The Monkey Business Of Real Estate

This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading !

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Chinese New Year conversations have never been so dry this year yet, on reflection, we realise that conversations since 2015 has largely been devoid of real estate talk which is a big difference from the years before where everyone was talking about those new condo launches, London , New York, and Australian units, commercial lots and our favourite Iskandar.
With even less to talk about when interest rates started rising last year, along with defaulting bonds, tipsy stock markets, topics started to veer towards the more mundane gossips, such as American politics which is pretty dangerous ground, after religion, and we are secretly thankful for topics like terrorism and new viruses to keep those conversations going.
Nobody likes to talk about unhappy things and many people I know have stopped looking at their portfolio statements after this new year’s meltdown in stocks and high yield bonds. Property investors, alike, are in their own despair as we hear of penthouses in Siglap renting at just 5.5k per month, down from the 10k it was fetching just the year before.
Couple the reduced rental with the higher expense of the highest interest rates we have seen in 7 years, the returns are miserable indeed.
Let’s be positive. If the house had been a bond, the effect of diminished returns would have driven the price down rather substantially especially if the rents will remain slumped. Yet, fortunately the URA Residential Property Price Index is just down 8.4% from its peak in 3Q2013 and anyone who had bought their property before 2011 would have profited in general, say nothing about the champions who had invested in 2Q2009 who would be still up an estimated 50%.

 

ura residential indexURA Residential Property Price Index (2008=100)

 

Yet unlike the faster pace markets in their various states of correction out there, there is less light at the 2016 tunnel for investors who are long real estate but not a bad place to be if you are out shopping for something out there, considering the potential correction just up ahead.

Rationalising the various losses in the marketplace, in the face of negative interest rates which is purported to be stimulative and not RETARDING, is real estate pain the next big pain to expect ?

Singapore

Luckily for Singapore, it may turn out considerably milder than the rest of the world, and for the rest of the world, it may not be a widespread problem as we note that home ownership rates are lowest in most jurisdictions such as the US whose home ownership rate has dropped to 63.4% (http://www.cnbc.com/2015/07/28/home-ownership-rates-drop-to-lowest-since-1967.html), lowest since 1967.

Milder for Singapore because the property market has already corrected ahead of the rest by its 8.4% which is a combination of 1. Regulatory measures, 2. Higher interest rates (at their 7 year highs vs the negative rates elsewhere) and, 3. Supply pressures and lack of demand (immigration).

2016 will not be a good year for real estate even if the ABSD (Additional Buyer’s Stamp Duty) is removed because the peak launch year was 2012 and there are sellers waiting to sell to avoid paying the Seller’s Stamp Duty (https://www.iras.gov.sg/irashome/Other-Taxes/Stamp-Duty-for-Property/Working-out-your-Stamp-Duty/Selling-or-Disposing-Property/Seller-s-Stamp-Duty–SSD–for-Residential-Property/) that is not applicable after 4 years.

property launches spore

Source : https://www.ura.gov.sg/uol/media-room/news/2016/jan/pr16-06.aspx

 

Supply Side

Supply will hit the street with 26,000 units to hit the street.

spore property supply

Source : https://www.ura.gov.sg/uol/media-room/news/2016/jan/pr16-06.aspx

 

.. just when vacancy rates are climbing.

spore vacancy ratesSource : https://www.ura.gov.sg/uol/media-room/news/2016/jan/pr16-06.aspx

 

Demand Picture

The demand picture from an investor’s perspective cannot look worse with wealth decimated en masse everywhere. John Mauldin put it plainly that oil prices alone have reduced the worth of all the world’s oil (estimated at 1,700 billion barrels) by $ 100 trillion although we should be grateful that not all that oil has been monetised or recognised on balance sheets.

Throw into the picture stock market losses such as the STI which is back to 2011 levels, the world can safely say that the central banks, who own most of the negative yielding bonds out there, are the only ones making any profits this year, albeit paper profits.

 

Interest Rates

Interest rates around the world may be turning negative but it also serves as a low benchmark for property returns, closing an eye on lower rental yields i.e. lower rents and lower borrowing costs. Higher interest rates, the Singaporean anomaly, on the other hand would have a re-pricing effect for rental yields to justify asset (property) prices.

In Singapore’s case, the landlords are faced with a double whammy in a situation with over-supply as immigration slows, to lead rents lower. Thus, requiring an even bigger adjustment to the asset (property) price ?

 

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