Reflection on real estate market following the implementation of 5 July 2018 ABSD

It has been more than a year since I started the journey of updating my thoughts on the Singapore real estate market. The 5 July 2018 ABSD is a significant moment for the local property scene and in the following post, I would like to reflect on what I shared over the past year and also my 2 cents worth on where investors can find value in the market.

  1. Recap on cooling measure

The 5 July 2018 ABSD will go down in the history of Singapore real estate market as one of the most decisive and impactful cooling measure. In the past, cooling measures implemented were a bit more measured and taken one step at a time. Since the start of the cooling measure implemented post Global Financial Crisis (GFC), the government has taken more than 10 iterations of the cooling measures in various form and sizes summarised below:

SSD: Seller Stamp Duty which taxed buyers who sell units within a stipulated period from purchase (i.e. buyers are locked in for a period for 4 years to avoid the tax)

ABSD: Additional Buyer Stamp Duty. In my view, the most dreaded and painful of all taxes. This tax is an additional tax slapped on Singapore Citizen buying their second home. Singapore Permanent Residence and Foreigners are also made to pay more ABSD to own a piece of property in Singapore.

TDSR: Total Debt Service Ratio. This restricts the buyer’s ability to take a property loan to 60% of income after considering all outstanding loan. This restriction help to mitigate the risk of default on loan by buyers and help buyer to avoid the situation whereby they bite more than they can chew.

In my view, the government do not want to see an excessive speculative element in the Singapore real estate market as many of such bubbles did not end very nicely in the event of any external shocks such as the Asian Financial Crisis in 1998; Dot-Com bubble in early 2000; SARS in 2003 and of course GFC in 2009.

For a quick overview of the cooling measures since GFC, you can refer to the following link:

  1. En Bloc Party and increasing land price feeding the positive sentiments

The root of the latest cooling measure is undoubtedly the en-bloc party which I blogged about in 5 October 2017:

I shared that the transacted volume of the en bloc party is approaching the last heights in 2007 and also shared the land price acquired is not very far away from what a new unit is marketing for.

“Taking Seaside Residence at Siglap as an example (albeit it is a 99 year site), the median sales price is already close to the land price for Amber Park and The Albaracca”

There are signs that developers are developing a group thinking syndrome to bid for land just because other developers are doing so which translates to record land bid and transaction volume in the en bloc market. One of the most unfathomable deal that I have to highlight is that of jaw dropping deal for Park House transacted at $2,910psf on land price alone. How many of you are betting the pants will drop together with the jaw?

The start of the positive sentiments can also traced back to the 7 hour sold out EC at Hundred Palms in August 2017 which I shared in a guest post:

Within the post, I also highlighted the cost of flour i.e. nearby land plot secured by Keppel and Oxley exceeded that of the cost of bread i.e. price of completed unit at Hundred Palms (albeit an EC). Fast forward to June 2018, I did a follow up post on the launch of the land plot (Affinity by Oxley and Garden Residence by Keppel) highlighting the significance of the lacklustre sales for both project  and had the following take on the property market:

“ The property bull cycle over the past year has been driven primarily by market sentiments with developers setting record bids with each government land sales or en bloc.  The myth that “developer must sell high because land cost is high” is a good sales pitch but must not be the primary indicator of property purchase. The unwillingness of buyers biting the high price that developer is offering at Garden and Affinity provides evidence that other factors such as comparable property pricing, supply situation or simply market forces do play a part. I have no crystal ball over how the property market will pan out. But what I do know is that 4 years down the road, unsold developments from the record en bloc season of 2017/2018 will be due for their ABSD.”

The magnitude of the ABSD on 5 July 2018 will almost certainly put the final nail to the coffin of the current en bloc party and with the supply looming from the previous year land sales, one could expect a supply glut leading up to the ABSD timeline 4 years from now (around 2022). Developers who have bought land in 2017 and not launch their project will suffer most because the rules of the game has changed and they do not have to benefit of “diversification over time” (i.e. lower average land cost or profits that are already locked in following project launch).

  1. Alternative ways to ride this real estate cycle

A more inexpensive way to ride on the real estate uptick is buying direct into developer shares. However, as the real estate development is very much cyclical, how can one time the market? With the benefit of seeing the sudden increase in land price in 2017 compared to 2016, I took positions into developers who held land banks (i.e. land at cheap price such as CDL and Bukit Sembawang early in the cycle) and also bought into developers who got their land in 2016 but launch in 2017.

I shared this in the following blog post in August 2017 for Bukit Sembawang:

But more often than not, the time to sell is often the hardest to grasp which I share in the following:

In September 2017:

“By comparing the price to book value across time, all companies is currently trading at their 5 year high. Personally, I would view that as an indicator that the sector as a whole is trading at a fairly rich level with share price driven up by sentiments rather than fundamentals.”

I also shared my experience taking profits in developer stocks (in retrospect at a fairly respectable price) in the following post in November 2017:

Rationale for my sale as follows:

“My view on the property sector in Singapore is that the price has overrun its value largely driven by sentiments mainly from the en bloc craze. Factors such as continued rental weakness and government cooling measure which remain largely intact would translate to developers who got their land in 2017 at record price bearing a higher risk of an unprofitable development. Given the large supply coming through from the en bloc deals fast forward 2 years later, I believe the overall real estate sector will be prone to any external shock that might occur similar to what happened in the last en bloc party in 2006 which came to a halt in 2009 due to the Global Financial Crises.”

What now?

Ironically, after the broad base sell-down on the local property counter post ABSD, I did a back-test and found value even amongst blue chip property counters whose business are diversified and/or with minimal gearing such that any prolong real estate downturn will not result in a significant impairment to their business. The 2 companies are Capitaland and UOL. Based on the 5 year low price to book ratio of 0.77 (for Capitaland) and 0.58 (for UOL), the implied price is $3.30 for Capitaland and $6.56 for UOL. (i.e. investors can use the price as a guide on a reasonable purchase price)

Fundamentally, I like the idea having exposure to Capitaland and UOL as they are market leader in their respective fields of business (mall management for Capitaland and hotel management for UOL) and also their exposure to other countries (such as China) and other subsectors of the real estate market such as the office and retail market. Significant insider buying at UOL post ABSD also gives added confidence to investor the value they are getting. So with that background, I nibbled on UOL at about $6.70.

  1. Resale market has more value

With developer balance sheet generally being fairly robust, there will not be an immediate hurry for developer to slash price drastically to move the units in the immediate term. This is especially so as en bloc beneficiaries from 2017 start entering the market this year (albeit with a greater dampening effect caused by ABSD as well as the lower LTV ratio).

One way which buyers of physical property  can derive more value is by looking at the resale market as sellers are generally more realistic with their pricing especially now with the backdrop of the ABSD and lower LTV ratio. Taking new launch sales price in the area as a benchmark could be a way one to determine if your purchase is a value buy.

Taking the following new launch in district 19 of condominium and EC in District 19 as the higher and lower pricing band respectively:

Development $psf Type Source Distance to MRT
Rivercove Residences $965psf EC 1.3km to Seng Kang
EC at Sumang Walk by CDL Land price of $583psf (Expected launch above $1,000psf) EC About 1km to Punggol
Riverfront Residences $1,300psf Condominium (Former en bloc site of Rio Casa HUDC) 900 metres to Hougang

With the above information, one who is keen to source for condominiums that is less than 400 metres away from comparable MRT station such as Buangkok, Seng Kang and Punggol with greater confidence on whether is the listing a bargain or not. Do note specific conditions of the development or unit do apply (such as factoring the age of the development, the facing and floor level of the unit and the layout).

Personally, I use the above analysis to secure a resale condominium from the secondary market. And yes with some luck before the new ABSD and LTV measures kicked-in.

I hope the above post allows readers to have a broader picture of the market: from physical real estate assets to property counters. If any readers have any specific queries, feel free to contact me and I will be more than happy to share my views.

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