How Investors Might Get in on Singapore's Real-Estate Boom
By YAROSLAV TROFIMOV
May 2, 2007
The real-estate sector has gone sour in the U.S., and the outlook for property-related securities isn't too bright in most other developed markets, either. But, bucking this trend, Singapore continues to power ahead -- and smart investors still might be able to cash in on the city-state's property fever.
As it aims to become a playground for Asia's rich, Singapore is shifting its economy from manufacturing to tourism and financial services, building yacht marinas and casino resorts next to the gleaming skyscrapers that house its private banks. On the ground, this translates into a growing influx of prosperous foreigners -- and fast-rising demand for luxury homes and prime office space.
Prices for Singapore's private residential properties rose 4.8% in the first quarter of this year from the previous quarter, after gaining 10% in 2006. Prices for the island's top-end and midrange residential real estate could be up as much as 35% for the full year, predicts UBS Securities. Rents in the sector should surge 30% to 40%, Citigroup forecasts.
Office properties are just as attractive, in part because more buildings are being demolished for redevelopment rather than completed this year, resulting in a shortage of supply. Singapore's prime office rents, which climbed 20% to 11.80 Singapore dollars (US$7.78) a square foot last year, could reach S$14.50 by the end of 2007 and S$18.50 in 2008, Citigroup estimated in a recent research note. Although the government has released new land for construction projects, "the prime office-space shortage will persist for at least three more years," a Goldman Sachs report predicted.
"The rate of [property] appreciation in Singapore looks extremely compelling," agrees Arjuna Mahendran, chief investment strategist at Credit Suisse Private Banking in Singapore. "Places like Tokyo, London, Hong Kong and cities in the U.S. are already up on the curve and quite mature. In Singapore, it looks like the beginning of a multiyear boom."
The question for investors, of course, is how to benefit from this upswing short of buying actual bricks and mortar.
The obvious solution for those who would rather keep their money in liquid securities would be buying the stock of flagship local property-development companies such as CapitaLand and Keppel Land. But this may no longer be a good idea, given that these shares have tripled in price during the past 24 months.
"Most of the [Singapore] property stocks already factor in future growth, especially those involved in high-end areas," cautions Peter Wong, a fund manager at Phillip Capital Management in Singapore.
Instead, he recommends the shares of building-materials companies whose prices haven't fully factored in the real-estate fever, such as Hong Leong Asia; and of media conglomerate Singapore Press Holdings, which profits from the many full-page advertisements for new luxury condominiums in its newspapers. Other money managers point to smaller property developers whose shares still have attractive valuations, such as UOL Group, Singapore Land and Bukit Sembawang.
They also flag the island's banking sector, dominated by three homegrown financial groups -- DBS Group Holdings, United Overseas Bank and OCBC Group.
"All the Singapore banks will benefit [from the real-estate boom] because Singapore still has a very protected banking sector," says Mr. Mahendran of Credit Suisse. "When the property sector is booming, a lot more people will apply for mortgages, which have higher spreads and lower delinquency rates than other loans."
Another way of riding the boom, he says, is by investing in Singapore real-estate investment trusts, which directly benefit from the spike in rents, and whose valuations are less lofty than those of pure-play property developers. Singapore "REITs are in a sweet spot as organic and inorganic growth prospects are good," concurs a Goldman Sachs report issued earlier this year, adding that such a favorable environment should last at least until the end of 2008.
Nearly two dozen REITs are traded in Singapore, which offers tax advantages and strict regulation and has become a regional hub for this class of assets. Although yields on Singapore REITs have been shrinking, they are still by and large higher than those on Singapore government bonds.
There are, of course, risks that the property boom will come to a premature halt, especially if the Singapore government intervenes to keep rent inflation in check. "Singapore wants to attract people here, so it is not in Singapore's interest to have a huge expansion in office costs," says Hugh Young, managing director of Aberdeen Asset Management Asia in Singapore.
There are also political concerns as local Singaporeans find themselves priced out of the island's most desirable areas, he adds.
Yet, despite these caveats, Mr. Young still holds on to Singapore property stocks such as City Developments and Bukit Sembawang. "Logically, I would say this market is slightly overshot," he says. "But this might be just the beginning of the overshooting."
Write to Yaroslav Trofimov at [email protected]