Another 7-10% fall in private home prices seen: BNP Paribas

Singapore

SINGAPORE is "half-way through the residential down-cycle" with another 7-10 per cent of decline in private home prices seen over the next two years, compounded by the prospects of a rising rate cycle, a softer job market and slower immigration growth, BNP Paribas projected.

This will be a slow bottoming-out process partly due to developers' resilience to price cuts due to their strong holding power and high land costs, said Chong Kang-Ho, head of research for Singapore, Malaysia and Indonesia and Asean property research.

"The implication of a slow bottoming-out process is that policy relaxation could be delayed," he said in a briefing on Tuesday.

Private residential home prices here have fallen 8.4 per cent in the fourth quarter of last year from the peak of third-quarter 2013, according to flash estimates from the Urban Redevelopment Authority (URA).

Mr Chong's projection implies a 15-20 per cent price fall from the 2013 peak; he expects vacancies to rise to 10 per cent by 2018.

One bright spot could be in the high-end segment. Mr Chong commented that there is greater likelihood of stabilisation in this segment, which has seen price premium over the mass-market segment narrowing. The price premium of Hong Kong luxury homes over Singapore's luxury units in districts 9 and 10 has also widened since 2010. "If I'm an international investor, it is a better time to look at Singapore because prices have plunged so much," he said.

But the rental market remains weak - even if property cooling measures are lifted in 2017, that alone will not stem out the weakness unless immigration rules are also relaxed, Mr Chong warned. "Even if the government relax immigration rules, we don't know if foreigners will come in now that the financial institutions are not hiring."

With net rental yield falling to 2-3 per cent and interest rates on the rise, Mr Chong said he does not rule out negative carry in the coming quarters - in other words, the cost of holding the property exceeding the return earned.

He opined that a policy reversal could take the form of raising loan-to-value or tweaking the additional buyer's stamp duty (ABSD), the mortgage servicing ratio (MSR) and the seller's stamp duty (SSD).

Meanwhile, developers' profit margins are expected to stay under pressure with falling residential prices and resilient land costs. BNP Paribas estimates that developers' net margins tanked to 11.8 per cent in 2014 from a peak of 35.7 per cent in 2009.

The government has responded to the surge in private homes completion by cutting land supply under its government land sales (GLS) programme. But this could have a "negative psychological impact" on developers, which may bid at higher prices in order to secure land, Mr Chong reckoned. Their hunger for land is reflected in their triggering of two private housing sites on the reserve list for sale last week.

On closer look at their bidding patterns, Mr Chong noted that the number of bidders per land site last year rose to 9.3 on average, from 7.2 in 2014, adding that this could impede developers' ability to restock land inventory at reasonable costs.

There has also been a crowding-out of traditional developers in the likes of City Developments Limited, Frasers Centrepoint Limited and Far East Organization by "non-traditional" developers - defined as foreign developers, boutique developers and construction companies.

Last year, these "non-traditional" developers secured some 82 per cent of the 12 private residential sites, up from only 18.3 per cent of the tender sites back in 2009.

Developers have also been cautious in their bids lately by bidding at above the mean margin buffer of 12.1 per cent - which is the difference between the potential average selling price for the project and the estimated breakeven cost. "In other words, they are building a buffer against future price declines," Mr Chong said.

With higher land costs and a more uncertain environment, more bidders are also forming consortiums. The average number of consortium partners for land bids rose to 3.4 in 2015 from 2.6 in 2014, BNP Paribas estimated.

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