Monthly Property Market Update for May 2008

May 2008 was an uneventful month as the same old story of ‘uncertainties in the global financial market’ was replayed again and again. The buyers continue to adopt the ‘wait-and-see’ attitude while the developers continue to hold back launches. While waiting for a new market impetus and direction, the market looks set to slide into oblivion in June 2008.

(A) Uncertainties reign in the larger market

Singapore economy faces triple threat

The Ministry of Trade and Industry (MTI) has recently expressed concerns that the economy is facing a threat from three areas, i.e. rising inflation, slower growth and weaker exports.

Rising global oil and food prices will have a significant impact on Singapore’s inflation whilst the economic crisis facing Singapore's major export markets such as US and Europe will affect our exports and growth. At the time of this report, oil price was hovering between US$120 and US$124 per barrel.

Consequently, the Malaysian and Indonesian governments took drastic measures to reduce state subsidies on petrol prices, causing pump prices to shoot in the two countries. In the case of Malaysia, the increase in pump prices is a hefty 40%.

As it is, the inflation risks in Singapore had overtaken slowing growth as the main worry for the government. The MTI had maintained its economic growth forecast for this year at 4% to 6%.

Regional instability may impact Singapore’s real estate market

The Malaysian government suddenly announced a 40% increase in pump prices, triggering widespread unhappiness. Earlier, the Indonesian government had also withdrawn the state subsidies on petrol prices, triggering massive student protests. The chain of events is significant to the Singapore real estate market as the citizens of both the regional neighbours make up slightly more than 40% of the total number of foreign buyers of Singapore real estate, especially in the high-end property segment.

The current disquiet may develop into large scale anti-government movements that may even topple a government – very much like the situation in 1998 where President Suharto was sidelined amidst widespread unrest. What follows is usually a period of great uncertainty and violence that will prevent the free flow of investment money into Singapore. At the rate oil prices are rising, the probability of the ‘worst case scenario’ cannot be ignored.

PM Lee said slowdown may stretch into next year but MAS disagreed

At first, Prime Minister Lee Hsien Loong sounded rather pessimistic about the immediate economic prospect. But three weeks later, the de facto central bank of Singapore the Monetary Authority of Singapore (MAS) issued an optimistic statement saying that the ‘slowdown’ is unlikely to be significant

The central bank insisted that there were robust expansions in both the domestic and offshore banking segments. Commercial bank loans continued to record strong growth, with firm gains across most non-bank customers, particularly building and construction. Also looking rosy is wealth management and domestic loans sector.

However private analysts are more cautious saying that if the credit crisis is not solved soon, even these sectors will be impacted.

PM Lee sees the economic momentum slowing in the next few quarters as the US economy struggled to stay above the troubled water of the sub-prime mortgage problems.

However, PM Lee acknowledged that whatever happens in the US downturn, the impact on the Singapore economy will be uneven. He pointed out that construction, marine engineering, ports and shipyards will be 'all right'; but tourism, financial services and information technology may not be as lucky.

The discrepancies between PM Lee’s and MAS’ statements best summed up the current market uncertainties.

Financial gurus’ take on the on-going crisis in the US

The following gurus have recently given their thoughts on the US situation.

· George Soros
George Soros believes that the 'acute phase' of the financial crisis is 'largely behind us', even as the US economy is only now starting to feel the effect.

The damage done to the global financial system has to affect the real economy but the effect of that is only beginning to be felt as there is a certain time lag.

· Jim Rogers
Separately, renowned investor Jim Rogers warned that the credit crisis 'isn't halfway through' and there may be more write-offs from European and Asian banks.

He added that considering the scale of the credit bubble that burst, it would likely take years to 'clean it up'.

· Alan Greenspan
Earlier, Mr Greenspan doubted there would be an immediate recovery, saying stagnation for the rest of the year was the most likely outcome. The economy would not start turning around until home prices started settling and eased pressure on finance companies to write off mortgage-related losses.

· Warren Buffett
Investment guru, Warren Buffett has said that the United States is already in a recession, though the pattern of the decline does not conform to the traditional definition of an economic recession which is two consecutive quarters of negative growth.

He added that this recession will be longer and deeper than what many people expect.

A quick review of the aftermath of the sub-prime mortgage crisis

There has been a prevalent belief that the impact of the sub-prime mortgage crisis is still not at its hardest and the worst has yet to come.

The summaries below will shed some light on the full impact of the crisis [for those who are interested in the details, they are in Annex A]:

(a) First of all, the foreclosure rates in the US are still at its highest and will continue to pose great danger to the US economy. [Annex A.1]
(b) Major banks, such as Citi and UBS are either offloading assets or laying off staff to cut costs. [Annex A.2 and A.3]
(c) Investors are staying away from US real estate. [Annex A.4]
(d) Perhaps the most serious of all, major banks are camouflaging their losses in the books. [Annex A.5]

A new world order creates the newly rich

A joint study conducted recently by the Citigroup and international property consultant Knight Frank ascertained that the soaring prices of natural energy and food have created many multi-billionaires despite the on-going credit crunch. And the good news is: they are buying more properties across different continents.

The report ranks high net-worth individuals in four categories - those with US$1 million to US$10 million; US$10 million to US$100 million; US$100 million to US$1 billion; and more than US$1 billion.

The study found that 15.7% of the entry-level high net-worth individuals own four or more homes. One notch above, 23.3% of those with US$10m to US$100m in wealth own as many homes. As the wealth increases, the individuals own more homes, with 31.5% of the third category and 60% of the wealthiest category owning four or more homes.


(B) Private property sales in Singapore

Developers face higher funding costs

Banks are lending less against the value of new projects. Before the US sub-prime mortgage crisis broke, property companies in Asia could borrow at spreads of less than 100 basis points or one percentage point above interbank lending rates. But now banks are quoting 200, 300 and for some smaller developers they are being quoted 400 basis-point spreads.

What this means is that developers will have to pay higher interest rate on loans.

Price correction for private homes appears to be on the card

A pessimistic economist from the Barclays Capital thought that this is the beginning of a multi-year price correction. He reckoned that the private residential property prices could easily fall by up to 30% by 2010.

A property review conducted by Credit Suisse in May 2008 saw rents and property prices falling even more steeply by as much as 40%, and downgraded its investment recommendation for the sector to 'underweight'.

[Full details in Annex B]

A number of high profile transactions of luxury properties – a sign of things to come?

There is some good news in the high-end market in May 2008. There were some high profile transactions in the high-end segment which may signal the end of the drought; and here are the numbers:

· Four bungalows near Eng Neo Avenue were sold for $5.5 million each at a preview on 9 May. The $22 million transaction works out to $1,128 psf of built-up area.

· A penthouse at The Grange was sold for 11 million recently.

· The first high-end condo project, Nassim Park Residence, that has been released this year has achieved good supports from buyers who snapped up 38 units [out of 100]. The project in the prestigious Nassim area has reportedly bagged a whopping $10 million or more for each apartment. Each unit is believed to be priced upwards of $3,000 psf.

Singapore luxury homes ninth most expensive globally

At about US$2,423 per sq ft, luxury homes in Singapore are the second most expensive in Asia and the ninth most expensive in the world.

At US$4,507 psf, high-end apartments in Hong Kong are the most expensive in Asia; while London is the most expensive place on earth to own a luxury residence at an average of US$6,191 psf.

(C) Non-residential properties and the rental market

Sales of strata offices down, may fall further

With only eleven transactions, sales of strata-titled offices have dropped considerably in 2008 so far. While prices are holding up for now, there are telltale sign to suggest that prices might start to ease in the coming months. For example, at International Plaza, the average price of units sold in January to March 2008 was $1,375 per sq ft (psf), down from $1,449 psf in the previous three months.

The slowdown in deals comes despite a continuing shortage of office supply, which helped boost sales and prices of strata office units to record highs last year. Some $1.7 billion of offices changed hands last year.

Rental continue to hold up

A telltale sign to suggest that the rental market is still holding up is the recent rental transaction at Seletar airbases vicinity. Rents there have almost doubled for the 131 units that will remain intact in the former Seletar airbase after the area has been earmarked for redevelopment into an aerospace hub in 2018.

Of the 378 Seletar houses, 131 will be retained as homes, and as a result the rentals for these houses have soared. In one such case, a two-storey terrace house recently attracted a bid of $5,000 - more than three times the guide rent of $1,500 set by the Singapore Land Authority (SLA).

Across the nation, rental rates jumped 69% between the first quarter of 2006 and the first quarter of this year.

Sale of NTUC Income Beach Road Property keenly watched as market going through lull

NTUC Income is selling Beach Junction, a small 999-year leasehold commercial property in Beach Road that could fetch around $24 million to $26 million.

New investors or owner-occupiers will also be able to give the building a new name.

The six-storey development has a net lettable area of about 19,000 sq ft and is fully tenanted. It is expected to worth about $1,300 to $1,400 psf. Many analysts are watching this closely as a gauge of sentiments in the commercial property market.

Real Estate Investment Trust (REIT) market may see some M&A or privatisations

As the market for listed property trusts in Singapore matures, analysts are predicting that some will merge or go private. One analyst went as far as to say that there are three to five Reits in Singapore that seem obvious for acquisitions or privatisations.

One reason why consolidation has not happened is that private equity funds, which could help engineer some of these deals, might be 'all cashed out' due to the global credit squeeze.

(D) News on En bloc Sale

There have been no new en bloc projects being introduced into the market.

Developers renting rather than building new project on en bloc sites

Due to the market weakness, some developers have decided to ride out the lull by putting up those en bloc sites that they have earlier acquired onto the rental market for income, rather than launching them for sale.

This is another evidence that the developers are feeling the pinch of the current weakness and are improvising in the interim.

(E) Foreign interest in commercial buildings in Singapore

Underpinning foreigner’s confidence in the Singapore success story, foreign funds are still buying up commercial properties in Singapore. On top of that, one of the international consultancies has restored its agency arm and repositioned itself in the new home market segment as it sees the potential in the new home sale market in the mid-term.

Beach Rd building sold for $70m

An Irish private equity firm and renowned international interior design firm Hirsch Bedner Associates have bought In-City Lofts at 700 Beach Road for $70 million. A further $3.5 million will be invested to upgrade the eight-storey building into a boutique office block and renamed 700 Beach.

The building is located between Golden Mile Tower and Golden Mile Complex and it has 8,500 to 12,000 sq ft floor plates and when the refurbishment is completed in August this year.

JLL re-entering housing project sales business

After seven years of absence from the new home sale market, Jones Lang LaSalle (JLL) has re-entered this market and clinched appointments to market Floridian, a 336-unit freehold condo development in Bukit Timah by Far East Organization and Wing Tai Holdings, as well as Lippo's Centennia Suites at Kim Seng Road. It is also marketing 34 units at the completed 99-year leasehold Amaryllis Ville condo in the Newton area on behalf of Goodearth Hotel group of Australia.

A spokesman of JLL said that the firm sees the huge upside for the private new home market which will be brought about by a vibrant and glossy economic prospect with many global events converging in Singapore in near- to medium-term.


(F) News on Government Land Sale (GLS) Programme

Plot ratio increases not needed for now

Minister for National Development Mah Bow Tan said that the government have no plans to increase the plot ratios despite the projected increase in population to 6.5 million people in the long term.

In fact, the new Master Plan 208 has plan for fewer homes. It allows for 327,200 new homes in Singapore. Whereas, the previous plan, MP 2003, allowed for 371,000 homes, 13.4% more than MP 2008.

URA added: 'In the medium term, around 350,000 dwelling units is a comfortable, reasonable number for land safeguarding purposes, which still allows some flexibility to meet market demand. Both MP 2003 and MP 2008 have safeguarded about 350,000 dwelling units.'

An extra 900 hectares of land added for park space in MP 2008 suggests Singaporeans will not be crowded out soon.

(G) News on HDB Resale Market

The HDB resale market had a relatively quiet month with only 2,179 transactions, as compared with 2,339 transactions in the previous month. Likewise, transacted prices have also dipped.

Sign of resistance spotted in HDB rental market

Although the rents for HDB flats are up due to the spill-over demand from private home market, property analysts do not expect price to rise much further.

Rents for some executive flats in Queenstown have gone as high as $2,900 a month, a price previously seen only with private apartments.

An analyst however quipped that although demand will continue to rise mainly because of the continuous influx of foreign talent, especially with the upcoming casino and international events such as Formula One, rentals are unlikely to surge from current levels as there are already signs of some resistance.

Case study of transacted prices of E-flats in Tampines over the past 5 months

A ‘thin slice’ of transactions was taken from the past 5 months of transactions of E-flat in Tampines for comparison. It is clearly shown that the transacted prices of E-flats have risen from the early part of the year, peaked in March 2008 and began its decline from April 2008 onwards. The drop was quite significant in May in the highest price category, suggesting that buyers in general are not willing to pay higher for older flats.

Annex A
News articles related to the impact of the US sub-prime mortgage crisis

(A.1) High foreclosure rates hurt broad economy: Bernanke

Federal Reserve Chairman Ben Bernanke warned that the rise in late mortgage payments and home foreclosures poses considerable dangers to the US economy and wants congress to take action.

Some 1.5 million US homes entered into the foreclosure process last year, up 53% from 2006 and the rate of new foreclosures looks likely to be even higher this year.

The current housing crisis has left them with mortgages that are bigger than the value of their home. When that's the primary problem, Mr Bernanke said the best solution may be reducing the amount that the borrower owes on the loan or some other permanent modification to the loan.

(A.2) Citi to sell up to $550b worth of assets

Citigroup has planned to offload US$400 billion (S$550 billion) of assets – 20% of its total - over the next two to three years for the sake of efficiency and profitability as a result of the credit crunch.

Its CEO, Vikram Pandit says that it will trim its US$500 billion of 'legacy assets' which includes real estate, leveraged commitments, sub-prime collateralised debt obligations and structured investment vehicles to less than US$100 billion within two to three years. He adds that it will be in an orderly fashion and expects to see US$15 billion in 're-engineering benefits' from the restructuring.

Since December last year, Citi has embarked on active restructuring and downsizing of the company and all these sales could raise billions of dollars for Citi at a time when the bank is feverishly raising capital. However, this process is spooking many analysts who looked on with scepticism that they sell-off might be a sign that more losses are to be revealed.

(A.3) UBS is laying off to cut costs

Swiss bank UBS had announced in early May that it would reduce a further 5,500 jobs on top of the 1,500 staff it already planned to get rid of by the end of last year, these lay-offs will mainly be in Britain and the US.

Of the planned cuts, up to 2,600 will be at its investment banking arm, which was the culprit behind the cumulative write-downs of US$37.4 billion (S$51.1 billion) the bank has made since last July.

(A.4) US project hit by pullout of many Singapore buyers

The decline in the local property market sentiment is now affecting overseas investment targets as well.

Two-thirds of Singapore buyers have backed out of their purchases of units in the much-hyped Chicago Spire in the United States. When it was launched in Singapore in early March, almost 40 buyers have placed their reservation but more than 20 changed their minds after the US sub-prime crisis threatened to take a turn for the worse in the weeks following the launch.

An analyst quipped that it doesn't make sense to buy and hold on to US properties when there are still sub-prime problems.

The 150-storey Chicago Spire is touted as the world's tallest condo, and boasts a unique spiral-shaped design.

As there is a cooling-off period which is a standard practice in US home sales, those buyers who backed out from the deal actually got a full refund of their reservation fee.

(A.5) US Banks camouflaged $48b in write-downs

The US regulatory authority has found out that banks and securities firms, suffering from unprecedented losses from the collapse of the mortgage securities market, are camouflaging at least US$35 billion (S$48.3 billion) of additional write-downs in their balance sheets.

Citigroup and ING have been found to be under-declaring their losses in their quarterly report to the Securities and Exchange Commission.

Adding the US$35 billion leaves the banks with a US$116 billion mountain of losses to climb.

The balance sheet adjustments are in addition to US$344 billion of write-downs and credit losses already reported on the income statements of more than 100 banks.

These firms have raised US$263 billion from sovereign wealth funds, their own governments and public investors to shore up capital. The balance sheet write-downs also reduce equity, which needs to be replenished.

Taking losses on a balance sheet instead of an income statement is acceptable under accounting rules, which make a distinction between so-called trading books and long-term investments.

But observers say that keeping those markdowns off income statements just delays the realization of the losses.

Annex B
Singapore developers at risks of higher borrowing and lower profit

Separately, a property market analysis conducted by BNP Paribas identified the high financial risks borne by small developers including Bukit Sembawang, Low Keng Huat and Lian Beng.

The report pointed out that these developers have almost all their debts due within a year. The bank’s assessment is that even major builders such as Allgreen, Keppel Land and GuocoLand could face difficulties after steep drops in profit in the last quarter as they launch fewer projects.

This situation has accentuated the developers' debt-to-equity ratio to dangerous levels above 70%, up from the industry average of about 62%.

In this respect, JPMorgan identified three developers, namely Allgreen, GuocoLand and Keppel Land, that could face some pressures on cash flow as their debt-to-equity ratio could be pushed up to a very dangerous level of between 80% and 130%.

Speculators who bought properties with little upfront cash before the Deferred Payment Scheme was scraped last October may need to dispose of about 700 units on the cheap this year, and another 2,000 next year, as the properties near completion and instalments are due. And this will increase the developers’ risks.

On the contrary, some ‘big gun’ developers are still hoping that the slump may be temporary and clinging on to the theory that there was always a seven-year cycle. Their wisdom stemmed from the continued arrivals of foreign investments as Singapore sees the completion of two casino projects and the influx of major events such as Formula One races and the Youth Olympics over the next few years.

However, the experts are looking at the numbers that tell a very different story.