Singapore: Is the Property Surge Sustainable?

Singapore: Is the Property Surge Sustainable?

Agence France Presse reports that Singapore’s residential property prices rose by 10% in 2006 and that rents have risen by a truly extraordinary 100% in 2007 so far. That rentals are increasing steeply is confirmed by other sources (http://lushhome.wordpress.com/2007/04/) and there is evidence to suggest that the government is just as surprised at the change as everyone else appears to be. However, we’ve found no confirmation of AFP’s 100% increase statistic, yet. Data to hand suggests that rental yields have normally been in the region of 3.5% maximum for a number of years.

Given that interest rates on savings in Singapore are less than 1% pa (www.singstat.gov.sg/Keystats/mqstats/ess/essa51.pdf ), property would still seem to be an attractive investment but, as borrowing rates are considerably higher (prime lending rate is 5.33%), any kind of gearing for property investments would be heavily dependent upon prices of assets rising to be economic.

Mortgage rates are lower with fixed rate mortgages available at 3.75% and floating rate ones available at 3.4% (with even more favourable terms for one to three year terms. With the increase rental yields in the first half of 2007 the economics of property investment in Singapore are seeing a sea-change.

In the last 12 months some comparisons have been made between Singapore and the richest of the United Arab Emirates, Abu Dhabi and Dubai, where property prices are still lower than in Singapore but rental yields can be twice as high. Relatively high rates of tax on rental income (10% plus an extra 10% for non-Singaporean owners) may have depressed rental yields in the past (but REITs provide a more favourable climate*).

There had been relatively little real estate development in Singapore since the end of the region’s economic boom in the 1990s but why this should lead to strong sale prices and low rental yields is not completely apparent. One factor is the very high proportion of public (Housing Development Board) sector housing but it would seem that there must be other ways in which the government of Singapore was influencing the real estate market.

The Singapore property story is now changing with new money coming into the country from oil exporters and newly industrialised countries. This is partly investments made by high net worth individuals from neighbouring countries and partly a consequence of Singapore’s reputation in the wider world as a well managed financial centre. One important mechanism for property prices to be affected is the trend towards ‘en bloc’ purchases of residential complexes by (corporate) investors. Appartment owners who have profited by selling out are, in turn, forcing up demand for owner occupied and rented accommodation elsewhere in the city. It seems as if Singapore is feeling the effects of worldwide inflation in asset prices; CB Richard Ellis forecast total property investments of $35bn for the year, up some 15% on 2006.

So far this year residential investments have reached over $14bn out of a total of over $21bn. Almost $8bn of residential purchases are accounted for by the en bloc/collective investments mentioned above. Bear in mind that the purchase of just one complex such as Pacific Mansions or Farrer Court can cost well over $1bn. These schemes are contingent on permission from the Singapore Urban Redevelopment Authority.

In conclusion, it would seem that Singapore is attracting investment currently because it is seen as a safe place in financial and geo-political terms. It looks as if a bubble may be developing. Possibly, signs of danger may be reflected in the share prices of property companies such as CapitaLand over the next few months.

In July, we’ll be taking a closer look at Singapore REITs (S-REITs). Please let us know if you have ideas on what has triggered the latest upturn in Singapore real estate.

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