Prospects of landed homes looking bright as sentiment improves

THE landed property market remains in the doldrums, after 15 consecutive quarters of price decline. In the first half of 2017, landed property prices fell 2.1 per cent, slightly less than the corresponding period in 2016, which saw a decrease of 2.6 per cent.

On the other hand, the non-landed segment prices have started to show signs of stabilisation with prices only falling 0.1 per cent in H1 2017. The current trend is a divergence from previous cycles as landed and non-landed prices tend to move in tandem at the beginning of a market recovery.

Nonetheless, green shoots of recovery have started to appear, and landed volumes have seen a steady rise on the back of improving sentiments. With demand starting to pick up, is the market approaching an inflection point?

COMMON THEME

Over the past 25 years, the Singapore private residential market has gone through three boom-and-bust cycles and we are still in the midst of the fourth. Looking at the price trends of the landed and non-landed segments, a common theme is observed. The higher prices climb during a property upturn, the harder the correction in the subsequent downturn. This trend has been consistent throughout the four property cycles (Chart 1).

For example, during the first property upturn from Q1 1992 to Q2 1996, landed property prices rose 193 per cent while non-landed prices rose 156 per cent. In the subsequent property downturn, landed prices saw a larger correction of 48 per cent and non-landed prices only fell 42 per cent. In the third property cycle, non-landed properties took the lead during the upturn, achieving a gain of 62 per cent, outperforming the landed price gain of 42 per cent. However, the non-landed properties saw a more pronounced correction during the downturn.

Notably, the subsequent correction that follows a property upturn tends to be of similar magnitude to that of the preceding price gain that causes the price indices of both landed and non-landed segments to converge after a downturn. However, in the current downturn, though landed prices have seen a larger correction so far, a significant gap remains between the landed and non-landed price indices. This suggests a further consolidation in landed prices and could explain why landed prices have continued to fall while non-landed prices have started to stabilise (Chart 2).

BUYERS LURED BACK TO MARKET

Nonetheless, buyers are returning to the market as evidenced by the jump in volumes in 2017. In the first half of 2017, 969 landed properties were sold, compared to 599 units sold in the corresponding period in 2016, representing a 62 per cent year-on-year increase. As landed prices continue to correct, buyers who were previously sitting on the sidelines are increasingly lured back to the market as prices become more compelling (Chart 3).

Based on historical data, a recovery in prices tends to be preceded by a jump in volumes, as observed in the last two property cycles. However, absolute volumes in H1 2017 still look relatively low as compared to previous years like in H1 2009 during the previous market bottom when 1,441 landed homes were sold. As such, volumes may still have to grow further for prices to stabilise.

New landed launches are also showing signs of improvement as seen from the recent encouraging performance. For example, Victoria Park Villas, a 99-year leasehold landed project by CapitaLand, sold 45 units in the first seven months of 2017, compared to 19 units in 2016. As at July 2017 monthly developer sales data, the project is currently 59 per cent sold, with 45 units remaining.

The positive sentiment is also shared by developers, as seen from a recent tender for a landed site from the Government Land Sales (GLS) programme. A 99-year leasehold GLS land parcel in Lorong 1 Realty Park was well participated by developers garnering a total of 11 bids. The landed zoned site was eventually awarded to Hongkong-listed China property developer Fantasia Holding Group, which submitted the top bid of S$75.8 million. Based on the land price, the future development could launch at over S$1,400 per square foot (psf) on land area, which is a significant premium over current landed prices in the vicinity.

LONG-TERM OUTLOOK

Long-term growth prospects of the landed market remain underpinned by its low existing and incoming supply. Landed property makes up only 20 per cent of the total private residential stock, with only 72,747 completed units out of a total of 356,116 private residential stock as at Q2 2017. Going forward, landed stock will expand by only 1.6 per cent, with 1,199 units expected to be completed between H2 2017 to 2021. In comparison, non-landed private residential stock is expected to grow by 15 per cent, with 42,592 units expected to be completed within the same period.

Furthermore, changes to the guidelines for strata landed housing developments in 2014, which lowers the maximum number of units for new strata landed developments, are a testament to the government's intent to safeguard the pleasant living environment and exclusivity of landed estates. As such, the exclusivity and prestige of owning landed properties will continue to grow, and bodes well for the growth of the landed market.

Also, demand for landed property in land-scarce Singapore is expected to continue to rise over the long term. Given Singapore's status as a global financial and trade hub, together with its reputation for "livability" and safety amid an uncertain global environment, high net worth individuals will continue to be attracted to take up residency in Singapore, and will inevitably fuel demand for landed property.

The inflection point for the landed market may continue to elude us in 2017, given the substantial price gap between landed and non-landed prices, cooling measures and still relatively muted volumes. However, one should note that the current property downturn was mainly induced by government intervention and not by financial distress. Therefore, past trends may not necessarily hold. Looking at the potential outperformance of landed property during a market upturn, one may find the risk-reward ratio of investing in landed property still attractive.