Will the private residential market gain momentum in 2017?
It has been tough for people in the property market since 2013, and the even tougher still in 2016 due to worsening economic conditions. Completed private homes faced a bleak performance especially as there was quite an influx of completions of new private homes starting in 2014. The URA records reveal that in 2014 a total of 19,941 landed and non-landed private residential units obtained TOPs, while there was a slight dip in 2015 at 18,971. However, the number is expected to be higher when 2016 ends, at 21,627 units.
Market performance further indicates that the rental premium that buyers anticipated during launch in 2010 to 2012 did not materialize as expected during completion in 2014 onwards. In fact, vacancy rates in the second quarter of 2016 climbed up to 8.9%.
With the number of available units, tenants have realized that they are in the position to be more selective with the variety of choices at their disposal. Rents have dipped as well, resulting in a dip of interest in the investors’ side. This phenomenon of weakened rents has been linked to the unprecedented increase in completions of new private residential projects. This means that the current leasing demand will not be sufficient to fill up these vacant units from recently completed projects.
What should we expect in 2017 in terms of prices and rentals for private residential properties?
Despite the lack of signs that the market is moving towards recovery, market experts still express optimism for prospects in 2017. Prices and rents are seen to improve, or at the very least reach a stable point. To have an understanding of where this optimism is coming from, it is suggested to divide the private residential market in three different tiers: Core Central Region (CCR) or high end, Rest of Central Region (RCR) or mid-range, and the Outside Central Region (OCR) or suburban condominium tiers.
Sales performance of high-end properties will continue to be driven by opportunity buying
Compared to 2015, there seems to be more buyers interested in high end properties in 2016. It should be taken into account though that this specific buying behaviour is not consistent and does not necessarily reflect strong buying interest in this type of property. In this light, interest in luxury properties as reflected by the number of high end properties purchased is better interpreted as opportunity buying or value for money purchasing rather than intrinsic interest in prime properties per se.
As we enter 2017, it can be expected that buying interest for high-end properties will be a bit muted. It is also safe to say that developers will continue to offer schemes such as deferred payment arrangements in order to encourage continued sales.
General forecast for 2017 when it comes to residential properties on the high end market will most likely continue to be flat. Price declines are also expected since raising prices for properties in this tier will most likely be unsustainable. It won’t be surprising as well for some sellers to be chalking up losses when selling these properties. For some of these sellers, their mindset would be more about moving on instead of dwelling on these losses, justifying the loss from reselling the property as “utility costs”.
The undesirable rental performance of these properties is also expected to be the same in 2017. Weak leasing demand is identified as the main culprit particularly with the cutbacks in housing allowances for senior expatriates and decreased retention of senior expatriates to save on corporate overhead costs. Improvement in economic conditions will not even guarantee that leasing will go back to favourable levels. As corporations have grown used to this cost-saving measure, expats will unlikely receive generous housing allowances once more.
Differentiators or unique selling points of high end properties – such as a one-of-a-kind design – seldom become saving factors when there is a slump in the property market. These uniqueness in design will only be accepted as justifications in rental premiums during good market conditions. Tenants won’t be willing to shell out for excessive rent during a market downturn even when faced with flashy modern design.
Resilient prices and rents for mid-tier city fringe apartments
While there were some declines in prices for properties in the city fringe in 2016, these figures were within the expected range due to the softening in the private residential market. The most number of private homes that were bought as investments were by the RCT. About half of the houses bought as RCR re-sales are purchased for investment purposes.
Keep in mind that RCR properties have the most potential as investments versus OCR properties that are either located too far or are too expensive. This is because RCR houses are attractive to renters at various levels – such as living in niche neighbourhoods, affordable monthly rent – especially foreign workers or expats.
It will still be a struggle for condos in the suburbs
In 2017, it will be suburban condos that may be worst hit since they will most likely experience weak rental demand. There has been an increase of completed suburban condominiums since 2014. By 2017, it is forecasted that prices will dip to 4% in the first half, with the rents dipping by 5% during the same period.
For tenants in general, units within the same development have the same to offer, and at large numbers (at an average of around 400 units). In addition, OCR tenants are prone to be on the practical side; they will most likely choose functionality instead of luxury or unique designs when it comes to renting a condo. Because of this, the demand for recently completed suburban condos to rent will depend on the rental prices set by the landlords. Just because a condo unit is new and in spotless condition, tenants will feel that the premium rental price is justified. Renters nowadays will rather opt for an older but conveniently-located condos with lower monthly rent compared to a swanky, all-frills expensive condo.
The silver lining: Projects with looming ABSD deadlines
In December 2011, the Additional Buyers’ Stamp Duty (ABSD) was introduced which will be imposed on local developers for units that are unsold five years after completing a residential project. Having to pay the ABSD will compel developers to sell their units within that timeline. Initially the ABSD rate was at 10% of the condominium site’s purchase price, but in January 2013 it was raised to 15%.
In 2016, this was not much of a concern as sites acquired in 2012 had projects that sold well, thus the number of projects that had to pay ABSD in this year was limited. This scenario most likely will change in 2017 since there is quite some number of projects that could incur ABSD, which will in turn prompt developers to find ways to offload unsold units as soon as possible. They are compelled to do this for the sake of their profit margins: if they end up paying their ABSD, their profits will be trimmed by 30% or even by as high as 50%. A project’s targeted profits are affected significantly due to the fact that the ABSD is based on the costs associated with the site’s acquisition.
Projects with less than 20% of their total units left unsold that have to pay their ABSD in 2017 will most likely cut their prices by around 5% during the second half of 2016 just to move stock. A price cut or similar incentive such as a first-year rental guarantee from the developer will entice buyers to purchase these units. Savvy buyers are often keen to purchase balanced units as these will be cutting prices very soon just to avoid paying their ABSD in 2017.
Some of these projects have unsold units that will be completed soon, which means that actual buyer financing will kick in very soon. However, this might be a deterrent for those who would like to avail of progressive payment schemes. For buyers with this frame of mind, interest is expected to be marginal.
How will it be for landed and strata landed homes?
While there were some major deals made with landed homes during 2016, the pace of activity here is not at the desired average levels. Landed home and strata landed home prices still exhibited a soft landing. There could be increased interest in cluster homes in 2017 when these will be sought after by home buyers who desire a landed property despite being on limited budgets.
In 2015, cluster home rentals went down by around 5%. In 2016, it is estimated to decrease by only 4%. Cluster homes intrinsically have something that set them apart from condos. While the demand has fallen, there will still be a market for landed homes as tenants would like to have this kind of living experience. Tenants leaning towards this option will drive the shift from renting condos towards renting cluster homes.
Choosing a cluster home is seen as an alternative to conventional condominiums that provides value for money. For buyers, the price of a cluster home will appreciate better versus that of a condominium unit, aside from other long term advantages.
In a typical suburban condo project, there are about 300 to 700 units. When a downturn in the property market happens, suburban condominium properties are generally hit hard since they don’t hold as much intrinsic value to keep the property’s price from decreasing. In contrast, due to the limited number of cluster homes available, they can weather a market slowdown with the distinction of being a type of niche property.