The results seasons has come to a close for 31 December 2017. In this blog post, I have extracted the relevant information from the announcement of the real estate players, with focus on residential development and office sector.
I will share interesting titbits that I discover as well which hopefully will give investors of shares in real estate players and physical properties food for thought.
||What they are saying
· In preparation for the expected next up cycle in the property market, the Group acquired several land parcels at competitive prices in 2017 with total GDV estimated at approximately S$5 billion and approximately 3,800 units. Rio Vista, Serangoon Ville, Vista Park and Mayfair Gardens are scheduled to be launched in 2018.
· In view of the recovery signs in the Singapore office sector, Oxley acquired Chevron House, a 32-storey commercial development with 27 levels of office space and a 5-storey retail podium
· Acknowledged MAS’s concerns over the exuberant en bloc market and significant supply ahead;
· Believes it is more important than ever for developers to carefully select the right sites with strong attributes such as location, size, accessibility and tenure;
· While upcoming supply may be quite substantial and rising mortgage rates can influence buying decisions, it really depends on the annual take-up rates for residential units and how the general economy does which will affect the property market.
· Central Area office rents appear to have hit the trough, with Q3FY17 and Q4FY17 data showing upward movement;
· While a return to strong demand may take some time, the overall outlook for the office sector has improved, with an increase in office development activity as well as strong participation and competitive bids for a vacant large commercial site under the GLS programme.
· The limited supply in 2018, together with a more positive economic outlook, is expected to provide the impetus for rents to continue the trend upwards.
· Remains optimistic of rental growth potential in the foreseeable future.
· Expects residential property market sentiment to remain positive, underpinned by increased transaction volumes and a recovery in home prices.
· Adopt a disciplined approach and source for well-located sites to build its residential pipeline.
· Office occupancy rates for Central Business District rose by 1.3% to 93.8% as at 31 December 2017;
· A sustained pick-up in the average monthly Grade A office rent at S$9.40 per square (per square foot per month), a 3.3% increase quarter-on quarter, support the view that the office market recovery is well underway.
· The strong momentum of sales of new private homes is expected to continue in 2018.
· However, pipeline supply of private residential units is expected to increase as more properties are being sold en-bloc.
· The upward momentum in the office rental market is extend to continue in 2018 on expectations of healthy demand and lower quantum of new supply.
3 key considerations
Having a longer-term view in the market is key
In the short term, the market will see a spike in demand arising from the positive sentiments as well as en bloc beneficiaries who are being displaced finding their next home.
However, if we stretch the time frame to 2 years, the en bloc sites and GLS sites will be launch ready, thereby resulting in an increase in pipeline of supply. Hence, it is uncertain if the market is able to absorb the increase in supply which is dependent on the overall health of the economy as well as government policy in allowing more foreigners entering Singapore.
If we stretch the time frame to a bit further to 5 years, developers will be faced with the possibility of facing onerous penalties (ABSD and QC) in the event there are unsold units which could result in a situation of selling below cost to avoid these penalties.
Time to market is key
Hence, the key for developer when faced with an impending supply in 2 years is the time to market. i.e. time taken for the development site to be launched ready. In the event the increased supply is not being able to absorbed by the market, it will be a scenario of musical chair where the late comer to the party realise there are no more chairs left for them when the music stops.
Government policy is key
Real estate market is a local market sensitive to government policy. This is evident in the Singapore market since the implementation of the various cooling measures which saw the downturn from 2012 to 2017. The downturn happened despite overseas market in Hong Kong and China continuing its ascend in price.
In the same respect, the shortening of the time period for seller stamp duty from 4 years to 3 years in 2016 also coincides with the recovery of the property market as developers takes confidence of further relaxation in government policy (which had not happened).
I have extracted below from the announcement of City Development which is probably a wish list for developers and also highlight the challenge developers face:
“Land price is the most crucial raw material for developers and in land scarce Singapore, land prices continue move upwards as seen in the high land bids and intense competition for Government Land Sales (GLS) and collective sales, where new prices benchmarks are continuously set. Land banking in Singapore is somewhat prohibitive given stiff penalties imposed on developers. All developers are subject to the additional buyer’s stamp duty (ABSD) where all units in GLS or en bloc sales must be completed and fully sold within five years or face ABSD penalties. Additionally, the Qualifying Certificate (QC) rules (which apply to non GLS sites) are also imposed on listed developers (because of foreign ownership regardless of the percentage of shareholdings) where their development are required to obtain TOP within 5 years and all units sold within two years from the date of TOP failing which escalating penalties are payable. The Group is of the view that the QC policy places listed developers, which includes locally-controlled companies, in a disadvantaged position. The double penalties of ABSD and QC prevents land banking options for listed property companies. Moreover, developers are now obliged to push out their projects quickly which may lead to an oversupply situation if the economy does not grow in tandem with the property market. To balance supply and demand, the Group hopes that the Government will review the QC policy as it is an impediment which has resulted in the rush to bid up land prices, as land must be acquired and then developed within a limited period, rather than being held on balance sheet over the longer-term, which would moderate escalating land prices. Ultimately, all stakeholders need to work towards a sustainable property market, and the Group believes that the Government will remain nimble and make the necessary tweaks to the policies when the need arises.”
What the real estate players could agree on consistently is that office sector seems to be on a sustainable uptrend. One could potentially ride on the uptrend by buying into office REITs at a distribution yield one is comfortable with (my personal benchmark is about 5% for office REIT) and at a discount to NAV to have a margin of safety.
I have personally exited most of my investments in property developer counters (I have previously accumulated on developers who obtain lower land price in 2016 amidst the rising land price in 2017) which I shared previously given the higher risk in line with higher land cost which reduce the likelihood of a profitable development.
Given the exuberant market sentiments, I personally do not favour entering the market for an investment property currently as well.
“Be worried, when the market is greedy.”