Singapore Residential Property Outlook 2015

Singapore Residential Property Market Outlook 2015 Special Report

Aquaint Research January 2015

1 Global Economy | Aquaint Research

Global Economy 2014 was an eventful year but with less optimistic than expected by analysts. The world gone through many conflicts, accidents and tragedy such as the Ukraine crisis, the Ebola virus diseases, Islamic State terrorism and the misfortune of the two Malaysia aircrafts. The global economy’s big picture is quite bleak with sluggish growth in major economies. European economies is back in an economic rut while Japan recovery is faltering again. China’s economy is preparing to hit the slowest rate of growth since 1990. Russia, one of the world’s biggest economies, is on the edge of recession as a result of dropping oil price, depreciation of the roubles and sanctions related to ongoing conflict in Ukraine.

However, there were some good things happened too. The US’s turnabout is the lead engine for the recovery of the global economy. In the latest data, the US

economy grew at 5% y-o-y in 3Q 2014, the fastest rate in over a decade. The revision is powered by an upswing in investment by business, higher consumer spending and stronger labour market. Given the improvement in the economy, the Federal Reserve (FED) stopped the quantitative easing in October 2014 and expects to raise the interest rate in mid-2015. However, FED is also cautious about whether the current growth is sustainable enough to raise the interest rate. The increase of interest rate by FED will negatively affect the global real estate as it is usually heavily leveraged. However, the global monetary policy divergence in different countries. While the US FED and Bank of England may begin to raise the interest rate, European Central Bank and the Bank of Japan may follow the accommodative monetary policies to push business and investment activities.

Figure 1

Source: International Monetary Fund and Bloomberg Businessweek

So what is waiting us in 2015? Economists around the world are pointing to a

brighter picture for the global market in 2015 but not much. There is a divergence

2 Singapore Economic Overview | Aquaint Research

between regions. The picture above provide a snapshot of expected economic growth in difference countries, based on IMF forecast (Figure 1). IMF forecasted the global growth for 2015 at 3.2%. The emerging markets in South and East Asia such as India, China and ASEAN countries will top the growth. China’s economy is expected to growth at 7.1%, which is quite high compared to other countries but still its lowest rate in the past 15 years. The decelerating growth rate may continue in a few years on the back of sluggish real estate activities and huge accumulative of bad debt. The marked slowdown of China will significantly impact the world by lower export demand from China. Those countries which exports goods and raw material to China will experience the downward pressure. China is currently the biggest

trading partner to both Singapore and Malaysia.

Mature economies with relative good prospectus for year 2015 will be the US, UK and Australia. The US’s recovery remains firm with the expected growth of 3.0 % to 3.1%. The US will still be the primary engine driving the global growth. Meanwhile, the Eurozone and Japan continue to grow at the slow rate at around 1.0 %. The Eurozone’s crisis is likely remain in 2015 with slow recovery and amounting threat of deflation. The bright side of the global economy is the lower oil price. It may help to boost global growth through increasing consumers spending and lowering business costs. In summary, the global economy is expected to experience a slow improvement.

Singapore Economic OverviewSingapore’s economic growth slowed more than expected in the 4Q 2014, which bring the estimated GDP’ growth for the whole year 2014 down to 2.8% (Figure 2). It is lower than the official forecasts of around 3.0 %. Manufacturing was the most worrying sector in year 2014. Based on the advance estimate by MTI, the manufacturing sector contracted by 5.8 % q-o-q and 2.0 % y-o-y in the last

quarter of 2014. Construction activity grew by just 0.8% y-o-y in 4Q 2014. Construction, especially construction in private sector, will soon feel the slowdown due to housing downturn, labour constraints and sluggish growth in productivity level. Public sector will be the key demand drivers for construction sector in 2015.

Figure 2

6.1%

2.5%

3.9% 2.8%

7.8%

0.3%

1.7% 2.40%

4.9%

8.6%

6.1%

3.0%

6.7%

2.8%

5.3%

3.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2011 2012 2013 2014 (P)

Singapore's GDP growth (y-o-y)

at 2010 Price

Overall GDP Manufacturing Construction Services

Source: MTI, Aquaint Research

3 Singapore Property Market | Aquaint Research

With possibly divergent monetary policies across key central banks worldwide, there will be a lot of volatile in the interest rate and currencies in 2015. As the global market remain uncertain and uneven between different countries, economists remain cautious about Singapore’s economy. Beside external risks, domestic risks including dampened activity in property market, tighter foreign workforce and weak productivity gains will also affect Singapore economic outlook. Among all the risks, weak productivity gains is among the top concerns of Singapore’s government. Productivity index has shanked 0.5% in the first three quarter of 2014. The increase in wages not couple with increase in productivity means higher business cost which can lead to lower profit margin for companies and reduce the whole economy’s competitiveness. To companies and businesses, particular SMEs, the labour crunch is their worst nightmare. The economy has been in full employment and the domestic source for worker is almost exhausted. However, new demand for workers, especially in service oriented sectors i.e retail, F&B still increase. More firms are expected to close shop or hold on their expansion plan due to labour shortage.

On the other hand, there are a few reasons to be optimistic about Singapore’s prospect in 2015. Firstly, the lower oil prices will help lower business cost of companies and boost the demand for goods as things become cheaper. Secondly, the stronger US demand and capital spending is expected to boost demand for Singapore exports. However, it may be offset by lower demand from other Singapore key trading partners, namely Eurozone, China and Japan. Last but not least, Singapore will be celebrating its 50th birthday this year, the long celebration may add more to the local economy through higher government spending and higher demand for services oriented industries, i.e. retail, F&B, tourism.

The Ministry of Trade and Industry (MTI) gave the projection GDP growth range from 2% to 4%, which is the same as last year 2014. Meanwhile, in the latest move, DBS bank has cut its 2015 GDP growth forecast to 3.2% from 3.6%. The median forecast of 24 private-sector economists polled by Bloomberg pointed to the expected growth rate of 3.35% in 2014.

Singapore Property Market

Residential Price2014 was a gloomy year for developer and property investors as the residential property price in both public and private market marked a slide down of 6.0% and 4.0%, respectively, during the year (Figure 3). However, it is a good sign from the government’s perspective as the property market finally cooled down

after 8 consecutive rounds of cooling measure in just a short span of time. The decline magnitude even might be underestimated as developers offered some indirect discount and incentives in the form of furniture voucher, absorption of additional stamp duty in order to prevent lower the original price.


Figure 3

Sale Volume Not only price, sale volume of private residential property dropped to the lowest level since 2007 with only around 12,720 units sold (Figure 4). The number of units sold even fall below the financial

crisis period in 2008. The number of HDB resale units sold in 2014 also dramatically slide down by 11.2% y-o-y as the increase in number of new BTO flats.

Figure 4

12,723

17,318

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2007 2008 2009 2010 2011 2012 2013 2014

Un

its S

old

Singapore Residential Property's

Sale Volume

Private Residential Resale HDB

Source: URA, Aquaint Research


Outlook Going to 2015, the market likely to be weak as there will be no major change in term of policies, environment and sentiment toward the residential market. The latest NUS-Redas Real Estate Sentiment Index showed that 70% of the respondents projected that property price will fall by 5% to 10% in 2015 and new sales volume will decline further by 15% to 20%. There is three main reasons why the market will remain weak in the future.

1. Firstly, there will be unlikely any easing or change of property restrictions in 2015. Despite all the warning, alert and comments to remove some of the cooling measures from real estate players, the government still sees the current correction in the property price is not good enough. “If what we observe this year continues into next year, I would consider that a very good development”, said National Development Minister Khaw Boon Wan. The government is preparing for a so-called “soft landing” for both public and private residential market with a correction of single-digit change per year. For those who still hope that the government will remove some of the restriction in 2015, you might be disappointed. Mr Khaw said some of the measures are temporary and will only be adjusted when the market is cool enough, which we expect it mean at least 10% to 15% more downward correction. Those temporary measures are likely mean buyer’s and seller’s taxes. However, the market killers, Total Debt Servicing Ratio (TDSR) framework, will stay on to make sure that buyers can be financial prudence in their decision.

2. Secondly, the weak demand and massive supply for residential property will remain in 2015. Lower price and sale volume are not the most worrying numbers to property investors but vacancy rate. It is most applicable to non-landed properties. Vacancy rate for non-landed properties is climbing up to reach 9.1% in 4Q 2014, the highest level ever since 2007 (Figure 5). This number are expected to increase to the max level of more than 10% in the next 3 years. Until 2017, around 71,550 non-landed residential units will be added into the market, many of them are in the suburban area. This new upcoming supply is as much as the total new supply in the last 9 years according to URA’s statistics.

The supply of residential house is increasing rapidly but not population. The fertility rate of Singaporeans remain low at 1.19 per female. Meanwhile, the government is very unlikely to loosen the current tight immigration and foreign worker policy before the next election. The increase in number of employment pass, S Pass and Work Permit holders was staying near zero in 2014 (Figure 6). Thus, the buying and leasing demand will stay flat in the future.

The fear of oversupply and falling rents will likely overshadow the residential market. Tenants will have more choices for their accommodation. Those properties at not convenience locations such as further from town, not near MRT station or transportation nodes will be left far off. As many homes were bought as an investment, the decrease in rental rate subsequently lead to more decline in property prices or even more default in mortgage payment, especially if

mortgage rate significantly increase.


Figure 5

Figure 6

3. Last but not least, the threat of increasing in interest rate by FED is coming closer. As Singapore dollar was weakening against the greenback, 3-month Singapore Interbank Offered Rate (SIBOR), which is used frequently to price mortgage loan, already surged nearly by 20 basis points as of Jan 2015 (Figure 7). The rise in interest rate will make it is more expensive to obtain a mortgage.

Together with falling rental return, investors will likely look for higher yield asset class instead of residential properties. The rise in interest rate and lower cash inflow also stress on heavily leveraged buyers. More mortgage sales are expected in the future especially from the luxury properties in prime location as the monthly payment rise significantly due to their big price tag.

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2010 2011 2012 2013 2014

% Change in Number of

Foreign Workforce in Singapore

Employment Pass S Pass Work Permit

Source: MOM, Aquaint Research


Figure 7

In conclusion, year 2015 is likely bring a bleak atmosphere for Singapore residential market. Not much new developments are offered for sale also as the government scaled down on the land sale. However, it is a good chance for genuine buyers to shop for their dream home when the price is more reasonable. More price reduction can be expected in the future, so the best things to do now is start do searching for ideal location and project and waiting for the right time to enter. Especially, the landed-property sector is presenting a great opportunities. Unlike non-landed properties, the future supply of non-landed properties in Singapore is

reasonable, vacancy rate is decreasing but the price is sliding faster due to the loan restriction. If investors have to ability to invest and hold on that big ticket item, there is a great chance of capital appreciation in the future.

We expect the overall private home prices to soften by 4% to 6% in 2015. HDB resale price will likely follow the same downward trend with greater magnitude of about 6% to 8%. With huge supply of new homes pursuing limited pool of tenants with tightening budget, the rental market is projected to face a downward pressure of about 5% to 7%.


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Singapore Residential Property Outlook 2015