When a Property Billionaire Turns Bearish

By Mr. Propwise

It is a rare occasion when a billionaire property developer talks the market down. Kwek Leng Beng, Chairman of City Developments Limited (CDL), a leading real estate developer in Singapore, did just that recently when he called buying land in Singapore at today’s prices “suicidal” and predicated an up to 5 percent fall in property prices.

Buying land in Singapore at current prices “suicidal”

Not one to mince words, he called buying land from Government Land Sales “suicidal”, especially given the requirement that the units must be sold within two years of completion. His point was that it didn’t make sense to buy land at today’s high prices, and then give up the flexibility of being able to time the sale of the units, especially if the deadline to sell coincides with a downturn in the market. Developers, would in effect have to “buy high and sell low”, and potentially face reduced margins or even losses.

Land prices have shot up in recent months as developers continue to bid them up despite the seven rounds of cooling measures and the recent Monetary Authority of Singapore (MAS) guidelines on the Total Debt Servicing Ratio. Based on CBRE’s analysis of government land sites that have been recently sold, the majority of suburban projects are expected to launch units for sale at above $1,200 psf.

Kwek: Up to 5 percent fall in prices over the next year

And just to be clear, Kwekis looking for a correction in the private residential property market of up to 5 percent over the next year, assuming the government’s property cooling measures remain. He sees a combination of a fragile and unpredictable global economy and the combined impact of the multiple rounds of property cooling measures creating “stronger headwinds” for the market (and for property developers).

Personally, I think it is quite strange for Kwek to be talking down the market when CDL is still actively marketing units of its projects. But a more cynical reading would be that he is talking down the market in a bid to depress land prices so that CDL can buy landbank at more reasonable prices. After all, CDL’s projects such as the 616-unit Jewel@Buangkok, 912-unit D’Nest and 868-unit Bartley Ridge are mostly sold already.

Signs that property price growth is already moderating

Despite the acceleration in the quarter-on-quarter growth of the URA Property Price Index in second quarter 2013 to one percent versus the 0.6 percent increase in the previous quarter, more timely (albeit unreliable) indicators suggest that price growth is already moderating as we enter the second half of 2013.

According to the Singapore Real Estate Exchange’s (SRX) figures, island wide private non-landed resale property prices were up just 0.1 percent in July, a slowdown from the 0.8 percent rise in June. Analysts blamed the MAS Total Debt Servicing Ratio framework for the slowdown (which limits borrowers to a maximum 60 percent total monthly debt repayment versus their gross monthly income), which might well be the case, but sentiment in general has already been hurt since the uncertainty created by Fed Chairman Bernanke’s talk about tapering, which have markets pricing in a rise in interest rates from as soon as 2014.

On the public housing front, we’ve also seen the Cash Over Valuation (COV) of resale HDB flats fall to a more than two year low to a median of $20,000, based on figures from the SRX. A weakening public housing market will become an overhang for the private property market.

Overleveraged buyers meet a supply avalanche and weakening rental market

Orange Tee expects a total of 33,555 units to hit the market in 2016, versus the 15,503 units available this year. This number includes both units from newly launched projects and those that have exited the four-year Seller Stamp Duty (SSD) period. The raised Seller Stamp Duty imposed rates of 16% for properties sold within the first year of purchase from January 14 2011, which would then gradually fade to 4% in Year Four. The first batch of these properties that can be sold without SSD will be hitting the market from 2015.

The SSD has led to a reduction in saleable units in the market since 2011 as buyers have held back from making their units available for sale in the market to avoid incurring SSD, and thus has likely had the potential unintended consequence of keeping property prices high as buyers faced a reduced supply in the resale market, and turned to the primary market to buy up higher-priced new units instead.

Furthermore, we are likely entering a period of weakening rental demand. Over the past few years, in the backdrop of a strong economy and growing foreign workforce, rental demand averaged around 42,000 units. Going forward, given that Singapore is looking at a slowing rate of GDP and foreign workforce growth, the growth in rental demand is likely to be lower than the growth of rental supply (from the large increase in completed units), leading to lower rental yields and high vacancy rates.

Finally, the MAS has recently expressed concern that Singaporean households are overleveraged on property loans, having been tempted by low interest rates and extended loan tenures. Given most mortgage loans in Singapore are floating rate packages, the MAS has estimated that a 3 percent rise in mortgage rates would put 10 to 15 percent of borrowers at risk.

So going into 2014 and beyond, we have a combination of a significant segment of overleveraged buyers facing rising mortgage rates and an avalanche of supply in a weakening rental market. Sounds like a recipe for a more than 5 percent correction in the market, if you ask me.

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