Time to look at prime properties?

There are few locations more aspirational in Singapore for property ownership than Districts 9, 10 and 11. We’ll take a look at the numbers, and see if this is the right time to invest.

By Chang Hui Chew

When most people speak of prime properties in Singapore, they are often not referring to property classes such as Good Class Bungalows (GCBs) or Black and White Bungalows. Rather, it is a reference to the prime locations of Districts 9, 10 and 11, i.e., Orchard, Cairnhill and River Valley; Bukit Timah, Holland Road and Tanglin; and Novena and Thomson.

Recent history

After the implementation of property cooling measures, prime-location properties were the first to take a hit. Two particular measures were responsible for this: the Additional Buyer’s Stamp Duty (ABSD), which imposes progressive taxes for Singaporeans depending on the number of properties owned, and a flat 15 percent duty on all foreign buyers, regardless of the number of properties owned; and Total Debt Servicing Ratio (TDSR), which restricts the total loan amount available to buyers, to 60 percent of their income.

Unlike suburban areas, where Singaporeans were buying homes for owner-occupation, prime-district homes were more often the purview of wealthy foreigners, or Singaporeans looking at investment properties with better yields and capital appreciation. The ABSD, therefore, increased the cost of ownership for these two groups of buyers.

When we speak to agents, they generally agree that the 15 percent ABSD is not out of reach for foreign buyers, especially those who purchase in cash. However, these buyers are reluctant to commit because they think the government will lift it sooner rather than later, and they do not want to feel like they have overpaid.

For Singaporean investors, especially retail investors who are using their personal funds, it is more difficult to get a mortgage for property in prime districts, because of the higher quantums. Since loan curbs in the form of the TDSR were introduced, coupled with the ABSD for second and subsequent properties, local investors have been finding these prime properties increasingly harder to attain.

The price of a piece

Land in these prime districts, however, is scarce. Because these areas have been occupied since colonial times in Singapore, much of the land has already been built up. For property developers who wish to build property in these prime locations, they either need to wait until one of the rare remaining plots come on the market, or choose to collectively purchase the land.

However, to convince owners to sell their homes requires a lot of financial muscle, and many developers have paid remarkably high prices to build in these areas. Two of Singapore’s most expensive en bloc transactions so far came from District 10: Leedon Heights, which developer Guocoland bought for $835 million in April 2007, and Farrer Court, the most expensive en bloc in Singapore’s history, bought for a whopping $1.3 billion by a CapitaLand-led consortium.

These are now the sites of Leedon Residences and d’Leedon, respectively. The developers went all out with these sites, engaging world-renowned architects such as SCDA and Zaha Hadid to design the projects. What no one could foresee during those heady highs was the subsequent hit to the property market, brought about first by the Global Financial Crisis (GFC), then by the imposition of cooling measures, when the recession’s recovery led to a rapidly overheating property market. Both of these projects still have remnant inventory, even after construction has wrapped and the buyers have collected their keys.

The en bloc heyday is past us, for now. Prime district homeowners hoping to cash out through en bloc sales might need to wait a few more years before developers start to pursue collective sales with any kind of fervour.

Interestingly, the only en bloc transaction of note in recent years was Thong Sia Building in July 2015. The building is a mixed-used development on Bideford Road, across from Paragon Shopping Centre, and was sold for $380 million to a private investment group.

Another sign of how cautious developers currently are with their land sales is that not one of them has snapped up the government’s sale of the plum site behind Holland Village. Within walking distance to Holland Village MRT station, and designated as a mixed-use site, it should have been a choice target for developers hoping to build up their prime district land bank.

A closer look

After the implementation of property curbs, sub-sales, which are often a proxy for investor flipping activity, declined to an average of nine transactions per quarter in 2015. Sub-sales refer to units that have been sold by a buyer before the project is completed.

So far in 2016, no caveats for sub-sales have been lodged with the authorities. This is likely due to the Seller’s Stamp Duty (SSD), which levies up to 16 percent on sellers if they were to flip the unit within four years of purchase.

However, resale activity in these prime districts remains relatively stronger. An average of 283 resale units per quarter saw caveats lodged from the start of 2013 to date, significantly more than the average of 192 primary sale transactions per quarter.

Primary sales, i.e., units sold directly by developers, have fallen significantly. In the first quarter of 2013, 527 of the 697 units transacted were from developer sales of d’Leedon. Since then, only two smaller bright spots have been seen in developer sales for prime locations. These are The Vermont on Cairnhill by Bukit Sembawang, and Cairnhill 9, a recently launched project by CapitaLand.

The former sold around 30 units in the third quarter of 2014, and the latter has seen 139 caveats lodged since launching earlier in 2016. Both saw median transaction prices above $2,400 psf, and are located within proximity to the Orchard Road shopping belt.

Cairnhill 9’s popularity deserves a closer look, in part because of its developer’s sales strategy. A significant proportion of the project’s buyers were foreigners from Indonesia and China, with the developer hoping to capitalise further on this group by taking the project to various foreign cities.

While Cairnhill 9 has several strong selling points, including easy access to Paragon Medical Centre and Orchard Road, we cannot discount the timing of the sale. With a global economic slowdown looming on the horizon, and with China one of the key markets affected, one of the reasons behind the project’s strong sales could be due to capital flight.

In general, foreign investors view Singapore as a sound location for investment, especially in more turbulent times, because of our rule of law, political stability and strong financial institutions. Furthermore, Singapore’s long-term capital appreciation on prime-location real estate has always been sound, if investors are willing to take a 10- to 15-year view.

Plunging rentals

The rental story in District 9, 10 and 11 is not particularly optimistic, either.

Since 2013, rental prices have been on a steady decline. Prices went from a median $4.52 psf per month at the start of 2013 to $4.00 psf per month at the end of 2015. This translates to a fall of about 13 percent over 12 quarters.

When we compute rental prices with resale transaction prices (since newly launched units need to complete construction before they can be rented out), current gross rental yield is about three percent per annum. For investors who bought resale units to lease at current market prices, current yields are on the lower end.

On the ground, we also hear that most owners who are collecting the keys to freshly completed units are pricing realistically. Most landlords now would rather just see their units tenanted, and have some support with mortgage payments, rather than pay the entirety of the mortgage out of pocket.

While rental prices have slid downwards, rental volumes have been moving upwards. Year-on-year, rental volumes in the peak third quarter of each year have moved upwards, by almost six percent. However, landlords should not be rejoicing so early, because the increase in volumes is not due to higher demand but rather, more frequent contract renewals.

To buy or not to buy?

Should investors therefore enter into these prime locations again with fervour? They might already be doing so, if the early indications we see with Cairnhill 9 bear out into a longer-term upward trend. It is almost a cliché, but there is pent-up demand and investors with the wherewithal to purchase units, despite loan curbs and stamp duties.

Hence, what many investors are trying to do is time the market, making sure it is at its absolute trough before committing. With the URA’s price index for the Core Central Region (CCR) seeing only marginal declines for the past couple of quarters, we are likely at the trough already, or entering it. It might therefore be a good time for investors to start keeping their ears to the ground for deals, pay attention to auction listings, and ensure their funds are in place if they need to commit.