Luxury condos - developers banking on local demand

SINCE 2016, there has been a gradual improvement in the number of overseas nationals buying into non-landed private residential properties in the Core Central Region (CCR). This followed a drop that coincided with the termination of the Financial Investor Scheme (FIS) towards end-April 2012. The FIS was then an alternative but popular avenue to gain Singapore Permanent Residency (PR) status and had been a source of overseas demand for real estate here.

Nevertheless, the overall share of transactions in the CCR by foreigners for new and secondary sales has been falling. It is only in the new and sub-sale market that their share of transactions has been trending up since 2012. But compared to 2011 or even 2015, the data still suggests a lack of commitment by overseas nationals.

After these two years, the share of transactions by foreigners in the CCR started to decline. In 2011, the percentage of overseas buyers was 48 per cent for all sale transactions but it fell sharply to below 40 per cent for the year 2012 to 2014. There was a pick-up in the share of overseas buyers in 2015 for new sale and sub-sale transactions, to 46 per cent but it started to soften again to 44 per cent in 2016 and remained at that level in H1 2017 (Chart 1).

Even in the higher priced quantum brackets, those at S$3 million or more, the proportion of overseas buyers has fallen to 47 per cent in H1 2017 and 45 per cent in 2016, from above 50 per cent in the preceding five years.

So what is really happening in terms of overseas interest in the luxury segment of the property market? Although there has been a gradual improvement in the number of overseas nationals buying non-landed property in the CCR, one must remember that it is coming from a low base and their share of total transactions points to a gradual decline in interest. If this is the case, could the recent buying interest be sustained?

Firstly, let us look at the possible reasons for the recent weakness seen in foreigners' demand of non-landed CCR projects. The decline in foreigners' demand was triggered by the removal of the FIS programme in 2012. More recently, there had been exogenous policy measures. These range from China adopting an aggressive stance to curb the outflow of foreign exchange to the Indonesian authorities implementing a tax amnesty period for their nationals to declare and remit funds back. For Malaysia, we have seen that over the past two years, the ringgit has been weakening against the Singapore dollar at a rapid pace.

The decline in China's foreign exchange reserves that began in mid-2014 coincided with Chinese corporate purchases in key gateway cities. In a similar vein, the non-landed CCR segment of the market also saw buying levels increase. A closer look shows that the year-on-year percentage increase in purchases by Chinese nationals in 2016 and H1 2017 outperformed that of foreigners who are non-Chinese, non-Indonesian and non-Malaysian.

Any analysis of the correlation between policy changes in other countries and foreigners' property purchases in Singapore becomes less clear because of two reasons. One reason is that the URA statistics defining foreigners' purchases include permanent residents (PRs). This would include PRs who are either working in Singapore or just having that immigration status without spending the majority of their time here. Nevertheless, by confining our analysis to just the CCR, it is logical to believe that PRs who purchased homes in this market segment are ultra-high net worth individuals and less likely to be those who belong to the working class here.

Secondly, for projects that are sold off-plan by developers, there is a possibility that the nationalities of the overseas buyers have been omitted in some submissions. There are some clues of this in the Cairnhill Nine project where 221 units were sold in 2016. Many agents believe that Indonesians made up a significant percentage of buyers.

However, for the entire District 9 where Cairnhill Nine is located, only 54 new sales were undertaken by Indonesians. Since there are other new projects that saw transactions by Indonesian buyers in 2016, then those transactions from Cairnhill Nine are likely to be lower than 54. Even if we assume that all 54 Indonesian buyers in District 9 last year were concentrated in Cairnhill Nine, that would mean a 24 per cent share of all transactions in the project. Agents on the ground believe that the percentage should be significantly higher.

But where primary sales are concerned, we would assume that if transactions by buyers of one nationality are under-stated, the transactions for all other nationalities may also be understated, so their respective share of transactions would still be somewhat consistent.

Given that the Chinese, Indonesians and Malaysians have consistently been ranked among the top three purchasers by nationality for non-landed CCR properties, we shall focus on how the future may hold for this segment of the local property insofar as demand coming from the nationalities of the three countries (Chart 2).

CHINESE BUYERS

Since the fourth quarter of 2016, the Chinese authorities have been introducing more restrictions to stem the outflow of foreign exchange. One can say that by now, it is virtually an impossible task to remit money from China to buy real estate anywhere in the world. Therefore, while we have seen a sharp rise in the number of Chinese buying non-landed residential properties in the CCR, we believe that moving forward, unless there are policy changes by Beijing, these numbers will start to diminish. For those Chinese who have kept some capital outside of China, they may still stream in for some large quantum deals such as penthouses. But if strict capital controls persist, these transactions will soon dry up and gradually settle to a lower level. Chinese buyers will likely be drop in the ranking of foreign purchasers in the quarters to come.

INDONESIAN BUYERS

With the tax amnesty programme having ended on March 31, Indonesians may continue to be more circumspect about acquiring real estate here. Thus, demand is likely to reach a new norm, possibly below 200 units per annum. However, this is a fraction of 1,387 units that we saw 10 years ago. The "Know Your Customer" rule that has been enforced for real estate transactions is further challenging the marketing process.

This new level will challenge the old adage that Indonesians should be the default target group of customers to pitch to for ultra luxury non-landed projects. While some projects like Cairnhill Nine and OUE Twin Peaks have seen a large percentage of Indonesian buyers, there are other launches that have lower participation rates. For this group in particular, developers and marketing consultants will have to be more focused when targeting Indonesians based on the micro-location and price quantum.

MALAYSIAN BUYERS

From feedback provided by agents and personal experience, the major grouse given by Malaysians not based here is that Singapore luxury real estate is expensive compared to prime London and Australia. The latter two countries are often used as a comparison because many ultra-high net worth individuals in Malaysia received tertiary education there. The strength of the Singapore dollar vis-a-vis the pound sterling and the Australian dollar, coupled with additional buyer's stamp duty (ABSD) of 15 per cent, also serves as deterrence.

For Malaysians, if they find that luxury residential properties here are expensive, they will only find them to be even more expensive further down the road. Therefore, procrastination begets further procrastination and we sense that the currency plus the ABSD have been the main impediment to their participation in the luxury market here.

CONCLUSION

As regional economies take proactive actions to stabilise their currencies and monetary assets, the topology of overseas demand for our CCR residential market has and is still changing. Old adages may be cast asunder and new ones have yet to form. But one thing stands out now for this segment - the increased demand from Singaporeans. Unless the project has unique selling points for foreign buyers, the developer will have to bank on demand from local buyers and this means affordability will be a major consideration. This is especially so for projects located nearer the fringe of the CCR where Singaporeans can still afford to buy.

To stem the decline in demand from overseas nationals, the key is to tweak the ABSD. Unless that is done, the inventory of large units built during the period just before and after the global financial crisis will remain unsold.

If general policy restrictions remain, developers and marketing consultants should be more focused when marketing projects. One way is to look more closely at the price ranges where those top overseas buyers are more pronounced (Chart 3).

With downward pressures on overall overseas buyers' demand, both developers and marketing consultants will have to spend greater efforts to target their product at the right segment of buyers in terms of nationality. The general conditions are still favourable as the supply of CCR properties in the pipeline is manageable and the land supply in the government land sales programme or the private market are dominated by plum sites.