There has been a recent buzz on a report by Colliers, forecasting a return to pre-Covid-19 levels for Singapore property. Before you get too excited, it’s not specific to Singapore’s residential real estate scene only; the forecast is based on real estate investment in all segments, including commercial real estate.
However, the rise in real estate investment includes a residential component; and what we are seeing coincides with a surge in luxury condo sales in March 2021. Note that many luxury condos are purchased purely as a form of investment, rather than for personal use.
While great for current homeowners, new investors with smaller budgets – as well as homeowners looking for top-notch properties – will be less enthusiastic about rapidly rising prices. It looks like those who expect reduced Covid-19 fares are going to be disappointed after all. Here’s what’s going on:
What happened to the real estate investment figures in Q1?
According to the Colliers report, real estate investment grew by more than a quarter (25.8%) in the first quarter of 2021. This is an increase of 47.9% over the same period per year. latest.[[nid:514644]]
It should be noted, however, that commercial / industrial properties accounted for the bulk of the proceeds, not residential (in particular, the purchase of a 50 percent stake in OUE Bayfront for $ 634 million).
On the residential side alone, investment sales reached $ 1.6 billion in the first quarter, up 12.9% from the fourth quarter of 2020. This is a 154% increase from at the same time last year.
This is not completely unexpected, as 2020 was the peak of the Covid-19 pandemic; The first quarter of last year was the circuit breaker build-up, which hit in April. As such, it’s no surprise that we see a big jump between the same quarter in 2020 and 2021.
At the same time, sales of new private homes surged in March 2021, especially in the luxury segment.
Transaction volumes jumped in March 2021, to 1,368 units. While this is still lower than the January peak (2,033 units), it shows that momentum from 2020 has not yet diminished:
(The lower trading volumes in February were due to the Chinese New Year and fewer launches were heavily marketed at the time).
This is the highest number of new unit transactions recorded for a month of March since 2017 (2,089 units):
What is most important in the March transactions, however, is that properties in the downtown area (CCR) moved the most units.
Of course, you could argue that the numbers are on the rise precisely because there are new launches – but few would discuss the resulting performance.
They accounted for almost half (42.2%) of new sales. This was showcased by two strong launches: Irwell Hill Residences, which sold 50 percent at launch, and Midtown Modern, which sold 60 percent at launch.
It is also the first time since the last real estate peak in 2013 that CCR condos represent the bulk of new sales.
What are the main drivers of the market today?
- The boost to commercial real estate may be linked to ABSD costs
- The threat of new cooling measures
- Higher prices per square foot, but lower quanta
- Low interest rates
- Singapore attracts foreign investors
1. The increase in commercial ownership may be related to the costs of ABSD
It may be surprising that commercial real estate is doing so well, despite the Covid-19 situation. However, generous government support – like rent relief and tax cuts for commercial tenants – fueled sentiment (if not always prices).
Many analysts were also quick to point out that during the last global financial crisis in 2008/9, Class A office rental rates fell 49%.
It turns out that the decline in office rents for 2020 was only about 9.3 per (from $ 10.81 psf to $ 9.81 psf, between Q4 2019 and Q4 2020).
The surge in vacancies predicted by “work-from-home” agreements also lacked teeth, with Class A offices seeing their vacancy rates increase by around 2.7 percent. While still of concern, it is nowhere near as bad as most market watchers expected.[[nid:524911]]
Coupled with this surprisingly strong performance, the Additional Stamp Duty for Buyers (ABSD) encourages consideration of commercial rather than residential investment.
Singaporean citizens who buy a second home would pay an ABSD of 12% on the price or value (whichever is greater), while permanent residents pay 15% and foreigners 20%.
Commercial property, on the other hand, incurs no ABSD; only the usual goods and services tax (GST) of seven percent.
As such, the commercial segment of Singapore’s private real estate market may appear more attractive to investors at the present time. Further cooling measures in the real estate sector will reinforce this effect.
2. The threat of new cooling measures
As we have already pointed out, rumors of further cooling measures tend to materialize. With the risk of rising stamp duties, investors may decide to act quickly and buy now; this in turn leads to increased transaction volumes and prices, which in turn compel the new measures.
Nonetheless, we have seen the rise of “if you don’t buy now you may have to pay more ABSD later” as the latest selling point. This is not wrong, given the context.
We’re inclined to believe that the new chill measures will come in the form of restrictions on loans, rather than just increased stamp duties (lest people just spend even more of their CPF money on a second home). See the article linked above for more on the issues regarding possible new cooling measures.
3. Higher price per square foot, but lower quantum
A good example of this for Q1 2021 would be Irwell Hill Residences. About 80% of its 540 units are single or double bed; So even with a price of $ 2.5XX to $ 2.6XX psf, it is still possible to buy a unit for $ 1.1 million or less.
It just continues the previous trend that we’ve already seen from 2019, like when The M had units that hit $ 3,000 psf, but had a quantum below $ 1 million.
Indeed, developers make condos in the Center-Center region (CCR) accessible to investors with a lower budget. This is done by reducing the size of the units, as they can still be easily rented out to singles or couples (who make up the bulk of expat renters).
A lower quantum also translates into higher rental yields and smaller loans; this makes it more likely that investors can meet limitations such as the total debt service ratio (TDSR).
This trend has allowed CCR properties to maintain strong demand, despite rental issues as a result of Covid-19.
4. Low interest rate
We have a more detailed article on this topic. But to quickly summarize, mortgage rates are at their lowest since the last financial crisis.
Interest rates as low as 1.2 percent are in the market; and given the state of the US economy, it will be some time before rates normalize.
Local real estate investors have also heard the warning “interest rates will rise” so often that the effect may have worn off. Private bank loans have been at or below 2% for more than a decade, despite repeated warnings of rate hikes.
(That said, we wouldn’t be too dismissive of the warnings; mortgage rates were hitting 4% in the late 1990s).
5. Singapore attracts foreign investors
Despite the 20% ABSD, Singapore is currently one of the most attractive havens. We are one of the few countries to beat GDP forecasts (growing rather than shrinking) despite Covid-19.
Additionally, Chinese investors have preferred Singapore to Hong Kong since 2019. This is in part due to the political turmoil in Hong Kong; but it is also because Singapore is outside of China. This offers greater diversification, which investors tend to look for in times of volatility like today.
It also helps that Singapore does not impose capital gains tax and has few restrictions on residential resale (although foreigners are not allowed to buy real estate homes outside of Sentosa Cove without special permission). .
Along with constant appreciation and low interest rates, this can help mitigate the impact of ABSD.
It is still too early to declare that Singapore’s private real estate market has escaped Covid-19 unharmed
It is starting to look like this, but we won’t be sure until late 2021. We don’t know if the still soft rental market will encourage investors for a long time; or how long will foreign tenants return to our shores.[[nid:522350]]
When it comes to commercial properties, the dip isn’t as bad as we thought – but it’s still a dip. Rental rates are falling and vacancy rates continue to rise. It still has the potential to get worse.
Nonetheless, there are more positive signs than negative signs that we are already returning to pre-Covid-19 levels.
This will likely be a bummer for first-time buyers, who may have held back for possible fire sales or developer discounts.
At this point, their best hope would be for further cooling measures to kick in and prices to drop thereafter; because Covid-19 does not appear to have done this job yet.
This article first appeared in Stacked houses.