The Urban Redevelopment Authority (URA) recently released their 1Q12 real estate statistics, and in this article we will look at the patterns emerging from the numbers for both the residential and non-residential (office, shop and industrial) segments.

Residential – Prices fall for the first time since 2Q09

The URA Private Property Index (PPI) fell by 0.1% in 1Q12, the first decline since 2Q09 after 10 quarters of growth. However, it is still up 3.5% on a Year-on-Year basis and is 16.1% and 13.6% above the previous 2Q08 and 2Q96 highs respectively.

If we drill further down into the numbers, an interesting pattern emerges. The Property Price Indices for the Core Central Region and Rest of Central Region both fell by 0.6%, while the Outside Central Region Price Index rose by 1.1%. Not only did prices in the Outside Central Region increase, but it re-accelerated from the 0.6% increase in 4Q11.

We can interpret this phenomenon as continued bullishness in the mass market segment, while the luxury and mid-to-high end markets seem to be stalling. Perhaps the impact of the Additional Buyers Stamp Duty, which affects foreigners and PRs more than locals, is finally being felt. But the increase in the mass market segment, driven mainly by locals who are still jumping into the market despite many rounds of cooling measures by the government, should be a cause for concern.

Developer sales of smaller, cheaper and less central apartments driving the market

While new sales are still hot, developers have been taking the opportunity to launch more projects for sale, putting a total of 6,903 uncompleted private residential units on the market, a 68% increase over the 4,105 units in 4Q11. And they’ve been successful in selling them, with 6,458 units sold versus 3,525 units in 4Q11, and 83% increase.

Shoe-box units (defined as smaller than 50 sqm) accounted for 27% of new sales in the quarter. Cheaper units of less than $750,000 accounted for 42% of new sales, a large jump from 25% last quarter. Most of the units sold were in the suburbs, as an all-time high of 82% of new units sold by developers were from the Outside Central Region. To sum up, the sales of smaller, cheaper and less central apartments are increasing, and are now the driving force in the market.

But the resale market is cooling

Meanwhile, as developer sales continue to be strong, the resale market has been cooling with the volume of resale transactions declining for the third straight quarter to 1,906 units in 1Q12, the lowest since 1Q09. Also as a proportion of total sales, resale transactions have hit an all time low of 21.8%, while the prices for resale properties fell by 0.7% versus the 0.2% increase for uncompleted non-landed properties.

What these numbers are saying is that buyers are increasingly neglecting the resale market while still chasing new launches by developers, despite the often large price premium of new units even when compared to neighboring completed projects. I believe that together with the increasing sales of mass market properties, this is a sign that the sophisticated buyers are staying out of the market while the unsophisticated buyers are falling for the glitzy marketing of developers and agents and lapping up the new launches while ignoring the bargains to be had next door.

Supply in the pipeline hits all-time high

There was a total supply of 78,572 uncompleted private residential units from projects in the pipeline, a 1.9% increase from 4Q11 and the highest recorded since such data was fist available in 1999. Another 4,100 units are expected to be added to this number from the 1H12 Government Land Sales Programme. 46.5% or 36,552 of these units remain unsold as of 1Q12.

Rentals are still rising as seen by the 0.3% increase in the 1Q12 Rental Index, but the rate of increase has been falling by three quarters. The vacancy rate of completed private residential units increase by 0.1% to 6.0% at the end of 1Q12.

Industrial property prices surged, while office rentals decline

In the non-residential space, the standout sector is industrial property, with the Industrial Price Index surging by 7.3% in 1Q12 after a 4.0% increase in 4Q11. Compare this with the poor showing of the Office Price Index which was flat and the Shop Price Index which edged up slightly to 0.2%. If you’re interested in industrial property, we’ve written an article on the URA guidelines for development types and also on the controversy over shoe-box industrial units.

Rentals for office space based on leases which had commenced decreased by 0.5% in 1Q12, versus rental for shop space which increased by 0.1%, and industrial property which increased by 1.8%. The weakness in office rental could be due to the increase in supply of office space, with a stock increase of 97,000 sqm versus a 53,000 sqm increase in occupied space. The weakness in office rentals seem to be driven by Category 1 office space (centrally located high quality office space), with the vacancy rate in this category jumping from 15.6% in 4Q11 to 18.9% in 1Q12.

Overall, my read of the 1Q12 URA numbers is that we are nearing (or already past) the end of the bull market as less sophisticated investors rush into the market (buying up smaller quantum shoebox residential and industrial units located in less central areas), while the sophisticated ones stay on the sidelines. More than ever, let the buyer beware.

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