Singapore Leads Asian Property Boom

Singapore Leads Asian Property Boom

While global investors worry about the United States subprime crisis, the mounting capital outflow from the US to Asia is pumping up certain Asian property markets. One in particular, Singapore, has seen rents for private residential units rise by 31.2% from the middle of 2006 to 2007, and rental rates for prime office space occupied largely by foreign companies has risen 13.9% in the second quarter of 2007, reaching an average of S$10.33 (US$6.84) per square foot.

Local property agents Propnex and ERA say that in the first quarter of 2007 apartment prices for the island state’s three most popular suburbs rose by more than 10%. And in other popular areas, a three-bedroom apartment of about 1,400 square feet (130 square meters) would now cost between S$350,000 and S$500,000, about S$250-S$350 psf.

Like many other Asian cities, such as Hong Kong, private condominium prices dominate the national headlines. High-quality apartments in central areas now cost anywhere between S$2,500 and S$5,000 psf. Foreign money in particular has pumped up this market segment, with non-citizen buyers occupying more than half the units of the high-end condo developments.

While soaring prices have pleased landlords, concerns are simultaneously growing that spiraling rental costs are hurting the island state’s price competitiveness and ability to attract new foreign companies. In response, the government is scrambling to moderate the market without being seen as overly interventionist.

Like other land-constrained urban property markets, such as Manhattan island and Hong Kong, Singapore’s price dynamics are complex. Singapore’s residential market is generally divided into three categories. Of those, the so-called “landed property” has the highest status, but because it is rarely open to foreign buyers, the top segment is less prone to cyclical changes.

The largest property category is the Housing and Development Board (HDB) segment, comprising apartments built by the government and sold to Singaporean citizens and permanent foreign residents. Currently some 80% of Singaporeans live in these apartments. This category, too, has seen rapid price increases, and many potential first-time buyers are grumbling as prices soar out of reach.

The property boom is symptomatic of Singapore’s success in luring foreign businesses to locate their regional headquarters here, bringing in a high spending expatriate staff. Singapore’s robust finance industry has also won recognition as a regional safe-haven for private capital.

The other side of the coin is that those same businesses and expatriate staff now suddenly face sharp and unexpected rent increases. According to property firm Knight Frank, vacancies for all office space are now near 8%, while prime space is at a mere 5%, the highest occupancy rates in the last ten years.

There has been a simultaneous boom in the house-moving industry, as a growing number of expatriates are unable to afford the higher rents demanded by landlords and are moving out of the private condominiums, where they enjoyed facilities such as swimming pools and gyms, to common apartments.

Historically, Singapore’s property market has experienced similar boom-and-bust cycles. After the 1997-98 Asian financial crisis, property went into a prolonged slump and only fully recovered after 2004, but prices have risen sharply in the last year.

CB Ricard Ellis’ Global Markets Report shows Singapore’s office buildings rising in cost more over the past year than anywhere else in the world, and in the prime Raffles Place area, office values rose by $804 psf in the past 12 months alone, boosted by a supply crunch and soaring rentals, which is more than double the increase in Hong Kong’s central district, where offices rose about $280 psf in value on average.

In percentage terms, Singapore’s office values jumped a staggering 105% over the past year, while Hong Kong’s climbed only 16.7%.

Surging demand and cost pressures on creating new supply, including Indonesia’s ban on exports of sand and granite to Singapore this year, have driven the rise also. The Indonesian ban drove sand prices up to S$60 per tonne, from S$25 which has caused a doubling of concrete costs from S$70 per cubic meter, to about S$140.

Another factor causing rising condominium prices and rents is the recent trend of property developers tearing down existing properties to rebuild taller, higher-grade condominium developments on the same plot. Huge profits have been made by property owners selling condominiums en bloc to property developers. Dozens of apartment buildings have been demolished over the last year, causing a drop in supply. Price increases in the private-condominium segment have filtered down to the HDB segment, which has started to impact adversely on those lower- and middle-income households that rent or are in the market to purchase an apartment.

To dampen these sales, the government recently increased the development charge from 50% to 70%, a tax the government imposes on the increased value of a redeveloped piece of land, in the hope that higher taxes will discourage property developers from buying out old condominiums and demolishing them. Whether or not these government measures will slow down the market remains to be seen.

It seems you can’t have it both ways and we will watch the Singapore government’s attempts to encourage growth and stifle it at the same time with interest. In the mean time, a new speculative front is opening in the hotel sector – Tourist arrivals to Singapore in the first half of 2007 set a new record, with visitor’s jumping 13.1% compared to the previous year and occupancy rates rising above 86%, bringing increased hotel room costs with it.