Tuesday, 10 October 2017

Singapore's Residential Market - Sustainable Recovery?

I realized that it has been a rather long time since I wrote a macro piece (especially for a self proclaimed macroeconomic focused value investor). As such, given the current hype over Singapore's residential market, it appears high time to review this particular sector's fundamentals. 

The Hype

The spotlight on Singapore's residential market was primarily driven by the recent spate of en-bloc deals by different developers. While unlikely to top 2007's en-bloc craze, 2017's en-bloc figures thus far have proven to be the greatest in the past 10 years.

Source: Bloomberg

This was soon followed by news that Singapore's private home prices had increased by 0.5% in Q3'17 - the first rise in 4 years.

Source: URA
The tiny 0.5% price growth brought about great hopes that Singapore's residential market had bottomed out. Such a view would have coincided with my guesstimate last September for residential prices to bottom out as early as 2017 (here). 

The main question here is whether such a view is accurate. No one knows for sure, but an examination of recent facts can lend weight towards an educated guess.

Minor Policy Support

The only significant policy change thus far was a relaxation in Additional Seller's Stamp Duty. 

For sellers of residential properties that are purchased or saw a change in zoning starting March 11, the SSD rate for holding periods for up to a year will be lowered to 12 per cent from the current 16 per cent.

For holding periods between one year and up to two years, it will be lower at 8 per cent from the current 12 per cent. For holding periods more than two years and up to three years, it will be at 4 per cent, half of the present 8 per cent.

No SSD will be payable for holding periods more than three years. At present, the SSD for holding periods for up to four years is at 4 per cent.

While minor, such a policy change clearly encourages greater speculative demand for housing as investments. 

Fundamental Demand

Demand for housing can generally be split into speculative demand for investment, and what I term as "fundamental" demand for homes. Basically, the former is a want while the latter is a need. 

The twin engines of fundamental demand are population growth and economic growth. Singapore is a mature economy which generally sees only minor changes in both population and economic growth on an annualized basis.

Indeed, Singapore's population had only grown by only 1% (here) while 2017 GDP growth is estimated at 2.5% (here). Therefore, while also minor, fundamental demand is expected to increase.

Supply

Residential property bulls will be pleased to know that an examination of unsold private residential units in the pipeline provides solid evidence that the supply glut has been slowly wiped out.

Source: URA

The pipeline supply of private residential units and ECs has also decreased year-on-year.

Source: URA 2Q'16 stats vs URA 2Q'17 stats

Supply is thus also well set up for a bottoming of residential property pries.

Conclusion - Sustainable or Not..?

Real Estate Developers' Association of Singapore (Redas) president Augustine Tan warned that the fast rate of recent land acquisitions at high prices by developers is "not sustainable" (here).

In contrast, JP Morgan's analysts believe that the Singapore property market is poised for the start of a "sustainable" three-year en bloc cycle, they said in an Oct 5 research report (here).

I lean towards JP Morgan's analysis - my personal view is that basic demand and supply analysis points towards Singapore's residential market bottoming out. However, as I have always maintained, a rising tide does not float all boats. Similarly, it should not be taken for granted that all developers will do well as home prices increase.

It is important to note that developers are operating in an environment where cost of construction is increasing. I urge investors who are bullish on Singapore's residential developers to examine their cost of land acquisitions as some en bloc deals appear to require a large increase in home prices to maintain profit margins. Such an overly optimistic projection of home prices diminishes investors' margin of safety.

With that in mind, here is to wishing everyone happy investing!

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