High-end rally seen as city centre homes hit peak

[Musicwhiz]

Jan 4, 2011
High-end rally seen as city centre homes hit peak
But URA data shows private property prices overall moderating in Q4
By Esther Teo

NEW data on property sales tells a mixed tale - city centre apartments have made a comeback and values are now likely at record levels but private home prices overall are moderating slightly.

Cooling measures introduced in August last year seem to have taken a little of the heat out of the market with prices for non-landed homes up 2.7 per cent in the three months to Dec 31 - slightly down on the 2.9 per cent increase in the third quarter.

Signs of moderation were even starker among private suburban apartments, with prices up just 1.6 per cent in the fourth quarter, down from the 2.2 per cent increase seen in the third.

But even a slower fourth quarter could not take the shine off what has been a bumper year for private homes, no matter where you live - or bought.

Prices of apartments in the city fringe jumped 17.5 per cent last year while they were up 14.5 per cent in suburban spots and 14.3 per cent in the city centre, according to flash estimates from the Urban Redevelopment Authority (URA) yesterday.

All in all, prices for private homes - landed and non-landed - surged 17.6 per cent last year.

The city centre, which has much of Singapore's high-end property, was clearly the laggard last year but the URA numbers show that a rally in this zone has finally kicked in.

Prices of private apartments in the city centre increased 2.3 per cent in the last quarter and are now 2.1 per cent higher than their previous peak, in the first quarter of 2008.

Experts tip that these prices could rise a further 8 to 15 per cent this year given the increasing number of foreigners buying here, healthy economic growth and low interest rates.

Mr Png Poh Soon, head of research and consultancy at Knight Frank, said that foreigners made up 24.7 per cent of buyers last year - up on the 21.8 per cent in 2009. 'The tightened regulations in Hong Kong and aggressive anti-speculation rules in China will inevitably direct some investors from these buoyant markets to Singapore,' he added.

The trend was already evident in the last quarter when Chinese buyers edged out Malaysians as the largest proportion of foreign transactions for the first time, Mr Png said.

Ms Tay Huey Ying, director of research and consultancy at Colliers International, expects city centre prices to jump by between 10 and 12 per cent this year while the overall market should see values rise by 10 per cent.

Experts said that buying momentum for high-end homes is likely to continue, with prime projects such as Ardmore 3 and Le Nouvel Ardmore on the way after recent successful launches such as Robinson Suites, Suites at Orchard and The Glyndebourne.

Ms Tay added that slowing price rises in suburban homes - up just 1.6 per cent in the fourth quarter - should keep further cooling measures at bay in the short term.

Mr Ong Kah Seng, senior manager of Asia-Pacific research at Cushman & Wakefield, added that modest price rises in suburban condos despite buoyant new sales in November and last month showed that the Government's measures have stabilised prices.

But he believes the cooling steps will have less impact on the top end.

'Prime residential properties, which have been the laggard in 2008 to 2010, are expected to shine in 2011, while those in (suburban areas) may be relatively restrained... due to the large forthcoming supply which intensifies competition among developers and provides more choices for home buyers,' he added.

The URA estimates capture mainly transactions in October and November as the cooling measures intended to quell speculation - including tighter lending rules for buyers with second mortgages - started gaining traction. The data will be updated in four weeks.

Separately, Far East Organization said yesterday that 253 out of 299 Soho-style - small office or home office - apartments released at 338-unit The Tennery at Bukit Panjang have sold for $950 to $1,350 per sq ft.

esthert@sph.com.sg

[egghead]

I always fail to understand why people still continue to buy investment properties in this market. The rental yield is only about 3% and as a landlord, you will have to deal with a lot of small issues raised by the tenant.

Instead, why don't people who buy investment properties buy into Reits instead? The advantages are:
- high liquidity and can invest in smaller units
- higher yield
- professional management and thus no need to handle tenants
- tax free

The only difference I see is that with physical properties, an investor can use low cost leverage by bank loan.

Any other expert views or insights?

[Musicwhiz]

I personally am NOT into investment properties, and I can't see the attraction either compared with say investing in solid companies paying a dividend yield of around 4-5%.

Then again, it's been widely recognized that Singaporeans are property-mad, so this may be the reason for the craze and the rise in prices.

Everyone will now get the impression that property is where the "quick and easy" money can be made......

[mrEngineer]

The main reason why investing property is an attractive option as it can be easily leveraged, no complicated knowledge required and capital gains are large (as magnified by the leverage). In Singapore, the risks are further reduced due to stable government, lack of land and regional hub status. That is why we do not see large losses like sub-prime or property crashes like those in Spain but the capital gains are as attractive as well.

However, we all know that the assumption of good times last forever will be tested someday.. I wonder HK ever experience a severe property crash before?

[egghead]

Interesting comments by MW and mrEngineer.

I tried putting in some numbers, I have the following calculations:

Case A. Initial capital of $300,000 invested in Company A which provides 5% dividend yield and 10% capital gain compounded over 10 years. For a 10-year period, the investor will get $15,000 annual cash flow (from dividend) and his initial capital would have grown to $778,112.74

Case B. Same initial capital of $300,000 but bought a $1,000,000 property using 70% loan and mortgage interest cost of 2%; and assumes he gets un-interupted gross rental of 3% over 10 years. Assuming further that his property valuation goes up at 4% annually. For the same 10-year period, this investor will get $16,000 annual cash flow (3% gross yield less 2% interest cost on loan) excluding any other costs. His property value would have grown to $1,480,244.28 which will net him $780,244.28 after subtracting the loan.

The above does support mrEngineers comments on the effect of leverage and capital gain.

[cif5000]

I once told my wife this dry joke.

There are only 2 types of people who invest in properties.
1. People who have the money
2. People who don't have the money

[mrEngineer]

Interesting comments by MW and mrEngineer.

I tried putting in some numbers, I have the following calculations:

Case A. Initial capital of $300,000 invested in Company A which provides 5% dividend yield and 10% capital gain compounded over 10 years. For a 10-year period, the investor will get $15,000 annual cash flow (from dividend) and his initial capital would have grown to $778,112.74

Case B. Same initial capital of $300,000 but bought a $1,000,000 property using 70% loan and mortgage interest cost of 2%; and assumes he gets un-interupted gross rental of 3% over 10 years. Assuming further that his property valuation goes up at 4% annually. For the same 10-year period, this investor will get $16,000 annual cash flow (3% gross yield less 2% interest cost on loan) excluding any other costs. His property value would have grown to $1,480,244.28 which will net him $780,244.28 after subtracting the loan.

The above does support mrEngineers comments on the effect of leverage and capital gain.

Hi egghead, your Case B scenerio is a little too rosy on the rental yield side.

Based on what I know, it is quite tough to get positive cashflow (rental more than interest) in properties. Rental tends to be unstable as rental contracts are usually 2 years with each renewal needing you to give up 1 month rental to the agent and stamp duty fees. Moreover, mortgage cost of 2% is a little too conservative as well.

However, the best part of properties is the unexpected capital gains from each property cycle upturn. The prices seem to be able to reach higher than the previous peak in every cycle. My only explanation for this is that properties have excellent correlation with inflation. As inflation is almost always present, property peak prices will always surpass the previous cycle.

Koh san or Contrarian san can easily verify their performance as they have not only once double their capital easily in properties investment. However, as for stocks, it takes alot more knowledge and skill to achieve such returns. You cant be simply lucky in stocks as companies collaspes or business fail as compared to properties (just buy near MRT with high floor at ridiculous low price - confirm bao chiak!)

[Musicwhiz]

However, the best part of properties is the unexpected capital gains from each property cycle upturn. The prices seem to be able to reach higher than the previous peak in every cycle. My only explanation for this is that properties have excellent correlation with inflation. As inflation is almost always present, property peak prices will always surpass the previous cycle.

With regards to your statement above, properties do hit new highs after each cycle, and I feel the reason is not just confined to inflation, but one must cast a glance at Singapore's immigration policies for the last 5-6 years. With such a large influx of foreigners, it is no wonder that prices are being driven up. Can this continue indefinitely? I don't think so.

Another point I wish to make is that share prices and profits also keep pace with inflation, as companies can charge higher prices for their goods and services in line with economic growth and inflation. So one can also obtain a very decent return on your investment in equities, without the associated risks relating to leverage when it comes to property.

[mrEngineer]

With regards to your statement above, properties do hit new highs after each cycle, and I feel the reason is not just confined to inflation, but one must cast a glance at Singapore's immigration policies for the last 5-6 years. With such a large influx of foreigners, it is no wonder that prices are being driven up. Can this continue indefinitely? I don't think so.

Another point I wish to make is that share prices and profits also keep pace with inflation, as companies can charge higher prices for their goods and services in line with economic growth and inflation. So one can also obtain a very decent return on your investment in equities, without the associated risks relating to leverage when it comes to property.

Hi MW,

Your comments made me think a little further. I agree with you to a certain extent but I think immigration policy is one of the reason why we have the inflation or economic growth. If we look at 20-30 years ago, I believe all of have heard the same old stories of mee rebus at 50cents and bungalows at $100k. However, how many stories we have heard of companies have lasted 20-30 years with consistent growth? Real estate would always have the inflation protection element as it is a necessity. Stocks wise, perhaps good examples can be found in US and perhaps Singapopre in the next 20-30 years of future.

There are plenty of reasons why we have sustained inflation and economic growth. Like I said earlier, our government, policies, people, geographical location have mitigated the risk to property crash. And I still stand by my statement that inflation as the leading factor for price surpassing each property cycle.

Nice exchange with you though.

[Musicwhiz]

Hi MrEngineer,

No problem! Great exchange with you as well, and thanks for your thoughts. Keep those ideas flowing!