Thursday, January 7, 2016

More weakness in the residential sector in 2016

The number of vacant private residential units remained high throughout last 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 more than 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.

The 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-year Minimum Occupation Period (MOP) have rooms available for rent. As of the third quarter of 2015, there were 1,847 vacant EC units. An online search shows that all 12 ECs that have been completed since mid-2013, and hence are still well within the five-year MOP, have rooms or part of the dual-key units available for rent.

On top of the increased competition, 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 seem to have declined by closer to 10 per cent in the past year, a much larger drop than those reflected in the official indices.

Market declines to accelerate

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 Singapore’s economic growth last year has topped expectations, holding costs are cheap and the property indices have not dropped much. But with the headwinds coming on strong this year, the price declines should accelerate.

Three main concerns weigh on residential property investors this year. First, the slowing growth in China’s economy and a realignment of the yuan exchange rate to a trade-weighted basket will have a negative impact on Singapore’s manufacturing sector and external trade. Second, housing supply continues to surge with a 22,000 increase in new stock (excluding ECs, HDB flats), while the influx of foreigners slows due to weak job growth. Third, mortgage costs are rising. The three-month Singapore Interbank Offered Rate (SIBOR), the key benchmark against which mortgages are priced, increased by about 260 per cent in 2015. With rising market risks, SIBOR will likely increase even more in 2016.

The Government factor

While many have called on the Government to lift the property market cooling measures, the fact remains that global economic headwinds, combined with a drop in rental demand, an increasing supply of vacant apartments and rising interest costs, will lead to lower prices.

Remove the Additional Buyer Stamp Duty (ABSD) 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 rental market and higher interest costs that will 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 simply open our gates and foreigners will flood in. That is only true provided Singapore remains attractive, offering good jobs and business opportunities that draw talent.

red-hot competition for tenants

In addition to the 25,000 vacant units and the unknown number of rooms for rent in the HDB and EC segments, there is the upcoming wave of supply of residences. Entering this year, there is some uncertainty about new supply as it seems that developers are taking a longer time to complete their projects amid a slow market. Data from the past seven quarters, from Q1 2014 to Q3 2015, shows that the expected completion of several thousand units last year has been delayed to this year.

In Q1 2014, 26,000 units were expected to be completed this year, but the number dropped below 21,000 in Q4 2014 and as of Q3 2015 it stands at 22,351 units. Looking ahead, several thousand units that are expected to be completed this year could be further delayed to next year. The forecast for how high vacancy rates may rise this year is a little murky.

What is in store for 2016?

In summary, residential property demand is expected to soften due to a weak economy, slower job growth and a waning inflow of foreign workers. On the supply side, vacancies are expected to hit 35,000 units, equivalent to a vacancy rate of 10 per cent, thereby increasing competition among 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 per cent this year, playing catch-up with the drop in the real market.

Investors need to accept that the tiny domestic market of Singapore has to adapt quickly to this rapidly changing world. Simply opening our doors to foreigners may not bring in greater numbers. Likewise, removing the cooling measures will not put tenants into vacant units.

Investors might like to wait until real tenant demand grows before committing to the market.