Singapore high-end properties likely to keep dropping in price

By Sonia Kolesnikov-Jessop

Published: January 15, 2009

SINGAPORE: After two years of double-digit growth, prices for luxury properties in Singapore came crashing down last year and analysts are predicting another sharp drop in the year to come.

In a recent report by the real estate agency CB Richard Ellis estimated that 55 percent of the 2,200 luxury units built in the city-state between 2006 and 2008 remained unsold as of November while, in another review, the Swiss bank UBS pointed out that units in two high-profile developments, Ardmore II and Scotts Square, recently sold at 20 percent less than their launching prices.

Also, there has been talk of the first default on a house in the upscale waterfront development of Sentosa Cove, which, if true, would underscore the financial pressures facing even wealthy investors.

Signs that the local property bubble was bursting started to appear in late 2007, especially in the over-heated high-end market, and last year the number of transactions slowed considerably, with fewer than 4,400 new private homes changing hands, compared with a record 14,811 in 2007.

Official preliminary estimates by the state's Urban Redevelopment Authority point to an overall price decline of 4.3 percent in 2008, a relatively minor correction when compared with the 31.2 percent increase in 2007 - but the fourth-quarter decline alone was 5.7 percent on an annual basis, the largest drop in a decade.

(Singapore's economy technically went into recession in 2008, although it still grew an estimated 1.5 percent on a year-on-year basis.)

Property analysts point out that the market's fall has not been uniform, with the luxury end registering much sharper losses in value - as much as 35 percent in prime districts.

Foo Sze Ming, an analyst at OCBC bank, said he believes that high-end properties are still the most vulnerable part of the market because there are so many unsold units and there are growing fears that buyers may default.

"We are expecting a 15 to 20 percent decline in high-end property prices in 2009," on top of the 2008 drops, he said.

Tay Huey Ying, director of research and consultancy at the Colliers International agency, had a similarly bleak outlook.

"Properties in this segment are likely to be the hardest hit in this downturn, with prices potentially being depressed by an estimated 15 percent to 20 percent for the whole of 2009," she said.

Many property analysts say they are concerned that there was a sword of Damocles hanging over the Singapore property market.

During the Asian financial crisis of 1997, a Deferred Payment Scheme was introduced that allowed buyers to make down payments of 10 to 20 percent and defer the remaining balance until the property was completed, typically two or three years later. Approximately 10,450 homes bought on deferred payments are to be completed this year and in 2010, stoking fears that cash-strapped buyers could start dumping them before the balances are due.

Foo said there might be defaults but that the risks also might be overstated.

"I do not think that default risk is widespread among all buyers," he said. "It is likely that speculators and investors will be the group that is more likely to default and genuine buyers who are buying properties to stay in them are less likely to default, in my opinion."

Some analysts still were putting on a brave face.

"Singapore's midterm economic prospects are fundamentally sound, being well supported by the ongoing economic restructuring works," Tay said.

The city-state does have a lot to offer medium- to long-term investors, given its increasing importance as a major financial center, said Christopher Fossick, managing director for Southeast Asia at the Jones Lang LaSalle agency. As proof, he pointed to the recent report commissioned by Mayor Boris Johnson of London that said the rising status of regional hubs like Singapore and Dubai was threatening London's position as the world's financial capital.

Fossick also noted that Singapore had no capital gains tax on real estate, the property market was highly transparent for foreign investors, and financial gains could be easily repatriated.

"Demand for the residential market is there. It might be standing on the sidelines for now because of the uncertain outlook, but we can see there is very strong demand," Fossick said, pointing out that household debt was relatively low in Singapore and the household savings rate was 45 percent, "miles away from those in the U.S. or U.K." Savings rates are 11 percent in the United States and 14 percent in Britain.

Fossick believed the city-state could soon start to benefit from property investors scaling back in other markets.

"Foreign funds that have played a major role in property developments in the country are looking at the market and telling us they would like to make some investment in the residential property market in 2009 and 2010," he said.

"They are looking at the opportunity of buying land or buying several units from a developer to rent them out and get the immediate yield," he added. "They're also looking to coming in at the development stage with existing developers."