The rise and rise of exec condos

NEW property measures were recently announced to cool the market and keep price increases in line with economic fundamentals. Potential buyers of executive condominiums (ECs) may emerge relatively unscathed from the property curbs. Apart from an increased 5 per cent down payment due to the stricter LTV (loan-to-value) limits, purchasers of new EC units will not be affected by the increased additional buyer's stamp duty (ABSD) as they are not allowed to own any other properties. We anticipate that ECs will continue to remain attractive among Singaporeans after the pre-emptive measures.

Dwindling supply is driving EC prices to historical high

There is strong pent-up demand for new ECs stemming from a dearth of new launches over the past few years. Based on Urban Redevelopment Authority (URA) data, sales volume of new ECs rose 57 per cent year-on-year to 3,999 units in 2016. It increased further to 4,011 units in 2017.

In contrast, the market has been facing an undersupply of ECs. Demand for new ECs (21,248 units) outpaced the number of units launched (19,460 units) over the period from 2012 to H1 2018.

This is due to a sharp decline in new EC launches from nine projects in 2012 to only one project in H1 2018. Consequently, the number of EC units launched fell drastically by almost 70 per cent, from 4,936 units in 2012 to 1,555 units in 2017. For the first half of this year, only 628 new units were added into the market from a single EC launch (Rivercove Residences). The growing demand pared down developers' unsold stock from a high of 3,492 units in Q2 2016 to 45 units in Q2 2018.

The potential supply of ECs may not meet the demand of buyers in the coming months as there are only four new EC projects in the pipeline.

The first is the project on the Sumang Walk site (with an estimated 820 units) that was awarded in the first quarter of this year.

Another two projects are on sites that have been launched for sale; the tender for the site in Canberra Link (which can yield about 450 units) closed on Sept 4, while the tender for the Anchorvale Crescent site (which can be developed into a maximum of 550 units) will close on Sept 14.

The fourth project in the pipeline is on the Tampines Avenue 10 site (estimated to yield 695 units) which has yet to be launched and is currently on the H2 2018 Government Land Sales (GLS) Programme confirmed list.

Together, these four projects will generate a potential supply of about 2,500 units that could be sold to end-users over the next few years. This is unlikely to meet the annual demand of about 3,000 units based on the four-year average sales volume between 2014 and 2017.

The next EC projects slated to be launched for sale to buyers are on the Sumang Walk site (from mid-2019) and the Canberra Link and Anchorvale Crescent sites (from early 2020).

The dwindling supply has driven EC prices to historical highs.

Based on data from URA Realis downloaded on Aug 24, 2018, the average price of new ECs climbed substantially by 18 per cent quarter-on-quarter, from S$808 per square foot (psf) to S$953 psf in Q2 2018. The pace of growth has surpassed that of new private condos (7 per cent) over the same period. On a y-o-y basis, the average price of new ECs rose 21 per cent from S$788 psf in Q2 2017.

Price hikes were seen across most recent launches. New sales at Parc Life, Northwave, Sol Acres and The Vales transacted about 4 to 9 per cent higher q-o-q in Q2 2018.

Many new projects were also selling above an average price of S$850 psf in the second quarter of this year, including Treasure Crest (S$1,031 psf), Wandervale (S$979 psf), Rivercove Residences (S$976 psf), The Vales (S$914 psf), The Criterion (S$893 psf) and Parc Life (S$873 psf). Comparatively, only one new project (The Vales at S$853 psf) was transacted above S$850 psf in Q2 2017.

Million-dollar ECs may become the norm

More ECs have breached the S$1-million mark in recent years. The number of young, affluent buyers snagging bigger and more luxurious ECs has grown since the monthly income ceiling for buying new ECs was raised from S$12,000 to S$14,000 in 2015.

Over the last five years, 20 per cent or 3,132 EC units were sold at S$1 million and above. In contrast, only 8 per cent or 497 EC units were sold at this price range in the preceding five years (2008-2012). For the first half of this year alone, almost 40 per cent of ECs (366 units) were sold at the million-dollar price tag.

Million-dollar buys may become the norm as EC land prices have risen. Rivercove Residences, with a land cost of S$355 per square foot per plot ratio (psf ppr), sold more than half its units at over a million dollars each. The land cost of the yet-to-be launched project at Sumang Walk is even higher at S$583 psf ppr.

Will more EC buyers be over-leveraging?

Some buyers may be overstretching their affordability with their million-dollar purchases. Assuming a 25-year loan tenure and a 3.5 per cent per annum interest rate for a couple with a combined monthly income of S$10,000, the maximum monthly mortgage repayment based on the 30 per cent Mortgage Servicing Ratio (MSR) is S$3,000 and the maximum loan available is estimated at S$600,000.

Considering a S$200,000 down payment with no additional financial support or external funding, the maximum purchase price that the couple can afford for a new EC will be around S$800,000. Adopting the same computation, the recommended maximum purchase price of a new EC unit for couples earning S$12,000 is S$960,000, and for S$14,000 (current income cap for new EC purchases) is S$1.12 million.

Buyers who had bought million-dollar ECs in the past could have received some form of financial support from family members or used a substantial portion of their savings; which otherwise could be set aside for their retirement or emergency usage. The number of buyers who may be over-leveraging may continue to grow as new ECs become pricier.

Some buyers may also need to compromise on their living comforts by buying smaller ECs for their affordability. Already, small-format EC units (below 500 sq ft) have begun sprouting; from 2016 to the second quarter of this year, 50 such units were sold. Sales of EC units between 500 sq ft and 800 sq ft have also increased from 142 units in 2015 to 432 units in 2017.

The escalating prices of ECs may become an insurmountable hurdle for the aspirations of the sandwiched class of home buyers - whose monthly household income is too high for them to qualify to buy a new public housing flat but find a private home purchase out of reach.

Marginal buyers may increasingly be forced out of the market. It is therefore pertinent for the authorities to consider releasing more land to moderate prices to a more sustainable level.

Christine Sun is head while John Tay is an analyst at OrangeTee & Tie Research & Consultancy.

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