REC weekly #0119: What every en-bloc owner MUST know about the property market

Delivering the continuation to a previous post “en-bloc owners will make the worst decision of their life…” this is Part II, continuation of the mini-series.

In order to curate the best option for property owners and buyers, we first need to understand the current property market cycle.

The environmental factors of the Singapore Property Market 

The Singapore Government apparent intention is to have rising property prices with income growth (2-3%), if any at all. This needs to be inline with inflation to allow housing to be affordable. This would mean that it is against policy for high property price appreciation. Coupled into an environment of rising interest rates, this is a consequential double whammy for Singapore property investors in a low yield environment.

It is often noted that buyers and investors purchase Singapore properties for capital gains, and lesser intent for rental yield. Now that capital gains are being squeezed, in light of the cooling measures. The current environment is much less conducive for property investment. Furthermore, there are events that could be waiting for us in 2-3 years time, namely, the next global economic downturn or crisis.   

Many industry stakeholders say that we are in a new up-cycle currently and the government had pulled the brakes. In my opinion, we are still in the up-cycle which started in 2009-2010 after the subprime crisis. However, we are also likely heading towards the end of the cycle. The 15-month decline in residential property prices was not a down cycle per se, but was more likely an anomalous correction caused by the implementation of cooling measures. The property market indicators and internals show that we are heading towards the end of the property up-cycle. We may be 6-12 months away from the start of the ACTUAL slowdown or slump.   

What does Singapore need to spur a growing property market?  

A. Rental Market

For the Singapore rental market to improve, a few things must happen:

  1. Expats will need better expat packages. Due to slowdown in economy, many expats have lower housing budgets and this has affected the rental market.
  2. We will need more expats to come in, so that demand for rental units can go up and vacancy rates can go down. My personal opinion is the government will allow talents we need (data science, blockchain, AI, cyber security, etc) but it will take time to attract these talents because Singapore is not the only country and also it will take time for foreigners to flow in.
  3. Increase in rental demand from en-bloc owners who will rent a home temporarily before purchasing their new home or while waiting for their new home to be ready. This is however only a short term increase in rental demand and is unlikely to be sustainable.

B. Property Price

For property prices to improve, these things need to happen:

  1. There must be an increase in overall investor demand. This means cooling measures have to be relaxed for both foreign and local demand.
  2. Foreigners need to start buying more units. In 2010, foreigners bought up many properties here causing prices to spike. Today, Indonesian buyers have slowed down due to the tax amnesty introduced. China buyers find it difficult to bring money out of the country due to capital controls, which is their government’s way of controlling their exchange rates. These challenges, coupled with cooling measures hinder the foreigners from buying Singapore properties. Chinese and Indonesians are the top foreign buyers for Singapore properties, the slow down in their purchases affect property price appreciation especially in the luxury segment. With both the ‘gates’ of Singapore and the foreign countries closed, the days of foreigners flooding in are over, at least for now.
  3. Local demand also needs to increase. With an aging population in Singapore, purchase decisions may change, when most property owners 10-20 years ago were young, property owners then can be more aggressive. The situation now is different as most property investors are at or close to their retirement age. The younger population, may not be as bullish on property investment. There are many other investment vehicles with the rise of robo-advisors, carefully selected overseas properties and cryptocurrencies. Real estate as an asset class, is just one of the many options. Especially when many think that real estate is a hedge against inflation, only to see their properties appreciate slower than inflation after expenses.

Where are we in property cycle? 

image 1 - private residential property index

Source: URA, REC Research

The property price index chart from 2009 to present can be read in two different ways. In 2017 during the strong en-bloc wave, there were talks that we are entering a brand new uptrend cycle and are turning around from a downtrend. This refers to the black arrows of 1->2->3 on the chart (Uptrend 2009 to 2013, Downtrend 2013 to 2016, New Uptrend 2016 to present). My personal view is that we have been in the same cycle which started in 2009, as seen with the red arrow. We are still in the same cooling cycle that started in 2009 and the 2013 to 2016 was a mere correction.

This is important because reading the cycles correctly will lead to different outcomes and projections. The property uptrend started in 2009 after the sub-prime crisis and next year 2019 will be the 10th year. This would be a good time to review where we are in the property cycle and be well positioned for what is ahead.

My view is that we are at or moving towards the end of current property up cycle. Let us look at a few critical facts about the property market (some of which I have mentioned in my previous article that was very well received – “5 facts you must know before your next property investment”)

Currently, we see that there is

  1. Real oversupply issues that will be present from 2021-2023, it is similar to facing a resistance block in a stock uptrend.
  2. There are affordability issues faced by the middle class to buy a private condominium.
  3. What is most critical and can directly affect demand supply balance is government policies, the cooling measures. The cooling measures that were implemented on 5th July 2018 were the strongest. Some analysts said the cooling measures were like using a butcher knife to kill a chicken. It is important to identify what the government wants to achieve from the cooling measures, too much cooling measures and property prices decline which will cause property owners to be unhappy. No cooling measures could mean runaway prices that will likely cause properties to be unaffordable for many Singaporeans.

After the introduction of the latest cooling measures, the government said that they want property prices to rise in line with income growth. The cooling measures were strongly directed at property developers more than property buyers as it is the developers that caused higher prices (from en-bloc sites) and higher GLS bids. Lets take a look at how this works.

image 2- illustration of aftereffect of en-bloc

Source: URA, The Business Times, REC Research

Take the popular Amber Park en-bloc in Oct 2017 for example. In a The Business Times article, an analyst noted that the redeveloped Amber Park would have a selling price of $2600 to $2700psf. Before the en-bloc was successful new launches such as Amber Skye and Marine Blue were selling at $2000psf price point (New Amber Park will sell at 30% premium). Nearby, The Esta and One Amber had units selling for an average of $1400psf before the en-bloc of Amber Park, months after, similar units were transacting at $1800psf (a 30% increase in price). These units at One Amber are still almost $900psf from the future selling price of Amber Park. Assuming we discount this amount, due to cooling measures, Amber Park may have a sale price psf of $2500psf ($700psf higher from One Amber $1800psf). This reflects a 38% price gap between the old and new. For average prices to move closer towards Amber Park’s new prices, assuming property prices follow income growth rates of 2% p.a, it would take almost 20 years (simple compound) for average prices to reach $2500psf.

I strongly believe that the government introduced the recent strong cooling measures in attempt to prevent further price increase that is attributed to developers redeveloping the sites. After all, imagine that developers will be making their usual double-digit profit margin that consumers will be paying for.

The latest cooling measures have also signaled that the current en-bloc cycle is approaching the end. We could see a few more good value sites en-bloc. After which the en-bloc wave should be cooled down. This is also a preventive measure from the government to cool the en-bloc market which will cause a massive supply increase as for every one unit en-bloc, about 3-4 more units are re-created.

What should you consider to do?

At this point, the upside potential of property investment is small compared to the potential downside. Property owners should consider reducing risk, repositioning to liquid financial assets and more importantly, avoiding being over leveraged.

Buying in the wrong part of the cycle could mean that you will need to wait for 8-14 years for your property to breakeven. This would mean a huge opportunity cost. If an investor breaks even in 8-14 years, you lose yearly inflation rate and potential gains. This is a MASSIVE loss. Risks can be reduced if an investor chooses the right property particularly when buying in the latter of the cycle. Of course, there are also homebuyers who do claim that they do not mind sitting on a loss making property, this is the mentality and preference of the minority of homebuyers. It is noteworthy to know that there are opportunistic plays in any part of the cycle, accentuating that property selection is the most important aspect of property investment.

In Part III of this mini-series, we will discuss what you can actually do to actively manage your and maximize financial portfolio that will be boosted by en-bloc proceeds. Stay tuned!

As always, please read my disclaimer here.