Caution: Huge home supply in Singapore; Investment homes face declining rental yield

Caution: Huge home supply

Monday, Jul 15, 2013

Christine Li

My Paper

SINGAPORE – Three weekends ago, eager buyers snapped up all of the 738 units (498 condo units and 240 Soho-inspired units) of the J Gateway condominium in the west within 24 hours. The remarkable performance surprised market watchers, including many developers, because the last time a sizeable project was fully sold within such a short span of time was in 2009, with Optima@Tanah Merah. One question that figures is: “Why are people still buying when prices are at a record high?”

This is especially true for new launches. Our research shows that in the first five months of the year, developers sold a total of 8,247 homes, with a 100 per cent overall take-up rate (developers launched 8,229 units during the same period).

Including executive condominiums, the sales would have been 9,601, a 111 per cent take-up rate. In other words, all the units that developers launched this year have been absorbed by the market.

In contrast, resale volume in the first five months of this year was only about 40 per cent of new sales. Home owners managed to sell only 3,430 units, according to the Urban Redevelopment Authority’s Realis caveats data.

One key reason that more buyers have been swayed towards the purchase of uncompleted homes has to be the imposition of the seller’s stamp duty.

Anyone who sells his property within four years will be penalised with a stamp duty of up to 16 per cent of the value of the property.

The investment rationale of such buyers is that they need only to fund the purchase progressively while market prices continue to climb. When the project is completed, they would have fulfilled the holding period and avoided the seller’s stamp duty.

Even though new launches look promising, they do not necessarily rake up the highest capital appreciation, going by our research data.

In the first half of the year, prices of resale homes outperformed those of new homes in all three market segments over the same period last year.

Based on caveats data, the median price of mass-market new homes in the Outside Central Region (OCR) rose by 7 per cent to $1,110 psf, from $1,040 psf a year ago.

In contrast, the median price of OCR resale homes increased by 12 per cent to $978 psf, from $871 psf a year ago.

In the mid-tier segment, resale prices in the Rest of Central Region (RCR) rose even more over the past year. The median price of RCR resale homes increased by 15 per cent to $1,260 psf over the same period a year ago, more than the 9 per cent increase in new-home prices.

In the luxury segment, it was also the same story. Resale prices in the Core Central Region (CCR) rose by 8 per cent but, in the new-sales market, prices went down by 26 per cent year-on-year. The drop could be because of fewer new launches by developers in the CCR in the midst of uncertainties over global economic recovery.

Interestingly, despite the higher- dollar-per-square-foot price of new homes, home buyers forked out less money for new homes due to their smaller quantum.

This is very apparent in the mass-market segment. Data shows that the total median quantum of new homes stood at $929,000 in the first half of the year, 22 per cent lower than the $1.19 million of resale homes.

This is largely due to the shrinking of apartment sizes. If we look at OCR homes, the median size of new homes is 28 per cent smaller than that of resale homes.

In the RCR segment, the difference in median sizes between new and resale homes is a staggering 37 per cent. The only exception is the CCR segment, in which new homes are actually larger than resale homes.

From the figures above, we can tell where the investment demand comes from. The city fringe seems to be the hottest area, followed by the suburbs, while investment demand in the city centre has cooled.

The crucial question now is whether these seemingly hot investments can eventually translate into real gains for investors.

Unfortunately, the odds are against the investors. Between this year and 2017, an average of about 18,000 private housing units will be delivered to the market annually.

(This is higher than the 10-year historical average, which stands at nearly 9,000 units every year.)

Out of these units, 54 per cent will be delivered in OCR, while 21 per cent and 24 per cent will be delivered in CCR and RCR, respectively.

Unless real demand from future tenants can support this huge wave of supply going forward, property investors should exercise caution when taking the plunge.

The writer is the head of research and consultancy at property firm OrangeTee.

Investment homes face declining rental yield

Monday, Jul 15, 2013

Fiona Chan

The Straits Times

Property investors in Singapore are starting to feel the squeeze as rental yields for investment homes sag across all segments of the market.

This is due to fewer leasing transactions taking place and rents flatlining even as home prices continue to rise, property consultants said.

Information compiled by Colliers International for The Straits Times showed that net yields of non-landed private homes have been declining since 2008, and are now at 3 per cent or below as of the second quarter of this year.

Net yields are calculated by deducting service charges and property taxes from the annual gross rent, which is then divided by the property’s purchase price.

Homes in the suburban areas, where prices have proved stubbornly resilient in recent years, saw the largest dip in rental yields, from 4.1 per cent in 2008 to 3 per cent now, Colliers said.

Yields on the city fringe fell to 3 per cent, from 3.6 per cent in 2008, while yields for centrally located homes slipped from 3.3 per cent to 2.7 per cent in the period.

“The downward movement in yields in the last five years can be attributed to price appreciation in the residential market,” said Colliers director of research and advisory Chia Siew Chuin.

“Rents have increased in a moderate manner, while prices continued to increase at a faster clip to reach a record high in the second quarter of this year, based on the recent flash estimates.”

While home prices are now partly supported by home buyers’ “aspirations” to own an investment property, leasing interest is generally more grounded on fundamentals, said Mr Ong Kah Seng, director of R’ST Research.

Tenants prefer “cost-effective, practical choices amid the ample new housing completions, and many expatriates have limited or no housing allowances”, he said.

“This accounts for a generally stagnant, or slightly dipping yield situation.”

A more in-depth look at rental yields by the Singapore Real Estate Exchange (SRX) also found that most areas across the island are offering lower rental yields for non-landed private homes now than last year.

Of the 34 planning areas in Singapore that had more than 30 rental transactions in the first half of this year, 32 areas posted lower yields, said SRX. Singapore has 55 urban planning areas in all.

The only two areas that recorded higher yields were the downtown core around the Central Business District, and Outram. In fact, investors in Outram scored the highest yields in the country, at 4.6 per cent, SRX said.

At the other end of the spectrum, Sentosa Cove and the Southern Islands had the lowest rental yield in the first half of this year at only 1.7 per cent, followed by Newton’s 2.2 per cent and Orchard’s 2.6 per cent.

Overall, rental yields for the island dipped to 3.9 per cent in the first half of this year, from 4.2 per cent last year and 4.4 per cent in 2011, SRX added.

Over the next 12 months, consultants expect rental yields to stay flat or even decrease. While prices are not likely to keep soaring, a slew of new homes will be completed soon, putting downward pressure on rents.

Colliers’ Ms Chia said housing prices “are not expected to increase much further in the next 12 months”, as buying interest – especially from investors – wanes amid the spectre of rising interest rates and recent loan caps introduced by the central bank.

“However, rents might slowly correct and ease downwards as there is a significant amount of new completions, bringing more supply into the market,” she added. Some 32,700 units are expected to be completed between now and the end of next year.

“Generally, yields are not expected to increase in the next 12 months, and might experience a mild compression,” Ms Chia said.

Still, net yields of 3 per cent for investment homes are not far below historical trends, and investment activity is likely to continue as Singapore offers a “safe haven” to park excess funds, she said.

“Whether yield numbers increase, stagnate or dip, it will not deter many intent and ‘aspirational’ investors, unless yields consistently drastically dip across the board,” added R’ST’s Mr Ong.