• The dilemma faced by Singapore property investors

  • Real estate investment is quite a touchy subject in Singapore now. As the property market is fairly weak, investing in property has somewhat fallen out of favour. There is some apprehension in the market on what the future holds. We examine some of the trends that investors face today.

     

    Property prices have fallen, but have they fallen enough?

    The Singapore private property price index has fallen 4% in year 2014. As at Q1 2015, this index has fallen by another 1%, from the peak in Q3 2015. In comparison, HDB prices dropped 6% last year and another 1% in Q1 2015.

    Have prices fallen enough and are property buyers attracted to come back into the market? Well we have seen the resale figures climb back up in late May, but a significant number of transactions was in prime districts 9, 10 and 11. So, it is still too early to say that it is a broad-based recovery.

    If you were to ask the man in the street, chances are he will say that property prices are still too high. And that is not surprising because, from a property index perspective, we are back to the 2011/2012 prices and even then, affordability was already a concern for many.  

     

    Existing home owners are not a happy bunch

    If you own a property in Singapore today be it a private condominium or a HDB flat, you are probably not very happy right now. Prices are trending down and the capital gains on your property would have dropped from over a year ago. Rental values are also falling across the board as there is more property supply today. With tightening immigration – which means fewer foreigners working here – and rising interest rates, rental yields are not as good as before. Also, the property cooling measures have made it difficult to sell, buy or refinance.

     

    Interest rates a big concern

    Interest rates in Singapore are low but rising. 3 month SIBOR (Singapore Interbank Offered Rate) rate has almost doubled from a year ago: the June rate was 0.83% compared to 0.36% in June 2014. With the US economy showing signs of growth and expectations that the Federal Reserve will raise rates in September, interest rates can only go up. With rental yields in Singapore hovering around 3% to 4%, property owners do not have much room to make a positive spread. On the other hand, keeping cash is a poor option because major banks are offering savings rates at sub-0.3%, and any increase in interest rates will not help you fight inflation.

     

    Immigration into Singapore is still kept low

    The Manpower Minister has recently stressed that the foreign worker policy will not be relaxed and foreign worker levies will not be reduced. Singapore has enjoyed a population boom in the past decade that has played well for the property market, but with slowing immigration, this positive factor has subsided. The government is committed to take Singapore’s economy through a productivity transformation and this will take time and there will be short term pains which will be felt in the property market, if not already so.

     

    Incoming Supply is High till 2018

    More than 180,000 units of residential property will come on the market between 2015 and 2018. To even out future supply numbers, the Urban Redevelopment Authority (URA) has only 4 confirmed sites in the private residential list for the H2 2015 Government Land Sales program, one of the lowest in recent years.

     

    Overseas property investments have been discouraged

    There has been a concerted effort through the media recently to discourage overseas investments. Singaporean investors have been affected by several high profile investment failures in Brazil, the UK and the US. Iskandar Malaysia has received a bashing by the media, and there have been warnings all round. The Council of Estate Agencies (CEA) has felt compelled to release an advisory to the public on what to look out for when investing overseas. Such moves have caused foreign currency losses, especially in the popular markets of Australia, the UK and Malaysia where the currencies in these countries have all fallen against the relatively strong Singapore Dollar in recent times.

     

    Underlying property demand is still high but fear remains

    Despite all the prevailing negative factors, Singapore remains a preferred investment destination and the underlying demand to buy properties in the city-state remains high. Everybody still wants to own a home in Singapore. What is stopping them from buying is “affordability” as cash down payments are too big particularly with the additional buyer’s stamp duty (ABSD) in place, and financing restricted because of the total debt servicing ratio (TDSR).

    Even if you have the cash for the down payment and can secure the loan, they are afraid to commit for fear of catching a falling knife, should prices continue to fall.  No one is certain if we are at the bottom yet because a 5% drop does not constitute a significant fall and factors such as the high supply and interest rates are potential dampeners. Making a wrong move can be financially detrimental, especially when the sums involved are so high.

     

    No sign on when cooling measures will be relaxed. Maybe 2016?

    There is some hope that a relaxation of cooling measures will give the market the boost it needs and turn a buyer’s market into a seller’s market. However the Ministry of National Development (MND) has been non-committal about that; it says it is still monitoring the market. There are 2 conflicting pressures here. Allowing property prices to drop further and letting this weak market persist may have a detrimental effect to the economy. On the other hand, prices are still too high for comfort and the incoming supply is still too significant to turn the tap back on.

     

    Hence, the dilemma that Singapore property investors finds themselves in. Inaction and a wait and see approach has been the common response. All the signs clearly show that we are in the bear stage of the property cycle and there are no easy answers. Bargain hunters are still waiting for the time to make a killing, but where the property cycle moves from here is still anyone’s guess.

     

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