High-end residential property boom 15 comments
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There is a buzz around the property market these days. High consumer enthusiasm for property usually happens at the mature/late growth stage of a business cycle, where consumer confidence has been strengthened adequately such that they are comfortable with making large purchases. Some skeptics are thus predicting that this will not last, and point to the lack of buyer interest in the mass market for residential properties as a sign that the property market is being talked up.
However, what looks more likely is that there is a stratification of the residential property market: the mass market where lower/mid-end condominiums are suffering from the after-effects of an over-supply of HDB flats plus limited local consumer demand growth, and the high-end property market in prime districts which all observers agree is extremely strong.
There were some studies done to compare Singapore high-end residential property prices with that of major global cities elsewhere (New York, London, Tokyo, Hong Kong etc) which concluded that local prime residential property was undervalued. Ok perhaps it might be the other way, that property in these other cities is overvalued, but there are fundamental reasons that underpin strong prime residential property prices and in my view, will be sustainable through this business cycle.
It basically boils down to demand-supply dynamics. The demand part is clear: Asia is the growth engine for the global economy, and Singapore as a key hub will see high demand for prime office space and also high prime residential property rents and property prices. The shift from manufacturing towards services will attract high-income individuals (especially in the financial industry) who are willing to pay high prices for prime residential property. Also, Singapore is seen as a safe haven in Southeast Asia, and the return of Indonesian money into Southeast Asia is benefiting Singapore --- as exemplified by Lippo purchasing commercial properties around Orchard Road and asset-heavy/"branded" companies like OUE and Robinsons. Indonesians, together with Malaysians, are key buyers of high-end residential property in Singapore, and this trend is showing no signs of abating.
The tight supply is reflected in a few phenomena. The en-bloc fever that has gripped the market in early-2006 is a result of developers seeking to add to their landbanks for new property development, and the sellers' market reflects the developers' desperation/optimism (although it has abated slightly recently). Hotels in prime areas have been torn down previously (Marco Polo, Seaview Hotel and Cockpit Hotel) and condominiums built in their place (a related article: Hotels in Demand), another reflection of the tight supply. It is in anticipation of further such conversion (possibly Hotel Negara coming up) that the Singapore government is releasing more sites from its land bank for hotel construction to meet future tourism demand.
This limited supply of residential land is most apparent in Orchard Road, where the action will be hot for the next few years as it undergoes a remaking with the development of Orchard Turn, the former Gluttons' Square, Somerset Central and probably more coming up (with Lippo a likely key player). The bulk of en-blocs have taken place around this area, in Cairnhill, Grange, Oxley etc. We had the Sail@Marina attracting huge demand last year, followed by strong interest again at Sentosa Cove, while the upcoming St Regis at Tanglin appears to have no difficulty selling off its units while setting a new benchmark of S$3,000 psf; these are manifestations of the strong demand for Singapore high-end residential property. As long as the government continues being stingy in releasing residential land in the prime districts, the demand-supply dynamics should continue to sustain such high rates for prime property developments.
This sector is one of the best plays on Singapore domestic reflation. Resistant in bad times, booming during good times, it is a direct beneficiary of Singapore's long-term positioning as a services and business hub and a "playground of the rich". Generally speaking, it is not just a play on rising income and purchasing power of Singaporeans, but also a play on foreign money entering Singapore from ASEAN, Asia-Pacific, the Western countries and even the Middle-East (in that order) --- a theme that is structurally more robust.
posted by DanielXX at Friday, June 16, 2006
15 Comments:
npvThks Danielxx for another good piece... just thought I would like to share with you something I read on the latest June Marc Faber GBD report on the high end, luxurious condo.....Marc Faber observes that unlike previous few years, there are many cranes all over the world building trophy high end condos.... and as an contrarian he is concerned.... his concern is probably more on a global basis and not necessarily applicable to Singapore, which has its own dynamics
Hi gsg,
I agree, he's probably got some reason to be concerned. I've heard the property boom in the UK is just waiting to burst, while that in the US is starting to deflate.
But the boom in these countries has been over a long period, and its sustained nature is probably what has encouraged property developers to build more and more, and which simultaneously worries the GBD editor Marc Faber. As you pointed out, the Singapore market marches to a different drumbeat, with a different customer base, different anchoring trends and a property market that has only just emerged from a real estate deflation post-1997 and consequently represents greater rationality. Cheers.
hi daniel, its me cheng.
said i wld come over to this blog of yours.
do you think the prime property market has still upside/long way to go? this post of urs was done 3mths ago.
develepors have been raising prices every other week for some project offerings, so a little concerned abt where fair valuations would be....
also, whats your opinion of k1? they recently announced a capital payout exercise of 6cts, which indicate they have lots of cash, and dont know what to do with it....
cheng
Hi cheng,
I wrote this three months ago and I put my money where my mouth was. I am glad it has worked out well for me :-)
I'm not sure how old you are and whether you have been through the whole ups and downs in the property cycle --- the mid-90s booms and busts. For me, I haven't been involved deeply, so I neither have the first-hand experience, but also none of the emotional baggage. To me, looking at it objectively (I hope), Singapore property is going to undergo an upward re-rating, particularly in the luxury segment, as long as Asia remains the growth market of the 21st century. The signs are good, and it makes sense to bet with it --- momentum is still strong in China, India, and also the more advanced economies like Japan and Korea. How high can it go? As long as property prices keep going higher, I'm ready to stay with the bet. That's the advantage of being a small investor --- nimble and less worry about exit strategies.
I was looking at K1 Ventures too earlier, because the CEO Steven Green was buying big. The moment I saw the 6-cent dividend I knew the stock would go up short-term, but I also felt it would come down after because in actual fact the results minus the extraordinary income weren't that good .... I do believe the group would have made a loss in 2H06 if not for the extraordinary gains from GASCO's sale. I actually do like K1 and the new locomotive leasing business, but it's worth watching the next set of results to see how things go. So what if it's 6 cents dividend? The stock will just adjust downwards 6 cents ex-dividend, and closed-end funds typically trade 10-20% below NAV anyway.
hi daniel
i m in my 30s. too young to buy property through the peaks in the mid 90s... but saw the bust from 96 - 99 and then the mini recovery in 99 - 2001. timed it excellently to buy something in early 99 post asian crisis/russian crisis, and did not sell through 911 and SARs. only sold in 2003 at breakeven. (poor exit timing)
bought something else in q3 2004, (excellent timing, wrong location in the suburbs in Katong).. and it has not move much up since. so a little disappointed with my property pick, as, if i had bought any area in newton/orchard/oxley, i wld be deep in the money now....
looking for my 2nd investment property right now... still think there is upside. the "dual economy" theory seems reasonable to me, with the upper end luxury segement still relatively cheap viz HK, NY, Ldn....strongly believe that PM Lee is remaking singapore in the right direction, making it global and internationally attractive city to come to work/play etc...
any areas which you thik still carry value on sec market ( i m thinking like International plaza, Mt Sophia area), or do u think to go for the new developments (like 1 shenton way)..?
Hi cheng,
You do sound like you have money to burn even though you're in your 30s!
What kind of investment property are u looking for? Commercial? Sounds like it if you're looking at places like International plaza and 1 shenton way. As far as I know, there is optimism over the office segment now, given the tight supply until One raffles quay and then the BFC come online. As a stock investor and not property investor, I may not be knowledgeable about the ins and outs of the property market, though :-)
nono..residential..
IP is retail at the bottom, but from the 30 something floor on, its all residential. i just spoke to a broker, the units on sale in july were all snapped up...
1 shenton way is being taken over by CDL to redevelop into leasehold residential, just like The Cliff at McCallum street, where the current building where watson is.. that one is by Far East i believe. they were marketing at 1100 - 1200 psf. recently just raised last week to 1300psf... leasehold mind you..
the office segment is a different ballgame - that there is a lack of supply until 2009, given the govt stopped the white site sales for office space during the downturn. rentals have been rising....
prime office grade A space is in short supply, and rentals have moved up from $3.5 - 4 psf (2 yrs back) to recently $6.5psf transacted.. and still rising. i personally know of owners who are now asking for $7psf.... these prime properties are going for abt 1200- 1300 psf (suntec office space)... so you can work out the yields....
hmm... come to think of it, maybe there are some opportunities there....
anyway the equity markets look weak.. i have been trimming.. hope you are not too badly affected too...
Hi cheng,
Nope, it's not really a deep correction I guess. And now, after a rally on Wall Street, I believe the market is suddenly going to change its tune again.
Well if you're looking for stocks in the commercial/office sector, you could check out UOL, Singapore Land, Keppel Land --- these are the ones that have strong commercial property exposure. Incidentally, for IP, the owner Hong Fok has been in the limelight lately. To me, the stock market is a proxy to play my cards in the property market without sacrificing liquidity (of course, the disadvantage is that I can't leverage as with property buying, because I don't like to use margin).
u think uol, singland etc still have value at these levels? i see that they have gone up quite abit since their lows in june/july.. relentlessly at that....perhaps wait for a pullback for a lower entry pt?
i am looking at sembcorp and kimtrans again after the recent corrections following their run ups....
what do you think of global voice? i think u featured it in ur other hotstocknot blog. i was having a discussion with my friend. he viewed it as an asset play, as a potential takeover target, and gk goh recently wrote abt it being a potential takeover tgt by level 3 communications in the US, who are predatory and looking for targets to expand their fibre optic networks. citing global voice as a possible candidate.
personally i thought that the stock would have moved already on all these news, but the fact that the stock has underperformed since 22 - 23cts at the start of the year is telling. the trade is too obvious, and there is no concrete earnings to back the valuation of the stock.
Hi cheng,
The property stocks will be for the long term. Personally, I buy and hold for these stocks, although my usual approach is to take medium-term positions. As sure as Asia is an emerging giant, its assets in prime areas of prime countries (betcha that Singapore will be one .... it is definitely aggressively pushing itself) will be re-rated.
Global Voice... it may be better now that all the previous hype about various investment groups buying in has finally died down. I can see they're securing various deals but not keen to reveal the amount involved. These tech/concept stocks are the most difficult to evaluate because their income flows is in the future and not now, so you have to take a position on the potential value of their assets. Normally what I'd do is to wait for one or two half-year results to see how they do, in particular the cash-flow, before even considering. But some may think I'm too conservative. However, to me, I hate opportunity costs (of sacrificing my liquidity). At the same time, others may think differently, and may be willing to take longer-term investing horizons ie. buy and hold, so I guess you'll be alright so long as your asset allocation is optimised (ie. small part of portfolio to such concept, or high risk-high return stocks).
daniel
tks for your views on global voice. i m not fully convinced, as everyone knows about this unlocking of asset values etc but price doesnt reflect it. perhaps mkt is also not convinced. nevertheless, maybe i will take a look at it....
sembcorp has bounced off the recent lows. yes!
I read that the bottleneck towards broadband delivery of video-streaming, the next big thing, is not at the end-product but in the delivery bandwidth ie. the pipelines. That may constitute a reason for buying into fiber optics networks for the long-term, though one has to consider it as a long-term investment. G'luck!
hi Daniel,
I was scouring through this blog and dont see any comments from you on the tech sector... the former darlings of the Singapore economy like VMS, STATs, CMS etc....
What are your views on tech stocks? Do you really think that the US slowdown is round the corner, and this will obviously affect the local tech companies? Just want to hear your views.
I have an article on an Elliot Wave newsletter which predicts a huge crash in the DOW is coming before the end of this year.....
Will locate it and try to send it to you.
Hi cheng,
On tech stocks, I think they're good for short-term, at best medium-term, trading, but not really suitable for buy-and-hold at this stage of the market cycle. There is a good chart on the investment moats site:
http://www.investmentmoats.com/?p=86
There is talk of US consumption slowing down, which could be real if the consumer sentiment turns downwards to their weakening home property market. Despite all the talk of the rest of the world taking over the mantle of consumption, the US is still the main man: their consumption forms ~70% of their GDP and their GDP is prodigious. Given a situation where oil prices decline as consumption demand weakens, you can bet that the positive effects of the former won't be able to compensate for the negative effects of the latter. There is compelling value in some tech stocks but I feel any rally will be rather muted. Just look at how the big boys are selling into strength for some plastic stocks during their recent rally.
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