Dark clouds over Singapore’s residential sector
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What is in store for the residential sector in 2016?08 January 2016, TODAY |
I have been wondering about the market indices in 2015 and previously published two head-scratching-and-thinking-out-loud pieces about why the indices seemed to be in suspended animation while prices in the real world seemed to have moved down a little more.
Table 1: Private residential price index, rental index and total number of vacant units over the last four to five quarters.
|
Price index |
Rental index |
Vacant units |
4Q14 |
147.0 |
114.1 |
24,062 |
1Q15 |
145.5 |
112.2 |
22,346 |
2Q15 |
144.2 |
111.0 |
25,071 |
3Q15 |
142.3 |
110.3 |
25,169 |
4Q15 |
141.6 (flash estimate) |
Not available |
Not available |
% change over 4Q14 |
-3.7 (4Q15 flash vs 4Q14) |
-3.3 (3Q15 vs 4Q14) |
+4.6 (3Q15 vs 4Q14) |
Source: URA, Century 21 (IPA)
The number of vacant private residential units remained high throughout the year due to a second consecutive year of near-record high completion of about 19,000 units. On the demand side, the population increased at the slowest pace in over 10 years on the back of a weak employment market and tight foreign manpower policies. The oil and gas, commodities, manufacturing and financial services sectors are all “right-sizing” their headcounts in Singapore, dampening the growth of Employment Pass holders who are potential tenants of private residential properties.
Official vacancy numbers do not include an increasing number of rooms for rent in private residences. Private residential landlords also face competition from whole flat and room subletting in the HDB segment. Even Executive Condominium (EC) units that are within their five-years Minimum Occupation Period (MOP) have rooms available for rent. As of 3Q15, there were 1,847 vacant EC units. An online search shows that all 12 ECs that were completed since mid-2013, and hence still within the 5 year MOP, have rooms or part of the dual-key units available for rent.
On top of the increased competition, more and more tenants are signing one-year rental agreements partly because their employment contracts may not be very secure, and partly to take advantage of declining rentals. In my work as a property agent, rentals and transacted prices seemed to have declined by closer to 10% over the last year.
However, 2015 was an eventful year for Singapore. Perhaps the official indices will play catch up with prices on the ground over the next few quarters. Right now though, many landlords are still holding out for high asking prices, as they deem that our GDP growth is above expectations, holding costs are cheap and the indices have not dropped much. But with the headwinds coming on strong in 2016, price declines should accelerate.
The three main concerns for residential investors in 2016 should be:
1. Slow growth in China’s economy and a realignment of the renminbi exchange rate to a trade weighted basket, will have a negative impact onSingapore’s manufacturing and external trade;
2. A 22,000 increase in new stock (excluding ECs and HDB flats) while the influx of foreigners slow due to weak jobs growth;
3. Increase in mortgage rates. The 3-month Singapore Interbank Offer Rate (SIBOR) increased by about 260% in 2015, to above 1.18%. With rising market risks, SIBOR will increase even more in 2016.
Dark clouds over Singapore’s residential sector
While many voice their wishful desire for the government to lift cooling measures, the fact remains that global economic headwinds, coupled with a drop in rental demand, stiffer competition from vacant apartments and rising interest costs, will lead to lower prices. Remove the Additional Buyer Stamp Duty totally and we might see a few owner-occupiers come into the market. But astute investors will remain on the sidelines as they wait out the poor rentals and high interest costs to bring prices even lower. In fact, any lifting of cooling measures may be viewed as official confirmation that the market is bad.
Investors are under the misguided impression that the government can open our gates and foreigners will flood in. That is only true provided Singapore remains attractive, offering jobs and business opportunities that draw talent. However, the recent push for productivity, shrinking manufacturing and commodities sectors, right sizing of financial institutions, etc. have led to three consecutive years of declines in the number of work passes issued. The target for 6.9 million people in 2030 requires us to grow our population by 80,000 to 100,000 per year. But in 2014 and 2015, we only increased our total population by 70,500 and 65,300 respectively.
In addition to the 25,000 vacant units and the unknown number of rooms-for-rent in HDB and ECs competing, we need to worry about the upcoming supply of residences purchased for investment.
Entering 2016, there is a still some uncertainty about new supply as it seems that developers are attempting to push out their earnings down the road, by taking a longer time to complete their projects. For example, data from the last seven quarters from 1Q14 to 3Q15 shows that a few thousand units expected to complete in 2015 were delayed to 2016. In 1Q14, 26,000 units were to be completed in 2016 but the number dropped to below 21,000 in 4Q14 and as of 3Q15, is at 22,351 units. Going forward, several thousand units expected to complete in 2016 could be further delayed to 2017. The forecast for how high vacancy rates may rise in 2016 is a little murky.
Chart 1: Private residential units expected to complete in 2015 to 2019, published over URA quarterly reports from 1Q14 to 3Q15.
In summary, we should expect demand to soften due to a weak economy, slower jobs growth and fewer foreign talent inflow. On the supply side, we expect vacancies to hit 35,000 units, equivalent to 10% vacancy rate, thereby increasing competition amongst landlords. Interest costs will also rise, pressuring the stretched landlords to sell their investments faster. I believe that both the price and rental indices will drop by 8 to 12%, playing catch up with the drop in the real market.
Investors need to accept that the tiny domestic market of Singapore has to adapt rapidly in this changing world. Simply opening our doors may not bring additional population. Likewise, reversing the cooling measures will not put tenants in to vacant units. Investors might like to wait until real tenant demand grows before committing.