SINGAPORE FOCUS II HOUSING: VOLUME DOWN, PRICES HOLDING UP SO FAR

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1 HOUSING: VOLUME DOWN, PRICES HOLDING UP SO FAR By Elaine Khoo & Wesley Chong From UOB Country & Credit Risk Management 214 new home sales volume has been dismal, falling 51% YoY to 7,316 units, levels last seen during the GFC. 1Q15 sales have also been lackluster, down 25% YoY (-5% QoQ). Developers reluctance to launch new projects in a softening market coupled with financing constraints and prohibitive transaction costs (eg. TDSR, ABSD, SSD) are key contributors. The public housing segment has not been spared with 1Q15 HDB resale prices down 5.5% YoY (-1% QoQ), marking the 7th consecutive quarter of declines. The 9.2% fall in HDB prices from the recent peak has surpassed that of the private segment. This could consequently dampen demand for private properties by HDB upgraders as sizeable Cash- Fig 1: Primary & Secondary Sales Have Plunged Fig 2: Singapore PPI vs HDB Resale Price Index 3, 25, 2, 15, 1, 5, Primary sales Secondary sales 1-yr avg primary sales 1-yr avg secondary sales Q9 1Q94 1Q98 1Q2 1Q6 1Q1 1Q14 PPI HDB Resale Price Index Source: UOB, Bloomberg, HDB Resale transactions have also contracted as sellers have been unwilling to significantly lower their price expectations while prospective buyers take a wait-and-see approach. The result of this ongoing stalemate is sharply reduced sales volume but milder price declines. The slew of tightening measures has resulted in increased interest in foreign property investments in markets such as Malaysia, UK, Australia and Japan. Developers have also stepped up their offshore diversification in response to shrinking development margin domestically and in acknowledgement that the challenging conditions could prolong. As such, local developers participation in government land sales has been lukewarm and land prices have slid. In contrast, foreign developers (particularly the Chinese players) continue to be relatively upbeat. Uneven Price Declines Based on the government s official Private Property Price Index (PPI), average prices have fallen by 5.9% since peaking in 3Q13. Price declines accelerated across all segments in 1Q15, with prices of nonlanded properties falling the most in the Rest of the Central Region (RCR) or city fringe areas (-1.7% QoQ). The overheated suburban segment, captured under Outside Central Region (OCR) has also started to cool (-1.1% QoQ) after rising 75% from 2Q9 to 3Q13. Meanwhile, price declines in the Core Central Region appear to have leveled off (-.4% QoQ). Over-Valuation (COV) premiums over the past few years have helped facilitate down payments. Deeper Price Correction On The Cards As Interest Rates Rise And Rents Slip Some resolution to the stalemate could emerge this year as developers and sellers capitulate in the face of rising interest rates and weakening rentals. The 3-month SIBOR and 3-month SOR have surged around 4bps and 7bps respectively, representing more than a doubling YoY. As the majority of mortgages in Singapore are floating, home owners will need to brace themselves for higher mortgage payments. Nonetheless, with interest rates still low by historical standards, the impact should be manageable although overleveraged buyers will feel more pain. Rents have fallen for 5 quarters as the massive supply pipeline starts to progressively hit the market. While the decline has been mild thus far (-5% from peak), the pace could accelerate as bargaining power shifts to tenants amid a sharp surge in supply. CBRE data showed that 1Q15 prime rental yields dipped from 2.8% to 2.7% YoY. While this still implies positive carry with mortgage rates <2%, the buffer could be rapidly eroded given the expected interest rate trajectory. Competition for tenants looks set to intensify further on the back of the government s tighter immigration 14 Quarterly Global Outlook 3Q215 UOB Global Economics & Markets Research

2 policy. In the face of oversupply, tenants flight to quality suggests that suburban landlords could be vulnerable as tenants opt to move closer to the CBD for similar rental budget. 2,5psf. As only foreign developers are subject to QC rules, more developers are seeking privatization to escape Fig 3: Private Residential Rents By Segment: Luxury Rents Have Been Under The Most Pressure S$psf Q97 2Q1 3Q5 4Q9 1Q14 Source: CBRE, UOB Luxury Prime Islandwide Fig 4: Price Gap Between Properties In The Central Region vs. Suburban Areas Have Narrowed To All-Time Low x Q9 1Q94 1Q98 1Q2 1Q6 1Q1 1Q14 Central/ East Central/ West Source: CEIC, UOB Global Economics & Markets Research Central/ NE LT average premium HDB sub-letting rents have also started to slide and we anticipate further weakness as HDB upgraders move out to private properties upon completion. With demand for resale HDB flats constrained by the 3% mortgage service ratio, more owners could elect to put their units up for rent instead. 4Q14 subletting approvals surged 43% YoY to 1,365 and continued to tick up in 1Q15 to a high of 1,385. The total number of HDB flats being sublet rose by 3.6% YoY to 48,338 units in Dec 214 (c.5% of stock). A Forced Handshake? Distress sales have increased particularly in the non-landed prime segment which is currently facing the most pressure due to oversupply and smaller accommodation budgets for expatriates. Based on data from Colliers, mortgagee sales spiked fivefold last year as over-committed borrowers defaulted on their loans. There were 159 forced sales listings, up from just 32 in 213. The bulk (78%) was residential non-landed units in prime districts 9 and 1. Luxury apartments from newer prime districts 1 and 4 (Sentosa and the City Centre) and shoebox units also featured. In the high-end segment, property funds approaching the end of their fund life as well as developers facing potential Qualifying Certification (QC) penalties have offered units in bulk. Through its wholly-owned company, Hiap Hoe acquired 55 units in bulk for S$227m across three of its own projects in order to minimize extension charges. Heeton is once again looking for a bulk buyer for 3-unit iliv@grange after cutting asking prices by 1-15% to S$1,879- these hefty charges. Popular Holdings recently emerged as the latest to go private, following in the footsteps of SC Global and HPL. Nonetheless, further price falls in the high-end segment could slow after the >15% drop last year, narrowing the gap to mass market properties to an all-time low. Supply will fall sharply from next year, which could support prices. Moreover, the bulk of unsold stock resides in the hands of major developers with greater holding power. Despite having written down the value of their residential land banks, developer balance sheets remain generally healthy with net gearing significantly below 28 peak. This should help prevent disorderly price cuts that could destabilize the market. Household balance sheets also remain firm and the pace of growth in household debt has decelerated on the back of MAS macroprudential measures. Increased willingness by developers/ sellers to cut prices could help spur inventory clearance as more price-sensitive demand returns. In addition, investors caught by the 4-year Seller s Stamp Duty imposed in Jan 211 could start to exit from this year onwards and may be more amenable to lower asking prices. This could in consequently set the stage for the market to trough. We expect a further 5-1% fall in private home prices this year. Start Of Supply Avalanche; Mass Market Completions Accelerating 214 private completions surged 52% YoY to a 2- year high of 19.9k units, significantly higher than Quarterly Global Outlook 3Q215 UOB Global Economics & Markets Research 15

3 URA s projections at the start of the year. We expect 21.2k units to complete this year and a further 19.6k units in 216 before easing materially from 217. Including HDB supply, around 183k housing units will come on stream over the next 4 years which will bring the overall stock of housing from the current 1.28m to 1.47m, representing a 14.5% increase or 4-year CAGR of 3.4%. With population growth forecasted at only 1.5% pa over the same time period, oversupply pressures will persist. Supply composition will start to shift this year. While supply over the past few years was dominated by the high-end segment, the number of homes in the fringe and suburban areas will account for >8% share of overall supply. Supply will pick up most prominently in the North-East (Sengkang, Punggol) with close to 14k new private and ECs slated for completion in the next 3 years, excluding the bumper crop of new HDBs. This may result in near term indigestion. Fig 6: LT Composition Of Private Supply Fig 5: Long Term Trend Of Overall Supply vs Population Growth 6, supply: 3.4% pa 6.% population : 1.5% pa 5, 5.% 4, 4.% 3.% 3, 2.% 2, 1.% 1,.% -1.% HDB under-building, private en-bloc boom caused severe shortage -1, -2.% E Net change EC Net change HDB Population growth (RHS), HDB Fig 7: Inflows Of Foreigners, PRs And Singapore Citizens Still Constrained Net change private LT avg dd 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 52% 4% 6% 39% 46% 66% 53% 6% 83% 84% 78% 31% 28% 26% 3% 31% 23% 19% 22% 12% 8% 6% Others 15 9,1,11 1,2,4 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, PRs granted # citizens granted Chg in # of foreigners Floodgates Still Shut With Singapore s anemic rate of natural increase in population, the government s immigration policy is a major driver of demand. It is however showing no signs of loosening its tight stance on immigration. The increase in the number of foreigners has dwindled to 44,6 last year, representing around a quarter of peak levels of ~163k pa from Similarly, the number of Permanent Residencies (PRs) granted has more than halved from the peak of 79,167 to slightly under 3, from As a result, Singapore s longer term population trajectory is unlikely to revert to the rapid increase seen last decade. In the 213 Population White Paper, growth rates are projected to decelerate to % this decade and slow further to % from This will weigh heavily on rents, particularly as supply surges in the coming years. Source: UOB, Singstat Private vacancy rates have risen from a low of 4.6% in 21 to 7.2% in 1Q15 (24k vacant units). We expect it to increase further to a high of c.9%, before dipping from 217 onwards as supply tapers off. By location, the high-end oversupply is reflected in above average vacancy rates for the Central Region (8.6% in 1Q15). Vacancy rates in other areas have also picked up, e.g. in the North, up from 2.6% in 1Q13 to 11.5% in 1Q15. In the North East (Punggol, Sengkang), vacancy rates have doubled in two years and could continue to trend up amid record supply. Light At The End Of The Tunnel As Future Supply Moderates While pockets of distress could emerge, a soft landing scenario could be at hand with affordability restored by rising income levels and supply starts to taper off from 217. The government continues to hold back on land sales, with confirmed supply on 16 Quarterly Global Outlook 3Q215 UOB Global Economics & Markets Research

4 Fig 8: Private Housing Demand, Supply & Vacancy Rates Fig 9: Total Inventory As At 1Q15 25, 2, 15, 1, 5, E Demand Supply 1-yr avg demand Vacancy rate (%) RHS 6, 5, 4, 3, 2, 1, 2Q98 3Q1 4Q4 1Q8 2Q11 3Q14 Without prerequisites for sale With pre-requisites for sale the 1H15 GLS Programme cut by 23% to 3, units representing more than half of peak levels in 212. On the public housing front, after ramping up the BTO building programme for 3 years, the government has tapered the BTO flat supply as the backlog has been cleared. This year, HDB will offer 16,9 Build-To- Order flats, down by 1/3 compared to the past 4-year average of approximately 25,1 units. Consequently, total inventory has fallen steadily to a historical low of 33.5k units in 1Q15 as the number of units without approvals fall sharply. This represents a manageable 2.6 years of supply based on the past 1-year average take-up. Tightening Measures To Go? Prospective homebuyers continue to harbour hope that the government will start to remove some of the tightening measures this year. In our view, it may make sense to tweak some of the stamp duty measures such as the ABSD and SSD as market speculation has fallen significantly and the TDSR framework and LTV limits essentially ensure financial prudence. Nonetheless, the government is unlikely to act in the absence of a larger price decline as the sharp rise in property prices was a key flash point during the last watershed General Elections. In late Oct 14, Deputy PM and Finance Minister Tharman commented that there is some distance to go in achieving a meaningful correction, without which property prices will run ahead of the growth in household incomes. This view was echoed by National Development Minister Khaw who said that it was still not the right time to wind down the cooling measures with further room for prices to moderate. While there is no guidance on what constitutes a meaningful correction, we think anything short of a Fig 1: The Curious Case Of Singapore s Ever-Shrinking Homes Fig 11: Affordability Ratio 1,6 1,4, 14 12% 1,4 1,2 1, Median price/ unit (S$) RHS Median size (sf) Median price (S$psf) 1,2, 1,, 8, 6, 4, 2, Q9 1Q93 1Q96 1Q99 1Q2 1Q5 1Q8 1Q11 1Q14 Median price of condo (S$psf) LHS Affordability ratio (RHS) 1% 8% 6% 4% 2% %, Singstat Quarterly Global Outlook 3Q215 UOB Global Economics & Markets Research 17

5 1% fall may not suffice. Historically, the government only reacted when faced with major external shocks such as the Asian Crisis, Dot Com crisis) which led to significant price declines (45% peak-to-trough in the former and 2% in the latter). Given our expectation of a 5-1% correction this year, the government could potentially review the measures at year-end. Relaxation in SSD and selected reductions in ABSD rates particularly for Singaporeans may be likely. Rising Incomes And Falling Prices Dampen Impact Of Rising Rates On Housing Affordability First time home buyers have been spared by the consecutive rounds of tightening measures. While the sharp spike in interest rates has adversely affected affordability, this has been offset by income growth and falling prices. Median household income from work by residents increased by a 3-year CAGR of 5.6% to S$7,4 last year. Home sizes have also continued to shrink with the average size of a 3-bedroom unit now less than 8sf (smaller than a 4 room HDB flat). As shown in Fig 1, the median size of new homes has fallen ~4% over the past 6 years. Notably, despite the sharp 45% increase in psf prices, overall price tag only increased by 7.5% with ~S$1m the sweet spot. As a result, our estimated affordability improved slightly from 33% as at end-213 to around 31% currently. Assuming the 3-month Sibor trends up further to 1.%, affordability ratio will increase slightly to 32% which is still below the long term average. 18 Quarterly Global Outlook 3Q215 UOB Global Economics & Markets Research