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Risks, bright spots in mass-market residential sector

Thursday, April 7, 2016 - 05:50

AN expected 21,906 private residential units are slated for completion islandwide in 2016, with more than half of them (11,507 units) located in the Outside Central Region (OCR), where the bulk of units in the so-called mass market segment can be found. Between 2010 and 2015, an annual average of 6,987 units was completed in the OCR, a 5.1 per cent growth per annum.

With a total of 157,616 available units in the OCR as at Q4 2015, the new completions in 2016 are equivalent to 7.3 per cent of the OCR stock. Although this is lower than the 9.3 per cent increase in stock in 2015, it remains higher than the preceding five-year average of 4.6 per cent. This upcoming stock entering the market is likely to put further pressure on rents in the OCR. As at Q4 2015, URA's private residential rental index has declined on a quarter-on-quarter basis for 10 consecutive quarters.

Of the three segments - Core Central Region (CCR), Rest of Central Region (RCR), and OCR - private homes in the OCR experienced the largest decline of 9.3 per cent from its high in Q2 2013, compared with the 5.2 per cent and 8.9 per cent decline from their last highs in Q3 2013 in the RCR and CCR respectively.

Reflecting the pressure from an enlarged stock, vacancy rates have also increased. It stood at 8.4 per cent in Q4 2015, significantly higher than the quarterly average vacancy rate of 4.5 per cent in the past five-year period from 2010 to 2015.

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With higher vacancy and the pending influx of completions, is there a value proposition for mass-market private homes in the OCR? Despite weakening rents, Knight Frank's analysis of a basket of private residential properties reveals that average gross rental yields in the mass market held up at 3.58 per cent in the last quarter of 2015, slightly higher than the 3.41 per cent and 3.04 per cent in the mid-tier and high-end markets respectively.

Amid rental compression across all market segments, average resale prices in the mass market have fallen at a faster rate relative to those in the mid-tier and high-end markets.

Several planning areas in the OCR have also outperformed the average yield in the region. Gross rental yields in Sengkang, Sembawang and Pasir Ris were 3.8 per cent to 4 per cent in 2015, and were among the top five performing planning areas despite the significant growth in stock in the past five years.

We surmise that this is likely due to lower average prices in these locations, as well as a larger proportion of newer units. Jurong West and Jurong East, in particular, have benefited from the enhanced infrastructure and new commercial amenities in the Jurong Regional Centre. Gross yields in these planning areas were 3.9 per cent to 4.1 per cent in 2015.

However, it cannot be assumed that the best places to invest are those with strong current gross yields. The healthy yields seen in the OCR during the 2012-2014 period was supported by the buoyant rental market. This compelled budget-constrained tenants to explore locations further from the city, thereby benefiting the OCR in terms of lower vacancy rate and higher rents. However in 2015, as the rental market swung in favour of tenants, many of them have taken the opportunity to re-locate to better and newer projects with good accessibility and connectivity. The trend of flight to quality is expected to continue in 2016.

DEVELOPMENTS SLATED FOR COMPLETION THIS YEAR

Given that new properties in well-connected locations have strong appeal to tenants, properties which are soon to be completed could offer a possible investment opportunity, if priced attractively. In particular, residential developments near MRT stations are typically more highly sought after.

We looked at a list of non-landed projects in the OCR with 300 units and above expected to obtain Temporary Occupation Permit (TOP) in 2016 and 2017.

However, as most of them were launched during the buoyant period in 2013, and have since achieved very healthy absorption rates, few units are left unsold. Nevertheless, opportunities could be found in the resale market, if owners are looking to sell.

Projects close to the MRT stations on the Downtown Line could also offer good value proposition to investors. With the completion of the first two phases of the line, connectivity to these areas, and hence rentability of the properties in close proximity, has significantly improved. It will be further enhanced with the completion of Phase 3 of the line.

New sales volume in the mass market segment was 5,149 units in 2015, an annual increase of 28.7 per cent. While this figure is a far cry from the 16,135 units transacted in 2012, it could foreshadow a reversal of the downward trend seen in the previous two years. Perhaps, as a further early sign of the return of capital, resale transaction activity in the OCR also increased by 17 per cent annually to register 2,890 units in 2015.

Transaction activity picked up as prices moderated to be more in line with buyers' expectations and appetites. Average new sale prices stood at S$1,151 per square foot (psf) in 2015, 2.4 per cent lower than in 2014; average resale prices stood at S$919 psf in 2015, one per cent lower than in the preceding year.

At the same time, a tapering pipeline supply may offer some relief among developers in the new sale market, and also owners looking to sell their units in the secondary market. There were 9,735 total unsold units in OCR as at Q4 2015, and this is significantly lower than the quarterly average of 13,780 units between 2010 and 2015.

However, the lingering worry is the number of homes possibly bought for investment and which will be completed soon; this may intensify competition in the leasing market. With more investors putting up their properties for rent, tenants are likely to enjoy higher bargaining power, further driving down rents and consequently, rental yields.

This could result in a fall in prices as investors are more compelled to sell, leading to rising value proposition of mass market homes for genuine owner occupiers.

Apart from the age of the property and proximity to MRT stations, investors must also consider the requirements of potential tenants in terms of the unit sizes and format type.

For example, suburban locations typically see higher demand for larger unit types for the family, as opposed to smaller units. The dual attributes of larger units at lower prices (compared to mid-tier and high-end homes) present value for family homebuyers.

In light of the prevailing economic uncertainties and the hike in the Singapore Interbank Offered Rate (Sibor) since early 2016, caution among prospective investors and homebuyers is expected to heighten. Investors who are looking to buy lease-ready completed properties could hunt the market for properties at reasonable prices, and ensure that the target rents are achievable.

Rents can be expected to soften further, and hence, investors are likely to be very cautious in their purchase decision.

  • Tay Kah Poh is executive director and head of residential; Alice Tan is director and head of consultancy and research; and Debbie Lam is consultancy and research manager at Knight Frank.
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