2018 has been nothing short of a roller coaster ride for the Singapore property market scene. The en bloc craze which gathered steam in 2017 ran into full speed into the first half of 2018. This is a once in a decade phenomenon where private property owners and private property developers became irrationally greedy and optimistic and buyers of new launch willing to pay top dollar for fear of missing the boat. It is akin to a game of musical chair where everyone is happy as long as there is sufficient chairs and music is being played continuously (i.e. everyone in the game is making money).
One can see more details in the following website which has a good summary of the successful en bloc and developments seeking for potential en bloc.
Developers are rushing into this en bloc fever with a few jumping into the bandwagon, thinking of making a quick buck. Hence, it is not difficult to find people around you are contemplating a private property purchase or in the process of being en bloc.
All this change overnight on 5 July 2018 when the government implemented the cooling measure to rein in the excessive greed and optimism in the market. The increase in Additional Buyer Stamp Duty for Singaporeans holding second property from 7% to 12% and lowering of Loan to Value Ratio from 80% to 75% placed a greater barrier for Singaporeans to achieve the “second property dream”.
Since the implementation of the cooling measure there have been only 2 successful en bloc deals at Golden Wall Centre and Waterloo Apartments by Hotel 81 owner and Fragrance Group respectively. The key differentiating factors are that both sites are located near city and can be redeveloped to a hotel. The en bloc scene for residential development post government cooling measure have given great indication that the current en bloc cycle has ended although there are still several ongoing en bloc attempts.
There is also greater uncertainty in the global markets as we moved towards the end of 2018 with several stock markets around the world entering red territory. In retrospect, the government cooling measure is timely as it prevented the property bubble from inflating further which might result in more players being hurt when the bubble eventually burst as the Singapore economy is highly impacted by the external environment.
As we moved on to the new year, there will be greater stress for developers who snagged en bloc sites to launch the new projects especially if they are late in the game and highly leveraged. Buyers will also be spoilt for choice for new launch. However, with most developers having strong balance sheet, the likelihood of a fire sale in the new launch market is low.
The valuation of the developer shares has also took a severe beating arising from the government cooling measure and subsequently by the new rule to be implemented in 2019 which limit the number of shoebox units a developer can build. The latter measure will impact the profitability of the developer as shoebox unit typically sell at a higher dollar per square foot.
The following link summarises the new launch expected in 2019: https://www.edgeprop.sg/property-news/about-60-new-condo-launches-expected-2019
As we face increase supply, coupled with curtailed demand arising from the government cooling measure and uncertain global environment, developer, in particular those who are highly geared will be focus on pricing the development to move inventories. This contrast with launches in 2018 whereby developers are delaying selling out their development in anticipation of higher future selling price.
As mentioned in earlier blog post, I am of the view investor will do better by parking their money in developer shares whose price has took a beating arising from the government cooling measures as value has emerged.
My criteria for share selection are as follows:
- Proven profitable diversified business model (investment in commercial properties and/or overseas market) such that slowdown in residential property market do not adverse overall group business;
- Low historical price to book ratio. As property counter are heavily invested in physical real estate assets, this is one effective way in identifying bargain situation;
- Insider buying;
- Low gearing ratio which gives comfort that the business will likely survive any black swan event that might happen.
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City Developments repurchased $21.4 million in shares in two months… is it worth a look now?
The bargain appearing in developer shares became even cheaper as 2018 come to a close. The price to book ratio is at its lowest for 2 particular counters fulfilling the above criteria UOL and City Development which are trading at 10 year low price to book ratio at $6.08 and $8.08 respectively on 4 January 2019. As the wave of optimism has pushed the wave of en bloc in 2017, the end of euphoria caused the pendulum to swing to the other direction and punishing the developer shares excessively. Based on the 10 year historical price to book ratio trends, the capital appreciation upside could easily reach 50%.
The most obvious catalyst will be any relaxation of government cooling measure. The previous euphoria was in no short sparked by the relaxation of government cooling measure in March 2017 by reducing the period from 4 years to 3 years before buyers can sell their properties to avoid paying Seller Stamp Duties which gave several market observers some hope that ABSD might be relaxed or abolished. But it is really anybody’s guess but at current market price, UOL and City Development represents great value.
PS: The author vested in both UOL and City Development