Department of Real Estate

RE 3801 – Real Estate Market Analysis

SEMESTER 1, AY 2010/2011

Group Report

Topic: Real Estate Market Analysis of the Condominium Market in Singapore

For Assoc Professor Harold Tan

Done By:

Alvin Quek Tze Loon                U086899A

Koh Choon Tong, Donn        U086930W

Koh Ee Kheng                         U086940R

Wang Khai Yau, Ryan         U086928R

Zhang Jiao                                U086929A


Executive Summary

Overview of Singapore Market Outlook and her Positioning

The Singapore economy has bottomed up and gradually recover since 2Q 09. The low unemployment rate, GDP, attractiveness factors continue to be a magnet in attracting MNCs to set up their headquarters here. The expatriates and foreigners which follow will drive up both the rental and sales demand. Given the excellent investment climate in Singapore - strong financial fundamentals and political stability, this upward demand trend is likely to continue for at least the next 5 years. Above all, Singapore is top in corporate governance among all other Asian countries, displaying the determination of the government to do whatever it takes to make sure it remains competitive in the region.

Government Regulations and our Views on the Recent Cooling Measures

It is in our view that the recent rounds of cooling measures are targeted at speculators who are manipulating the economy recovery as an opportunity to flip properties, resulting in price irrationality, causing a potential unsustainable property bubble. This may have negative connotations to the property market. We believe that the measures will affect sales in the private mass market projects as intending HDB upgraders have to fork out higher cash outlay. However, the measures would help maintain a stable and sustainable property market in Singapore, which proves to be beneficial for all genuine buyers, local and foreigners alike. We are recommending New Homes to cater to the luxury condominium sector and analyses will be further elaborated in the subsequent sections.

5 Condominium Subsectors in Singapore

The condominium market in Singapore could be broadly classified into 5 subsectors, namely, the Mass Market (lower middle), the Upper Middle Class, Executive Condominium (EC), the Luxury and the Super Luxury. The price ranges from $900psf for a typical Executive Condominium unit to above SGD $2,500psf for a Super Luxury condominium unit. The different location, price, quality of fittings and facilities are the main factors that aid in the categorizing of the different developments into their respective subsectors.

Singapore Current Home Prices for the Luxury Sector

From the figures provided by Singapore Real Estate Info, it can be seen that there is an increased of transacted volume of non-landed luxury properties that were sold from S$2,000psf to S$3,000psf in District 9 and 10 in recent months. It could also be observed that there was a pick-up of transaction involving developments that were sold for more than $$3,000psf (CBRE MarketView 3Q10). These trends give an indication of the high level of interest in luxury and super luxury units within District 9 and 10. As observed by Cushman & Wakefield, Singapore’s luxury prices are still some 18% below peak prices of 2008. The mean average for Hongkong’s luxury properties in 3Q 10 is S$3,636psf (CBRE Hong Kong Luxury 3Q10). This represents a potential for growth in luxury condominium market.


Reasons for Recommending Luxury Development

We have identified 10 conceivable reasons to support our argument for recommending luxury development to New Homes. Some of which includes attractive rental yields, Singaporeans ranked 4th in personal wealth. Prospectively, it is Singapore’s openness and stability that make it a popular investment destination. One should not neglect the growing influence of Chinese investors resulting in ‘hot’ money flowing into Singapore's property markets. More expatriates and foreign investors from other countries are also expected in the next five years, making them one of the key demand drivers for luxurious condominiums.

Restrictions on foreigners buying landed properties further enhance the appeal of luxurious condominiums, hence, catering to the demands of these expatriates as well as affluent foreign investors. The growing interest on real estate investment and increasing wealth of Chinese investors would also create demand for luxurious condominium. Wealthy Indonesians are expected to continue having a penchant for the luxury properties in Singapore too.

Projecting Condominium Demand

Projection of the demand for condominium in Singapore for the next 5 years is based on the key demand and supply drivers. As the economy began its recovery in 2Q 09, developers and the secondary market saw confidence returning back to potential buyers. At the start of 3Q 09, many developers also launched their held-back uncompleted developments (due to recession), which could be seen as current quarterly supply that promised future space. As seen by the number of units sold directly by developers as well as in the secondary market, we can make a viable assumption that consumers’ confidence has grown as demand increases.

Past data and trends have been used to project the growth rate such as population and household size. In addition, press releases and speeches by minister are also taken into account which helped in the approximation of future population. With the target population of 6.5 million in the next 10 to 15 years, and with the local growth rate expecting to drop, the government is constantly and will continually woo foreign talents to make up for the shortfall in local population. Other statistics are obtained from the URA and REALIS which aid in the demand projection for the next 5 years as shown in Table 20. It is projected that the general housing demand would increase from 4439 to 19,953 from 2010 to 2014.

Income and Affordability

Income Level

Due to the economic recession, the average monthly household income in Singapore was decreased by 2.6% from $7,752 in 2008 to $7,549 in 2009 (Department of Statistics, 2009). Nonetheless, it is observed that household income for owners of private residential units are less affected by market conditions as compared to HDB dwellers. Hence, it suggests the greater affordability of high income earners for private residential units, typically with average monthly household income of more than $8,000 (61st – 100th deciles of households).


Affordability Analysis

Affordability of condominiums is analyzed by different income levels, which are 51st to 100th deciles of households with average monthly household income of $6,500 to $22,000. Available cash and CPF that can be used to service the monthly housing loan is calculated for each income level, thus affordable housing price is deduced based on the mortgage repayment ability, assuming 70% LTV ratio. Furthermore, 5 scenarios with different mortgage interest rates (1% to 5.5%) are used to analyse the impact of interest rate fluctuations on housing affordability.

The analysis shows that the affordability of mass market and upper middle market condominiums would be greatly affected by the interest rate rises as this group of potential buyers are price sensitive. Conversely, luxury condominium sector would be more affordable for a wider range of high income earners (81st – 100th deciles) and they are less affected by the fluctuations in interest rate as they are cash-rich and higher liquidity muscles.

Recommendation

This report recommends that luxury condominium sector would have the most potential for New Homes Pte Ltd (refer to Annex A). The appropriate price range that we recommend would be $1,800 to $2,500 psf in order to stay competitive.


Table of Contents

Introduction                                                                                        8

General Profile of Singapore                                                                        9

News of the World Financial Market in 2010                                                10

Outlook of Singapore Economy                                                                12

Singapore Remains Top Asian Country In Corporate Governance                                14

Current Job Market Outlook in Singapore                                                        16

Market Overview of Singapore Private Property Market                                         16

Projecting Condominium Demand                                                                17

Projecting Condominium Supply                                                                19

Sentiment of the Residential Property Market in Relation to Population Growth, Fertility and Household Size Patterns                                                                        23

Projecting General Housing Demand                                                                27

5 Condominium Subsectors in Singapore                                                        28

10 Reasons Why People Will Invest In High-End Condominium                                33

Income, Affordability, Pricing Levels and Recommendation                                41

Potential Competitors in the Luxury condominium sector                                         51

Conclusion                                                                                        52

References                                                                                        53

Annex A – OCBC featured article: Is now the right time to buy property?                        58


Tables & Figures

Tables

1. General Profile of Singapore

2. Economic Indicators of Singapore

3. Gross Domestic Product at 2005 Prices

4. Outlook of Singapore’s Economy 2009

5. Major Macroeconomic Indicators

6. Singapore Faring System in Corporate Governance

7. Singapore is the World’s Easiest Place to do Business

8. Employment Figures

9. Absorption Rate of Landed and Non-landed Residential Property

10. Private Residential units (landed and non-landed) launched and sold in the quarter

11. Building Commencement for Private Residential Properties

12. Supply of Non-Landed Properties in the Pipeline

13. Stock of Non-Landed Residential Properties

14. Private Residential Units in the Pipeline

15. Singapore Population Size and Growth by Residential Status

16. Fertility

17. Average Household Size at 10 years interval

18. Average Household Size at yearly interval

19. Population Projection

20. Demand Projection

21. Proportion of expats earning more than US$200,000 a year

22. Monthly Household Income from Work among Employed Households

23. Median Monthly Household Income from work by Dwelling Type

24. Average Monthly Household Income from Work among Employed Household

25. Banks Home Loan Packages

26. Available monthly mortgage payment

27. Scenario 1,when interest rate is @ 1% p.a

28. Scenario 2, when interest rate is @ 2.5% p.a

29. Scenario 3, when interest rate is @ 3.5% p.a

30. Scenario 4, when interest rate is @ 4.5% p.a

31. Scenario 5, when interest rate is @ 5.5% p.a

32. Summary of different scenarios

33. Condominium house prices by subsectors

Figures

1. Singapore Competitiveness

2. Condominium Housing Market Structure in Singapore

3. Condominium Housing Model Determinants

4. Indicators of Supply

5. Ave $psf for District 9 & 10 private residential properties from April 2009 to August 2010

6. Total Population Average Annual Growth Rate

7. St Regis Residences

8. Bedroom Decor and Fittings of St Regis Residences

9. Caribbean Condominium

10. Citylights Condominium

11. The Quartz Condominium

12. Attractive Yields of Luxury Property

13. Country Growth in Millionaire Households

14. Property Price Index of Non-Landed Private Residential Property (4Q98 = 100)

15. Rental Value (RV) & Capital Value (CV) of Prime and Luxury Property Indices

16. SIBOR rate for past 1 month

17. Historical 3-month SIBOR

18. Examples of Luxurious Condominiums


Introduction

Government Regulations and our Views on the Recent Cooling Measures

The government plays the regulatory and supervisory roles in the real estate market by ensuring that the development planning and control mechanisms are properly implemented and enforced. It sets and manages macro-economic policies to enable efficient operations of the economic activities. The government’s influence on the private real estate market is unmistakeable and must not be ignored.

From a macroscopic perspective, the recent rounds of cooling measures have directly or indirectly affected 2 main groups of buyers. They are 1) speculators who are benefiting from concurrent ownership of public and private residential properties and 2) HDB upgraders. The measures are “anti-speculative” as they are out to control the phenomenon of ‘property flipping’, where speculators push up housing market price irrationally without any intention to hold the property. This may lead to what is often known as a property bubble burst.

The reason why the group believes that private mass market projects would be affected more than the rest of the other private subsectors as the cooling measures would require buyers to commit to a larger cash outlay upfront when buying a new property. If it is a second property that a person is buying, the lower LTV limits would enforce buyers to exercise financial prudence, and to reconsider their financial positions in owning another property. As we know that HDB-upgraders are people who yearn for condominium living but yet may not have the deep pockets to actually afford a private condominium, more so with the cooling measures kicking in, the high initial outlay would mean that there is the need for a large quantum from the CPF savings. This would automatically disqualify many potential buyers who do not have that kind of financial ability.

According to The Sunday Times (15th August, 2010), more Executive Condominiums slated to be launched within the next months, namely Compassvale Bow, Punggol Field, Buangkok and Yishun, would yield some 1,400 units of apartment. Expected to be priced between S$650psf to S$750psf. These condominiums with condo-like facilities would give private mass-market development a run for their money. Coupled with the raise of income ceiling from S$8,000 to S$10,000 per month, the increased supply of Executive Condominiums may just ease away the already dwindled demand of the mass market condominiums

One cannot concurrently own a HDB flat and a private property during the 5 years Minimum Occupancy Period (MOP). However, after 5 years, potential HDB upgraders would face obstruction when buying a new-launched condominium. According to Ku (2010), if they choose to sell their HDB units to buy an apartment they like, they can take up 80% LTV; however, they have to be prepared for the inconvenience of moving into a rental unit for a few weeks to months while waiting for the issuance of Temporary Occupancy Permit (TOP) of their new shelter. These various encumbrances were also reflected by the lacklustre response in many Mass Market showrooms after the announcement of the cooling measures.

This affected demand from HDB upgraders is one of the compelling reasons our group would advised New Homes against going into the mass market as there will not be abnormal profits to be made under a ‘perfect competition’ scenario, where the entry to mass market is not high and more developers will just come in and cream off the already shrinking pie (due to the new cooling measures). Furthermore, a distinction has got to be made between anti-speculative measures and measures that would deter investment. The government of Singapore encourages investment that would maintain a stable and sustainable property market in Singapore.

The cooling measures have little impact on affluent investors; it is also the reason why we are recommending New Homes to cater to the luxury condominium sector. Besides the demand generated by well-to-do Singaporeans, foreigners are also taking advantage of the relatively lower prices of luxury projects in Singapore compared to country like Hong Kong. Further, true investors who have the ability to hold on to property would prefer the upmarket properties that cater to their lifestyles.

Going forward, our group predicts that private property prices (URA PPI) are unlikely to be adversely impacted but could moderate to a more sustainable level of 2-3% per quarter. Similarly, public housing price growth (HDB Resale Price Index) could moderate to 1-2% per quarter. In short, the demand for mass condominium market would be moderate and the demand for luxury and super-luxury sector should spur potential growth.

To begin with, we will give you a broad overview of Singapore in terms of its demographics and economic performance in comparison to other countries, followed by an overview of the non-landed private residential market. We have included ten compelling reasons why we propose luxury development, coupled with household income and affordability analysis as well as identifying your competitors in the market.

General Profile of Singapore

Table 1: General Profile of Singapore

                                                Source:  


News of the World Financial Market in 2010

                        Table 2: Economic Indicators of Singapore                                

Source:  

The first half of 2010 saw yet another roller-coaster ride for the world economy. The initial strong rebound in equity markets over the last few months gave a sense of assurance that the global economy is out of the woods. However, circumstances involving the southern European economies remain frail; hence recovery in the European Union expected to remain sluggish.  This European turmoil proved to be a damper on markets across the board, with fears of a halt in the road to recovery. While it did not start another recessionary wave, it certainly caused uncertainties in the financial markets and it is likely to remain a major risk factor that will continue to weigh on the global recovery.

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Moreover, the latest economic data is pointing towards a fragile economic recovery. The strong global production numbers appear to be peaking, while monetary and fiscal policies, particularly in the larger emerging economies, are in the midst of normalising. This coupled with low U.S. consumer confidence, continued high unemployment, modest wage growth and credit crunch, points to a period of uncertainty in the economic outlook. Although stock markets around the world have since recovered from the European debt crisis, the equity markets are expected to continue to meet with upward resistance during this period. While the economic recovery remains unpredictable, ...

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