Updated from : The Business Times, 11 August 2020
IN THE second quarter, private home prices surprised on the upside by climbing 0.3 per cent despite the “circuit breaker” – reversing from the Urban Redevelopment Authority’s earlier flash estimate of negative 1.1 per cent.
This increase was led by the core central region. And the primary market proved more resilient than the secondary market, accounting for nearly two-thirds of all transactions.
Several transactions for properties in prime projects such as 8 Saint Thomas, Leedon Green, Martin Modern, Van Holland and Pullman Residences took place in the last two weeks of June, according to real estate consultancy JLL.
But with the economy in recession and the unemployment rate ticking higher, the Q2 increase might prove to be a blip.
The spike in unemployment numbers could also affect the rental market adversely if foreigners are retrenched, making it tougher for owners to service loans for an investment property.
Developers may therefore need to wheel out discounts to move units, especially as new launches make their debut in 2H2020 after being disrupted by the circuit breaker. In Q2, developers were already dangling discounts to get buyers to bite.
Bukit Sembawang Estate, for instance, introduced a limited offer in June for freehold development 8 St Thomas in District 9. Cuts of S$200,000 to S$500,000 were offered, taking prices to a range of S$2,600 per sq ft (psf) to S$2,700 psf.
Prominent Land, the developer of 38 Jervois, introduced discounts of 13 to 24 per cent in a firesale ahead of a looming Additional Buyer’s Stamp Duty deadline to clear the remaining 16 units in the 27-unit freehold condominium.
Other properties that have been offered at discounts in recent months include Parc Clematis, Riverfront Residences and Treasure at Tampines, The Business Times reported previously.
And yet, the full impact of the Covid-19 pandemic may not have been fully felt.
“The decline may come when the economic stimulus, such as the Jobs Support Scheme and mortgage deferment – is pulled back,” said Vijay Natarajan, analyst at RHB Securities. And property developers are likely to take a hit.
Mr Natarajan’s top pick in the sector is CapitaLand, which he likes for its diversified portfolio. He said that the smaller mid-cap players and private entities might be more inclined to face some stress than the bigger players.
Firesales or a nosedive in property prices – akin to what happened during the Global Financial Crisis or the Asian Financial Crisis – may not be on the cards.
The lower-for-longer interest rate environment is seen as supporting demand, while speculative activity has been kept in check in recent years by various property cooling measures such as the total debt servicing ratio.
The government still has room to manoeuvre should unemployment rise drastically and property prices fall dramatically, analysts say. For instance, it could tweak the previously introduced cooling measures.
Slow declining trajectory
A more likely scenario is a slow declining trajectory in private home prices over the next two years, assuming that all things remain equal, said Mr Natarajan.
This year, prices in the primary market could decline by 3 to 5 per cent. Sales volumes are likely to come down by a double-digit figure, he estimates.
CGS-CIMB expects overall private residential prices to retrace by up to 5 per cent this year, while transaction volumes for the primary market could fall by 20 per cent year on year.
“We expect developers will continue to calibrate their pricing strategies according to market conditions, to optimise sales and margins, rather than an outright price war,” said CGS-CIMB analyst Lock Mun Yee.
CGS-CIMB has “add” calls on City Developments, CapitaLand and UOL owing to their robust balance sheets and diversified business models.
Analysts are ruling out a price war mainly because developers are working with thinner margins of some 5 to 15 per cent in the current crisis.
In the last en-bloc cycle, exuberant developers – including those from China and Hong Kong – bid aggressively in private and public land tenders, driving up prices and resulting in a relatively expensive landbank.
As it is, “most developers may have to sacrifice margins to boost volumes” as delays to construction work push up construction costs, while the current economic environment restricts home buyers’ abilities to dig deep into their pockets, said DBS Group Research analysts Derek Tan and Rachel Tan.
With construction hampered by the virus outbreak in the foreign worker community, CGS-CIMB anticipates progress billings could be slightly delayed in the near term, which could result in a delay in recognition of residential contributions for developers.
While our borders remain shut to foreigners, the bulk of buyers will consist of Singapore residents. This means that mass market and mid-tier projects should fare better.
As market watchers have pointed out, however, when border controls are finally lifted, mainland Chinese buyers who were looking to buy in Hong Kong may shift their attention to Singapore, which could eventually fuel demand.
With the government moderating the supply of private residential homes through the Government Land Sales Programme, the private residential market is likely to remain sound in the long term. In the short term, however, things might get worse before they get better