector, CBRE has said a correction of residential prices to the tune of 5 to 10 per cent in the second half of this year is likely as the global economy suffers the continued onslaught from the sub-prime mortgage meltdown and inflation.

Riding the turbulence

Colliers' Ms Tay highlights the importance of a sound government land supply policy - 'not just short-term reactions' - will help the local property market to ride out the challenges ahead.

'For individual home buyers and sellers, they should arm themselves with the right information instead of succumbing to herd instinct or following their emotions,' she adds.

Knight Frank's Mr Tan says: 'Demand for real estate is dependent on economic prospects. With strong economic fundamentals, I have no doubt that interest in real estate in Singapore by local and foreign institutional investors will return once the current market turmoil blows over.

In similar vein, CBRE's Mr Shee says: 'Fundamentally, the long-term development of the office, retail, residential and hospitality sectors will not change in spite of the present global financial worries.

'It was all these government initiatives that attracted a fresh wave of foreign investment into Singapore in the last 24 months, and it will be these developmental drivers that will continue to attract investment from various parts of the world to Singapore.'