BT Investment Roundtable
Published August 12, 2006

Property sector making steady recovery


THE property market in Singapore has climbed out of its trough reached in early 2004. The recovery in the last two-and-a-half years has been slow but steady. However, not all sectors have seen the same degree of strengthening. In the next one to two years, which sector offers the best upside? And which stocks will give investors the best exposure to these sectors? We asked our panel of analysts for their views.


in the roundtable:

Moderator: Teh Hooi Ling, BT's senior correspondent.


Colin Tan, head of research at Chesterton International.

David Lum, analyst at Daiwa Institute of Research.

Michael Ng, managing director, Savills Singapore.

Nicholas Mak, director of research and consultancy at Knight Frank.

Sean Monaghan, analyst at Merrill Lynch.

Hooi Ling: At current prices, and at the current stage of the economic cycle, which sector of the Singapore property market (residential - top-end, mass-market, commercial or industrial) do you see having the biggest upside - both in terms of price and rental?

Michael Ng: In terms of capital values, we see the high-end residential market having the biggest upside given that prices of these properties are still considered attractive compared with similar developments in key global cities.

Singapore's stable political environment, strong economic fundamentals and favourable business-friendly environment have encouraged businesses to relocate their operations here. Multinational corporations which are already here are also expanding their operations. The government's plans to make Singapore the regional hub for financial, R&D, education, maritime and aerospace services have benefited the high-end residential market as more top management personnel relocate their families here.

Repositioning Singapore as a truly global city has also attracted a steady flow of international investors to our investment grade properties. We expect prices to grow between 15 and 20 per cent in the next 12 to 15 months especially for developments located in prime districts 9, 10, 11 and in Downtown Core (CBD living, which is near the Integrated Resorts).

In terms of the rental market, we expect commercial market segment to have the biggest upside. We expect the rental rates for Grade A office space to continue to climb given the limited new supply coming on stream. The most significant development in the pipeline is the Business & Financial Centre at Marina Bay (BFC Phase 1) which is only slated for completion in 2010. Rents for Grade A office buildings are likely to rise by another 20 to 30 per cent from current value by the end of 2007. Grade B office buildings will also gain from the 'spillover' effect over the next couple of years. We see office rents for these buildings rising between 10 and 15 per cent by the end of the year.

Nicholas Mak: I think the sectors that have greater potential for more upside are the mid-tier residential market and well-located office space. The high-end residential market already had a good run in the past 18 months. There are signs that the growth momentum is spreading to the mid-tier segment.

Colin Tan: At this point in time, the high-end segment of both the office and private residential markets still looks to have the most upside to be followed most probably by the high-end segment of the retail sector.

However, we must understand that how well the property market performs at present depends not just on the current economic performance but on confidence levels as well. At the moment, the 'hype' surrounding the future high segment of the office and private residential segment have led to rentals and prices racing upwards - seemingly very much ahead of economic fundamentals.

Some of the increases are, no doubt, deserved but some of it are due to clever marketing - aided no doubt by parties which have vested interests - investors and speculators included.

They paint a very optimistic future scenario exploiting the expected benefits of the BFC and the two Integrated Resorts.

As Singapore is entering uncharted territory - we are talking about attracting more than twice the number of visitors we ever had to Singapore - there are no previous benchmarks to act as guideposts. Marketeers, therefore, have free rein to paint a cautious, moderate, optimistic or even very optimistic scenarios. In truth, nobody really knows and so nobody can prove these marketeers right or prove them wrong. Prospective buyers or renters should be very aware of the maxim 'caveat emptor'.

However, having said that, some of the hype have a way of becoming real as the economic fundamentals catch up as the Singapore economy does have a tendency to surprise by sometimes outperfoming itself. (This can easily happen especially when the property market is still in the early stages of its recovery cycle.) The danger is when the hype gets really played to the hilt and races too far ahead for even the economy to catch up in the near term. Buyers/renters have to ask themselves when the hype becomes the absurd.

Things become more complicated when its comes to the high-end housing segment where the intended target market is the global market. What is absurd to the local buyer is not so for the global purchaser as affordability levels for foreign owner-occupiers will be as varied as the width of the intended target market.

Sean Monaghan: For us at Merrill Lynch, we see strong fundamentals for all sectors of the Singapore property market although we believe the prime residential sector is positioned very well to outperform over the next three to five years.

Our positive outlook for residential is based on our expectations for continued strong population and employment growth. Singapore is already attractive on a regional setting in terms of both price and lifestyle even before you take into consideration the massive transformation underway with the Integrated Resorts, Orchard Road and infrastructure projects such as the circle line.

This transformation of Singapore by way of major new projects is consistent with catalysts such as the awarding of the Olympics to cities like Sydney which resulted in a decade of growth.

David Lum: Now that the recovery of the property market is firmly underway, I believe we are near the beginning of a sustainable upward trend in the cycle, and for everyone's sake, I hope the uptrend will continue to be stable and moderate.

As for sector, I would agree that the upward momentum already evident in office properties is likely to continue. The broad office sector is still about 50 per cent below the peak in 3Q96 and 36 per cent below the recent peak in 4Q00.

As a major financial centre in Asia, our office rents are still extremely competitive compared with Hong Kong and Shanghai. At the micro-level, there also appears to be a supply vacuum between the release later this year of One Raffles Quay, which is almost fully pre-committed, and phase one of the BFC towards the end of this decade.

Hooi Ling: Which are the sectors you think are in danger of a correction?

David: On my radar screen, there is no danger of correction from any sector in the next six months. In the longer term, I believe the major risk is over-optimism and the obvious danger signs would be when property prices in whatever sector start to show double-digit gains for several quarters or more, exceed their historical peaks, most of which are still far away, and disconnect entirely from the underlying growth of the economy.

Sean: In the absence of any major regional or global economic shock, we do not expect any of the Singapore property segments to experience a correction in the next 12 months. While some of the residential prices have moved significantly, this is consistent with the recovery process and where we see Singapore moving to in the future.

Colin: At the moment, I still feel the 'hype' surrounding the property market is still within reasonable limits. There is a good chance that the economic fundamentals can still catch up in the not-too-distant future. However, if it gets played up and turns into a frenzy in the coming months, we will quickly reach a point when a property bubble will emerge.

Michael: In the short term, we don't foresee this happening given the strong economic outlook.

Nicholas: Neither do I. There would still be some expansion of prices and rentals, but certain sectors, such as those that had experienced high growth in the past year may see a slower rate of increase.

Hooi Ling: What will the impact of easing interest rates have on the various markets? And what if interest rates continue to climb?

Sean: We don't expect a material change in Singapore interest rates over the next 12 months. Any significant increase in interest rates could result in a significant appreciation in the currency which may not be the desired intention of the Singapore government.

David: I don't believe interest rates were ever a big factor in where the property market is today, and as long as the Singapore currency remains stable and there are no external shocks, interest rates are unlikely to change much or play a major role in the property market going forward, in my opinion.

Nicholas: Easing interest rates would contribute to an increase in investment demand, especially in the residential property market. Although there is already strong investment demand for commercial space, there is a shortage of investment-grade space for sale, resulting in fewer deals. If interest rates continue to climb, demand for medium-term property investment would be lower as sellers may not be willing to meet the higher yield demanded by investors.

Michael: Easing interest rates means good news for businesses and the property sector, especially the mass residential market, where lower interest rates could help to revive the already sluggish market. It will spur potential home owners, who have been sitting on the sidelines to seriously look at buying their first private property.

On the flip side, any increase in interest rates will impact the demand for mass residential market the hardest. It will also impact business sentiment as companies may look at either maintaining or reducing rather than expanding their office space, as the cost funding goes up.

Colin: I think easing interest rates are less of a problem than if there are continued hikes. If rates continue to rise and are quickly transmitted to the housing loans market, it will hurt the recovery in the 'very price-sensitive' mass-market private residential segment which is only starting to show signs of a recovery.

However, this can be mitigated if banks re-introduced fixed rates for the first two or three years in a big way. Current housing loans based on floating rates are much too risky and will lower the affordability levels of buyers. This may, in turn, affect purchases. Hooi Ling: Which are the stocks that will benefit most from the anticipated market trend?

David: According to our valuations, the shares of most property developers have already run ahead of the property market recovery. We believe Singapore-listed Reits, particularly CapitaMall Trust, Macquarie MEAG Prime Reit, Suntec Reit, Mapletre Logistics Trust, Ascott Residence Trust, and CapitaCommercial Trust are the best plays during the current gradual uptrend phase of the market. Investors should realise that the yields of S-Reits are not static and are more likely to expand in a rising rental market, along with their net asset values.

Sean: We believe all property companies that have exposure to Singapore are in a good position to benefit from the anticipated strong recovery. The companies with large existing land banks in the prime areas, such as City Developments, are arguably in a better position than companies which are now having to re-stocking their holdings.

Nicholas: The stocks with both overseas and local exposure are likely to benefit more from a market upturn. But just because a property stock is highly exposed to a particular segment and that segment is doing well, the stock price may not necessarily increase accordingly.

Hooi Ling: What are the developments that could prevent your expectations from becoming reality? What are the chances of these events taking place?

David: I believe one reason that the Singapore property market has been a laggard for most of this decade compared with almost any other property market in the world is that local buyers have been cautious, and that is a good thing. I would get really worried when market participants forget what happened to them during 1997-98 or 2001-2003 because their memories, in my opinion, will be their most valuable defence.

Sean: We believe the current cycle in residential property should run for at least another three to five years. The only threats that could conceivably undermine this strong outlook could be large regional or global macro shocks which impair investor confidence generally. Alternatively, if there was an event specific to Singapore, then this also could impact the outlook for growth. Luckily, we do not see any clouds on the horizon.

Colin: The property segments - high-end sectors of the office, residential and retail markets - which are benefiting currently take their cue as much as from local happenings as from global events. So, major events such as the possibility of the widening conflict in the Middle East, oil and interest rates hikes as well the possibility of an avian flu pandemic could easily scuttle whatever gains made in the past few quarters.

Nicholas: The property market could face a correction if the Singapore economy experienced a severe slowdown or the stock market is battered by sustained poor sentiments. However, the chances of these events occurring appears to be slim.

Michael: Unforeseeable circumstances like an epidemic, energy crisis, slowdown in global and regional economies and natural disasters will have a negative impact on Singapore's economy. This will, in turn, affect the growth of all the sectors mentioned above.


The Singapore property sector looks to be on a sustained recovery cycle, with high-end residential and office space seeing the most upside.

But the market has to watch out for over-optimism, when prices start to shoot up in double-digit figures over consecutive quarters.

Interest rates are not expected to rise drastically in the next 12 months, and if they did, the mass residential market will be hardest hit. However, the negative effect on the property market may be mitigated if banks re-introduce fixed rate housing loans.

The panel is not in total agreement if property stocks still represent a good investment opportunity. One reckons that valuations of property developers have run ahead of the physical property market recovery, and sees Reits as better buys. Another still sees value in stocks like City Developments, and those with large land banks in prime areas.

The current up-cycle can last three to five years with only major events like the widening conflict in the Middle East, oil and interest rates hikes as well the possibility of an avian flu pandemic posing a danger to the uptrend.

Copyright Singapore Press Holdings 2005.