[SINGAPORE] As dusk descends upon the Singapore skyline, the excess capacity building up in the private housing market is evident. Dark patches in some condominium developments completed six to 12 months ago, or even longer, point to significant vacancy.

Analysts cite a host of factors, including strong investment demand for real estate after the global crisis, escalation in private home completions of late, and slower expatriate inflow. Vacancies are set to climb and rents fall in general. Suburban locations, where most of the supply is, will be the worst hit.

" If increasingly there are a lot of empty units," says Lee Lay Keng, DTZ regional head (SEA) research, " it could indicate we' re not making the best use of our limited land resources."

After the global crisis, investors sought refuge in trusty assets such as real estate. Fuelled by the low interest rate environment, some took to hoarding property at new launches and are hence not bothered whether they can find a tenant after taking possession of their units, say observers. Some high net worth foreign buyers treat their Singapore property as a holiday home and leave it unoccupied most of the time.

But there are others who leave units vacant because they are not able to find tenants. As Ms Lee notes: " Competition for tenants is increasingly intense, with both demand and supply factors at work. On the demand side, changes in labour policies have slowed down the flow of foreign professionals into Singapore while on the supply side, there is a higher-than-average number of private home completions."

JLL national director Ong Teck Hui highlights that " those who bought for rental returns would find themselves in a more competitive leasing market today, where units in mediocre locations would be more difficult to lease and therefore remain vacant for a longer duration, especially during this period of strong supply" .

Ku Swee Yong, CEO of Century 21, explains that those who acquired private homes, say in 2010, would already be sitting on profits. " If they bought for capital gains, they may prefer to keep their unit empty rather than rent it out because it is quite usual for a fresh tenant to have a clause in the lease agreement protecting them from viewings by the landlord in the first six or even 12 months."

R' ST Research director Ong Kah Seng says that, due to low rents, some owners have left their units empty, especially the cash-rich set who did not take any housing loan for their purchase. " A vacant unit may deteriorate faster but leasing it out at a low rent may not be feasible since it will incur high maintenance costs. High-end properties have the finest finishes, so maintenance and repair costs may be hefty. Selected fit-outs and finishings such as tiles may be of limited collection and difficult to replace if it is damaged by the tenant."

Developers left with unsold units, especially in the slow high-end segment, also contribute to vacancies as these projects are completed. Other factors may also be at play in specific projects. But the overall trend of rising vacancies and softening rents is clear amid climbing private home completions since last year.

The 13,150 private homes that received TOP last year was 27.3 per cent above the previous year' s 10,329 and 40 per cent above the past 10-year average of 9,395. The figure for Q1 this year was 4,114 and the full-year tally is expected to hit 17,138, based on estimates submitted by developers to the Urban Redevelopment Authority. Thereafter, completions are slated to climb further to 21,738 next year and 26,252 in 2016 before easing the following year.

URA figures show that the pool of vacant private homes has risen to 19,284 at end-Q1 2014 from 18,003 at end-Q4 2013 and 14,532 at end-Q1 2013. The islandwide vacancy rate rose to 6.6 per cent at end-Q1 this year from 6.2 per cent a quarter earlier and 5.2 per cent at end-Q1 2013.

CBRE executive director (residential) Joseph Tan says that the latest quarter' s increase could be due partly to families that had yet to move to the new homes that were completed in Q1.

Rising vacancies have been accompanied by softening rentals. For the first time since Q3 2009, URA' s private home rental index contracted in Q4 last year. The index dipped 0.5 per cent quarter-on-quarter, followed by a further 0.7 per cent drop in Q1.

CBRE predicts a 5-8 per cent drop in rents generally this year. JLL predicts a 4-8 per cent decline Century 21' s Mr Ku reckons competition for tenants will drive rents down by 8-10 per cent, followed by a further drop of up to 25 per cent in 2015.

Against the backdrop of the large supply, says DTZ' s Ms Lee, some landlords could become more flexible on their rents, particularly after the removal of the vacancy tax refund with effect from Jan 1, 2014. " Landlords now have to pay property tax on their vacant units and some may accept a lower rent and have the unit rented out instead of leaving it empty."

This could create downward pressure on rents.

JLL' s Mr Ong predicts the vacancy rate could be around 7-9 per cent at end-2014.

Mr Ku reckons vacancy will head towards 7.5-8 per cent mid to late next year, adding that price drops are likely to be limited to 5-10 per cent per year - assuming the economy is fine.

Competition for tenants is likely to be more intense in suburban projects, as the bulk of completions last year as well as the potential supply pipeline are in Outside Central Region (OCR). URA' s Q1 rental index for non-landed private homes in OCR was down 2.3 per cent from a year ago. This compares with a decline of 0.3 per cent for Core Central Region (CCR) and a rise of one per cent in Rest of Central Region (RCR).

Of the 67,507 homes under construction at end-Q1, about 59 per cent were in OCR, 22 per cent in RCR and 19 per cent in CCR. Four years earlier, of the slightly over 36,000 units under construction, the respective shares were 30, 36 and 34 per cent, notes JLL' s Mr Ong. " The heavy buying in OCR in the past few years has resulted in units under construction in this submarket surging 270 per cent over the past four years. While it is true that a high proportion of purchases in OCR is for owner-occupation, the level of investment purchases in the past few years has also been substantial.

" Based on rental contracts registered last year, OCR' s share of the leasing market was about 31 per cent. Hence, the disproportionate oncoming supply may be expected to impact on this submarket more significantly."

Ms Lee, too, expects a bigger impact on rents and vacancy rates in the suburbs, " although rental demand will still be supported by budget-conscious foreign professionals as the rental quantum for suburban condos is lower than city-fringe or prime condos" .

 

On a year-on-year basis, resale volume fell 42.6 per cent drop (from 734 units resold in May 2013), flash figures released by the Singapore Real Estate Exchange (SRX) on Monday showed.

Prices in the core central region (CCR) led the fall with a 2.9 per cent decline, followed by a 0.3 per cent drop in the city fringes, while prices in suburban areas inched up by 0.6 per cent

The median Transaction Over X-value (TOX) stayed negative at -S$10,000 for the non-landed private resale market in May, meaning that most buyers last month bought their units below what other buyers who came before them paid for similar units.

 

Overseas shipments gained 7 per cent from a year earlier, the Beijing-based customs administration said yesterday. Imports fell 1.6 per cent. The trade surplus widened to US$35.92 billion.

Stronger exports may bolster Chinese leaders' confidence that a recovery in demand from the US and Europe will support economic growth and reduce pressure on the government to counter domestic weakness with stronger stimulus as the property market slumps. The European Central Bank' s unprecedented easing last week is a welcome step for China that should help export growth, World Bank economist Karlis Smits said on Friday.

" The export figures are positive news for policymakers and we expect continued solid export growth in the coming months amid gradually improving global demand momentum," said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong. " The import data suggest a pretty subdued state of the domestic economy though and the dilemma for the government is how to balance the need to reduce growth in leverage with all the calls for support."

 

LAST week, US stocks finished at record highs as a rate cut from the European Central Bank (ECB) and a strong jobs report gave stock bulls a second wind.

The momentum of the latest bull run could carry the market higher for another week. Having closed less than 100 points away, the Dow Jones Industrial Average is almost sure to test the 17,000 level. If they are to run much further, however, the bulls must fight two headwinds: valuation and rising interest rates.

As anticipated, the ECB cut deposit rates for banks below zero, effectively making it cheaper for lenders to give loans than to sit on reserves. This sparked the late-week rally, and the jobs report supported it. A higher-than-forecast 217,000 jobs were added to payrolls in May and the unemployment rate held steady at 6.3 per cent. While the four-month aggregate of jobs added was the highest since the 1990s, what observers such as Dallas Federal Reserve president Richard Fisher have called " structural" problems persist. A low participation rate still shows that millions have been left behind in the recovery.

Sales reports from major retailers last week suggested that the revival of mall traffic in April lasted through May. This week, the government' s tally of retail sales should confirm modest growth for the month. In another good sign, a survey of home-builder sentiment is expected to show its highest reading since before the Great Recession.

 

" The rebalancing is not smooth, and quarterly growth is volatile," the World Bank noted in its latest China Economic Update. Recent data suggest, however, that " growth has stabilised and growth momentum is expected to accelerate in the second quarter of 2014" .

The World Bank report came a day after the International Monetary Fund published the results of a regular economic consultation with Chinese authorities in which the IMF forecast that China' s growth should be around 7.5 per cent this year, but could slip to 7 per cent in 2015.

The IMF said bluntly that " activity in China since the global financial crisis has been too dependent on credit and investment, including in real estate. While this has supported growth and provided a boost to global demand, it is not sustainable and (creates) rising vulnerabilities."

Both institutions expressed overall confidence in the China' s ability to achieve a controlled slowdown or soft landing while also pointing to a series of risks.

" Recent growth rates (in China) have been significantly below levels observed over the past decade as drivers of economic growth shift from manufacturing to services on the supply side, and from investment to consumption on the demand side," the World Bank said in its update.

The growth slowdown in the first quarter of this year " reflected a combination of dissipating effects of earlier growth-support measures, subdued external environment, and tighter credit, especially for real estate activities" .

In recent months, however, economic activity, including industrial production has started to show signs of acceleration, the World Bank said. This is " expected to continue into the next two quarters of this year - partly reflecting the effect of new growth-supporting measures, robust consumption, and a recovery of external demand" .

A planned decline in Chinese investment growth will be largely offset by a gradual increase in consumption growth, supported by an increase in household incomes, the World Bank said.

" The fundamental drivers of the global recovery remain intact and should provide a favourable tailwind to China' s net export growth. However, headwinds from a gradual deceleration of credit growth can be expected to weigh on domestic economic activity."

The World Bank said that the main channels of a possible disorderly unwinding are related to local government financing, which in case of a disorderly deleveraging could trigger a sharp slowdown in investment growth, and to prospects of sectors such as real estate, which in case of an abrupt change in the cost of capital could result in debt service difficulties.

It called for fiscal and financial sector reforms to address financial stability risks in the medium term. The first task involves effectively managing rapid credit growth, including the less well-regulated shadow banking system.

" The second, gradual and orderly deleveraging of large stock of local government debt accumulated through off-budget and quasi-fiscal platforms. Both of these reforms could potentially be disruptive to growth in the short run."

The IMF said, meanwhile, that activity in China since the global financial crisis " has been too dependent on credit and investment, including in real estate" .

 

' As unsold inventory builds up, there will likely be more bargains in the market if developers want to avoid paying penalties to extend the sales period, especially high-end developers who have already paid premium prices for their lands.'
- OrangeTee research head Christine Li

DEVELOPERS have collectively paid up to $55.1 million in extension fees for unsold units in their private condo projects since 2012. They could potentially fork out another $80.7 million to extend the sales period for another year if they do not sell their inventory by year-end, according to a study by OrangeTee Research.

" As the penalty amounts to millions of dollars per project, we believe that it will incentivise some developers to reprice some of these projects to move sales in the near term," said OrangeTee research head Christine Li.

A total of 24 condo projects, mostly high-end ones, are still not fully sold two years after receiving their temporary occupation permits (TOPs) between 2010 and 2012, the study showed. Under the government' s Qualifying Certificate (QC) rules, developers have to pay extension charges to extend the sales period after two years of the project' s TOP.

All developers with non-Singaporean shareholders or directors need to obtain QCs to buy private land for new projects because they are deemed " foreign developers" under the Residential Property Act (RPA). This means the QC rules apply to all listed developers. Privately owned Far East Organization and Hoi Hup are among the few developers exempted from the rules.

Given that the QCs allow developers up to five years to finish building a project and two more years to sell all the units, the heat is on developers to clear their stock by the deadline.

To extend the sales period, developers pay 8 per cent of the land purchase price for the first year of extension, 16 per cent for the second year and 24 per cent from the third year onwards. The charges are pro-rated based on unsold units over the total units in the project.

Such fees drove luxury residential player SC Global to delist from the Singapore Exchange last year after sales slowed significantly due to the government' s property cooling measures.

Analysts warn that more extension charges will kick in. The charges paid up so far are just the tip of the iceberg as projects built from land acquired during the 2006-2007 en bloc fever have just crossed a seven-year mark, they say.

" More developers are caught between a rock and a hard place" as they have to decide whether to pay the extension charges or cut prices to move the units, said SLP International executive director Nicholas Mak.

If they pay for extension charges, there is also the question of whether they can recover these costs later on, he said. This is why some developers of luxury projects are resorting to selling the units in bulk to mega investors.

OrangeTee' s study of the 24 projects excluded three projects whose land costs could not be determined. It tracked sales of projects through caveats lodged, which it conceded could be lower than actual sales.

At the end of the first quarter of this year, there were 10,295 unsold units in the Core Central Region (CCR), 8,089 in the Rest of Central Region (RCR) and 12,433 in the Outside Central Region (OCR).

Based on URA caveats, there are 71 unsold units in Wheelock Properties' Scotts Square that TOP-ed in 2011 and 16 unsold units in Wing Tai' s Helios Residences, which also TOP-ed in the same year.

" As unsold inventory builds up, there will likely be more bargains in the market if developers want to avoid paying penalties to extend the sales period, especially high-end developers who have already paid premium prices for their lands," Ms Li said.

The study excluded the fees that developers need to pay to extend the completion of projects beyond five years, as they can typically extend without paying the charges " based on technicalities" .

Even in a more optimistic scenario where developers manage to sell 20 per cent of the remaining units for the rest of this year, further extension charges to be paid by developers by end-2014 will amount to around $68.3 million.

Some market watchers noted that the QC rules should mark a distinction between larger and smaller projects, given that it takes a longer time to move all the units in large projects in a difficult market as the current one.

Century21 chief executive officer Ku Swee Yong said that demand for high-end projects had been hit hardest by higher additional buyers' stamp duty (ABSD) since January 2013 and a borrowing cap under the total debt servicing ratio (TDSR) since June last year.

Even if a developer decides to set up an investment company to buy the units and rent them out, the company could be hit by a 15 per cent ABSD and is restricted by a loan-to-value limit of 20 per cent.

While there is good reason for having QC rules to regulate foreign participation in the housing market, these rules were in place before the ABSD and TDSR. " It is about time we review these measures," Mr Ku said.

The Dow Jones Industrial Average, S& P 500 and Nasdaq Composite all closed about half a percent higher for the day, with the Dow hitting 16,924.28 and the S& P 500 ending at 1,949.44.