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Thread: Fairly sound fundamentals for GCBs

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    Default Fairly sound fundamentals for GCBs,00.html?

    Published September 26, 2008


    Fairly sound fundamentals for GCBs

    Prices of Good Class Bungalows are expected to hold steady at least for the rest of the year. STEVEN MING and AVIN SEOW explain why

    GOOD Class Bungalows (GCBs), as defined by the Urban Redevelopment Authority (URA), are bungalows that sit on at least 1,400 sq m of land and are located within one of URA's 39 designated GCB areas. The more popular GCB addresses are located within Nassim, Cluny, Bishopsgate and White House Park estates. They are widely viewed as a barometer of the overall health of the economy.

    These bungalows are homes to the upper echelon of Singapore society - successful businessmen, high flying professionals and captains of industries. This housing segment does not have a high concentration of foreign buyers as they are generally not allowed to acquire any landed properties, except on Sentosa Cove.

    The recent slew of bad economic news on global economic conditions has slowed down the sentiment-sensitive property market, as seen by the lower sales volume and fewer development launches. Together with the rest of the market, the GCB segment is feeling the impact of an economic slowdown, although from a price point, it has been relatively unscathed to-date.

    The first eight months of 2008 saw a total of just 31 GCBs worth some $550 million changing hands, down from the 84 transactions worth $1.1 billion in the same period last year. The first six months accounted for 27 of the 31 transactions in the review period, signalling a significant slowdown in activity after June. Transaction volume has declined to its lowest since 1998.

    On the other hand, the transacted value of each GCB this year has averaged around $16 million, with eight GCBs transacted remarkably above the $20 million quantum.

    Consequently, the average price of a GCB stands at around $836 per sq ft (psf) as at end-August 2008, more than twice the average price of $365 psf transacted in 2005. The highest price paid this year in terms of psf is for a property located at Leedon Road, sold in May for $1,303 psf. It is observed that for GCBs transacted this year at over $1,000 psf on land area, most were sold with a new or relatively new bungalow, or a bungalow that had undergone some recent refurbishment and hence been able to command the price premium.

    In spite of the much hyped pessimism overhanging the property market, the underlying fundamentals of the GCBs remain fairly sound.

    Firstly, the inherent scarcity of land in Singapore should continue to lend support to the landed housing segment, especially GCBs, given there are only about 2,400 of such homes in Singapore. It is little wonder then that these prestigious homes are much sought after and justifiably more expensive over time.

    We also note that there is growing accumulated wealth in Singapore, as backed by a recent World Wealth 2007 Report by Merrill Lynch and Capgemini. The report said that the number of millionaires in Singapore with net assets of at least US$1 million has grown by 15.3 per cent per annum to 77,000 (or 1.7 per cent of the population) in tandem with recent strong economic performance of the Asian region. The new and more accumulated wealth among Singaporeans creates new demand for the limited number of GCBs, which will then lend support to the current prices.

    Government initiatives like the integrated resorts, Formula One (F1) race, the revamp of the Orchard Road shopping belt and the growing stature of Singapore as a financial hub should also lend more support to the property market in the longer term. The economy will receive its much-needed jab in the arm once these initiatives are up and running successfully.

    The integrated resorts at Marina Bay and Sentosa, scheduled to be ready by 2009 and 2010 respectively, are expected to create an additional 75,000 jobs island-wide and generate millions of revenue for the government - and hence boost the economy. The same spillover effects are expected from the F1 and other government initiatives.

    GCBs tend to be bought and kept as a long term investment. A GCB owner's average hold of the property is for well over 10 years. Drawing from past performance, GCBs have proven to be a very stable and secure investment.

    For example, a GCB located along Second Avenue, which was transacted at a price of $4 million, or $142 psf, in 1990, was sold again in 2003 at around $8 million, or $280 psf, according to the URA's lodged caveats. Similarly, a unit located along Mount Echo Park bought for $9.3 million, or $501 psf, in 1996 was sold at $13.3 million, or $714 psf, this year.

    The high construction cost is another factor shoring up the current GCB prices. According to Rider Levett Bucknall's May 2008 report, construction cost for landed detached homes has risen by more than 20 per cent year-on-year to about $311-$525 psf of construction floor area. Therefore, given today's higher replacement cost as a result of the higher construction cost, buyers would prefer GCBs that are reasonably well-maintained and priced with minimal refurbishment required.


    The extent of the impact of the US crisis on Singapore property market is as good as anyone's guess. However, if history were anything to go by, where a major crisis like the 1997 Asian Crisis led to a plunge in property prices, GCB prices should also come under significant downward pressures once the US credit crisis fully blows out.

    The 1997 Asian Crisis then saw average prices of GCBs reaching a high of $637 psf before sliding by more than 70 per cent to $359 psf in the following year.

    With US recession imminent, it should be no surprise if history replays itself with a free fall in asset prices especially since given that the current US sub-prime is widely seen as a crisis with a magnitude stronger than the 1997 Asian Crisis.

    However, there are no strong indications yet to subscribe to such a pessimistic view, especially after taking the above mentioned factors into consideration. Barring a greater-than-expected slowdown in US economy and sudden changes in macroeconomic conditions, GCB prices are expected to hold steady at least for the remainder of the year.

    Steven Ming is director of Savills Prestige Homes; Avin Seow is analyst, research & consultancy, at Savills Singapore

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