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Up, up and away

Our panellists assess the outlook of Singapore's property market and give their take on whether the upward trend will continue


Matthias Dekan.

Christine Sun.

Joseph Tan.


Genevieve Cua, BT Wealth Editor poses questions to wealth experts for their insights on Asia ex-Japan assets.

Matthias Dekan, HSBC Bank (Singapore), Head, Customer Value Management. Matthias has been working in the financial industry for over 15 years. Besides spending time with his three young children, he enjoys getting to know firsthand different countries, people and cultures.

Christine Sun, OrangeTee & Tie Head of Research and Consultancy. Christine has more than 15 years of research and consultancy experience. She develops value-added research on Singapore's residential market. In her free time, she engages her artistic self by painting in oil.

Joseph Tan, CBRE Executive Director, Residential. Joseph is a veteran in Singapore's residential project marketing circle. He built up one of the most successful project marketing teams in Singapore. He spends his weekends at the golf course at Singapore Island Country Club.

Sentiment over Singapore's residential property market has improved markedly, spurred partly by a flurry of activity in the en bloc space. But how sustainable is this uplift? Our panel of experts share their views.

Singaporeans and high-net-worth individuals have always been partial to real estate investments in their portfolios. What place does real estate have in portfolios? Why might you advise for or against an allocation?

Mattias Dekan: Real estate is an asset class that can be a core building block within an overall investment portfolio. Real estate returns are linked to economic activity and are less correlated with other asset classes, giving it an added diversification to an investment portfolio. However, owning a portfolio of physical buildings can have practical challenges, namely large lot sizes, lack of liquidity, high-transaction costs and high demands associated with the management of physical buildings.

These challenges augment when seeking diversification within real estate, either geographically or through owning different types of buildings, such as commercial or office or industrial. Real estate equities and Reits can provide relatively liquid access to the indirect returns of physical buildings by providing exposure to a large underlying portfolio of physical buildings with global exposure across multiple operating clusters, with lower transaction costs.

Furthermore, over time, the correlation between property equities and direct property increases whilst the correlation between property equities and the broader equity universe decreases.

Christine: The economic fundamentals in Singapore have always been strong, buoyed by our stable GDP growth, strong employment rates and political stability. Although the current price appreciation of some residential properties may depress rental yields, real estate is still a good long-term investment choice as prices of most asset classes in Singapore have risen over time. After all, real estate investment has been a powerful wealth building tool that has made many millionaires here.

We foresee that local and foreign investors will remain confident of Singapore's property market as many believe that properties here will continue to post good capital appreciation and sustainable rental income in the long run. Many foreigners still feel that properties here are attractively priced compared to other global cities like New York and Hong Kong.

Joseph: By virtue of Singapore being a gateway city, real estate in Singapore will always appeal to investors. Real estate assets are traded in a politically stable environment; policies relating to property are transparent; and economic fundamentals remain sound. It is no surprise that Singapore is the destination of choice for commercial property investments in CBRE's annual investor intentions survey (2018). And it is equally unsurprising that Singapore overtook the US as the destination of choice for Chinese overseas investors in 2017. The optimism in Singapore's commercial real estate market has always had a positive impact on the residential market.

High-net-worth investors continue to view Singapore luxury residential property as a long-term play, confident that their wealth will be preserved. With improving confidence and on the back of stronger GDP growth, the outlook for the Singapore housing market is positive. CBRE's Global Living 2017 report found that four of the top five most expensive cities to buy a home remain the Asian giants of Hong Kong, Singapore, Beijing and Shanghai. On a $ per sq ft basis, Hong Kong remains firmly at the top where prime properties average US$3,160 psf (US$6.3 million). In comparison, Singapore's prime properties average US$1,463 (US$2.2million). This makes Singapore's prime residences a very valuable proposition.

Based on your views of the near-term demand/supply balance, how sustainable is the recent upturn in sentiment and values? Please share your top picks in terms of the choice of districts/regions that may offer the most attractive price or yield appreciation potential. What do you see as the likelihood that any of the cooling measures might be lifted, or increased?

Christine: We feel that the market should be able to absorb the current level of pipeline supply, going by historical trends. Firstly, using URA figures, the current demand for primary and secondary private homes has been robust, hovering above the five-year average (2013 to 2017) of about 18,000 units. Further, the current total 23,514 unsold units in Q1/2018 is below the average 28,000 units between 2013 and 2015, indicating that the market is able to absorb the available stock.

While supply is expected to build up as a result of the recent collective sales fever, we feel that demand would continue to rise in tandem to absorb the additional homes. Moreover, foreign demand has been growing in recent months and is expected to rise further since our asset prices are more attractive than many major cities.

En bloc sales and government land sales will drive capital appreciation of private homes in the area. Looking at the recent land sales, we foresee good capital appreciation in areas such as Orchard Road, River Valley, Sophia Road, Balmoral and Bukit Timah for the Core Central Region; East Coast Road, Queenstown and Outram for the Rest of Central Region; and Serangoon, Hougang, Tampines and West Coast for the Outside Central Region.

We do not foresee that the government will introduce any major cooling measures in the months ahead. While overall prices have escalated in recent months, the number of transactions remained low as compared to the high volumes seen in 2007 and 2010-2013.

Further, various pre-emptive measures like the TDSR (Total Debt Servicing Ratio) and Seller's Stamp Duty are in place to stabilise the market while factors that fuelled the property bubbles in 2007 and 2010 are notably absent - such as high volumes of sub-sales (an indicator of speculative activity), many overstretched borrowers and influx of foreign buyers.

Joseph: I expect investor interest to remain centred on prime residential homes, as prices in these districts have declined most since the last peak. As more projects are completed, developers will continue to come up with various schemes such as indirect price discounts to market them. On top of brightening economic prospects, the Singapore residential market appears to be on firmer footing as speculative activity has been reduced to a minimum, foreign liquidity has eased, and financial checks are in place to prevent over-gearing.

Projects that are located close to upcoming MRT stations will have potential upside arising from improved accessibility and connectivity; these include projects located near Napier, Orchard Boulevard and Orchard stations along the Thomson-East Coast Line, scheduled to open in 2021. A few completed prime projects sold well in 2017 - Ardmore Three, priced at around S$3,940 on average; two other projects Gramercy Park and Leedon Residence also saw good traction. The success of these projects will spur more activity this year.

On the whole, high-end residential prices are now between S$2,200-S$3,200 psf, some two per cent below the price levels four years ago.

The government has regularly reviewed the property market to maintain credit worthiness. The most recent property measure was to raise the buyers' stamp duty from 3 to 4 per cent for properties valued in excess of S$1 million. The barriers to entry have therefore been adjusted upwards. The government has repeatedly explained the rationale for the property measures and all things being equal, there is no impetus for the measures to be lifted, particularly in light of the latest price movements and uplift in sentiment.

What is your outlook for Singapore and US interest rates and inflation in the near term and how would this affect buying sentiment?

Matthias: We expect two further US interest rate hikes in 2018. Whilst the recent US$1 trillion US tax cut package is expected to bolster growth in the short run, this may be inflationary as the economy is already operating near full capacity. Rising interest rates are usually a sign of a growing economy and subject to suitable constraints on new supply, rents are expected to increase as businesses and employment grow and wages rise. The environment driving higher interest rates should, therefore, be positive for real estate fundamentals, not negative.

Generally, rising interest rates and inflation may "dampen" buying sentiment. However other factors come into play, such as economic and employment outlook, current collective en bloc sales that are generating demand, supply of new property launches, rental yield and take-up, and government intervention in the property market.

Christine: Although interest rates have been rising gradually, rates are still considered extremely low by historical standards. We do not foresee a steep hike in the near term as the US Federal Reserve is likely to keep interest rates low.

Further, all banks currently calculate the TDSR using a standardised 3.5 per cent assessment interest rate, which already provides a buffer for any potential short-term interest rate fluctuations. As interest rates are expected to remain low, investors will continue to buy properties as they will benefit from the low cost of borrowing. We expect some buyers to continue to opt for fixed rates as a hedge against interest rate rises.

Joseph: The lending environment in Singapore has begun to change, and this may impact investors' risk appetite going forward. In 2017, the MAS began to monitor property loans which developers were securing from banks. With three rate hikes expected in 2018, short-term interest rates are likely to increase in tandem.

When the US Federal Reserve increased the target range of the US effective federal fund rate in 2017, 3M Sibor rose from 0.97 per cent in 2016 to 1.5 per cent in 2017, and 3M SOR increased from 1.01 per cent in 2016 to 1.11 per cent in 2017. These are expected to continue increasing, which would lead to higher interest expenses. Rising borrowing rates are likely to place pressure on long-term interest rates.

What advice would you have for buyers and sellers on how they can best be positioned to take advantage of this upturn?

Matthias: HSBC's Expat Explorer Survey 2017 report shows that more than 60 per cent of Singaporeans living abroad own properties overseas. Of those surveyed, 45 per cent are based in UK while 11 per cent are based in Australia. Our findings are reflective of data compiled by real-estate data and analytics firm, Real Capital Analytics. In 2017, Singapore investors invested close to US$28.4 billion, which is a 40 per cent YoY increase from 2016, in overseas properties. While Singapore investments have remained concentrated in the Asia-Pacific (over 40 per cent), it was the third largest spender in US real estate last year.

Therefore, both buyers and sellers must do their sums carefully and take note of the applicable stamp duty and other associated costs for the property purchase or sale, particularly for overseas transactions. It will be prudent for buyers to factor in a potential rise in interest rates including any foreign exchange rate risk to compute the monthly repayment affordability. Whether they are buying for own-stay or investment, it is important to work out the budget that is appropriate for the property loan commitment with a medium to long term view.

Christine: They should look out for developments that have the potential for high capital appreciation, such as properties that are (a) currently undervalued when compared to their historical peak prices; b) have the potential to be converted for Airbnb-style home sharing and c) are near collective sales sites or government land sales sites that have been successfully sold.

On point (a): Investors may see robust returns when they buy properties that are currently undervalued. The prices of many luxury homes are still transacting about 10 to 20 per cent lower than their previous peaks, owing to less foreign demand when higher levies were imposed to cool the property market. Prices of these homes are expected to recover as the current stock is dwindling and new supply will only enter the market about one to two years later. For better affordability, buyers could consider smaller apartments in the prime districts so as to capture a slice of the luxury segment now before the market fully recovers.

(b) The government has the intention to implement an 80 per cent consent rule for private developments to adopt the Airbnb-style home sharing. If approved and investors wish to invest in such a unit, they should target smaller developments or those with many small-format units as these projects are more likely to receive the required consent, since many investors would have bought these units for the intent of long-term leasing.

Therefore, smaller condominiums and apartments in areas like Killiney, Novena, Newton, Telok Kurau, Tanjong Katong and Serangoon, that have been traditionally popular among foreign tenants, would have a higher potential for Airbnb-style home-sharing. Some luxury and mid-tier condominiums or projects near MRT stations could also be considered.

c) As mentioned earlier, en bloc sales and government land sales will drive capital appreciation of private homes in the area. Looking at the recent land sales, we foresee good capital appreciation in Orchard Road, River Valley, Sophia Road, Balmoral and Bukit Timah for the Core Central Region; East Coast Road, Queenstown and Outram for the Rest of Central Region and Serangoon, Hougang, Tampines and West Coast for the Outside of Central Region.

Joseph: Buyers have some room for maneuver, albeit options for luxury projects are limited. New luxury projects are probably now in excess of S$2,000-S$3,000 psf which translates to a quantum of about S$8 million. These are limited in stock, which then shifts the spotlight to older projects. These are typically 10 to 16 years old and cost about S$3,000 psf, although pressure on pricing is mounting as sellers are looking to capitalise on future pricing. These older units have seen some traction in the past year, mainly because the supply of new projects is tight. Until more new projects come on stream, buyers who would like to take advantage of the early part of the upturn should probably be realistic in negotiating for a resale unit.

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