June 13, 2009
'Optimism in property market won't last'
Analysts point to over-supply and weak rental demand
By Joyce Teo
THE optimism in Singapore's property market is unsustainable, given an impending over-supply of new flats, weak rental demand and the fact that the country remains in a recession.
That is the pessimistic view of two research houses, which concluded that the price recovery is highly fragile.
Citigroup said the market is not at the start of a cyclical upswing and that the spike in home prices cannot last. 'We caution against over-optimism, because fundamentally the market is not ready for a sustained price recovery,' analyst Wendy Koh wrote in a report on Thursday.
In the same report, she downgraded Allgreen to 'sell', putting the developer in the same 'sell' basket as City Developments, CapitaLand and Keppel Land. Citi also downgraded Wing Tai to 'hold'.
While there has been strong resale demand, the call for new homes is patchy and rental demand remains weak, Ms Koh said.
Resale prices of some projects have risen and some developers are reducing discounts for new projects but Nomura Singapore believes these seemingly positive factors are misleading.
It maintained that the demand for new homes was boosted by price discounting and the interest absorption scheme.
'A rapid deterioration in rents amid higher supply and weaker demand has undermined yield expectations,' it said.
Nomura also pointed to the damaging effect of rising unsold inventory and forced sales by defaulting or distressed buyers who bought on deferred payment.
These properties form a source of 'hidden' inventory that will place further pressure on asking prices.
Also, as competition among new launches increases, there will be further risks of price declines.
The Citigroup report said a short-term price spike is possible, even in the luxury segment, given strong liquidity and the widening gap between Singapore and Hong Kong property prices.
But it cited the same over-supply risk highlighted by Nomura in its June 10 report, pointing out that supply scheduled for completion will reach a five-year high of 10,300 units this year and exceed 10,000 units a year through to 2011.
Knight Frank consultancy and research director Nicholas Mak is equally sceptical: 'The stock market fuelled much of the recent exuberance in the property market. People tend to think the recovery of one market is the recovery of another.'
If there was a time lag of six to 12 months, the property price rise would have been more sustainable, he added.
The private housing market has seen unexpectedly strong new home sales, at a rate of over 1,000 units a month.
'While this is good as it helps clear the backlog of over-supply, I am very concerned as rentals are still falling - by my estimate - at 3 per cent every month for some time now,' said Chesterton Suntec International's head of research and consultancy, Mr Colin Tan.
There is a clear disconnect if prices are improving while rents are falling, he said.
What is worrying is that most purchases now are made by investors, not owner-occupiers. These buyers will need to find tenants for their investment homes.
Around two-thirds of the completed supply coming through this year and next is in the central region, said Citigroup.
Couple this with the absence of a strong inflow of expatriates with large housing budgets, and rents in the upper-middle and luxury segments are likely to fall by another 20 to 30 per cent in the next two years. This would make a price spike unsustainable, said Citigroup.
It is more upbeat on the mass market sector as supply is limited, but rents there are also sliding, so any price rise is likely to be capped at 5 to 10 per cent.
The upside for the Housing Board resale market is limited as there is no wage rise in sight.
Nomura expects a shallow decline in mass market prices from now.
It tips the likelihood of a W-shaped recovery in asset prices, rather than the previously expected U-shaped recovery.