How low can it go? MARCH A study on the price trends and the impact of various government policies on the Executive Condominium market

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1 P ROP ERT Y HERALD How low can it go? A study on the price trends and the impact of various government policies on the Executive Condominium market Introduction Executive Condominium (EC) is a hybrid of public and private housing in Singapore which were first introduced in It was meant to satisfy the housing aspiration of the sandwich class, which is a group of homebuyers who are not eligible to buy public housing due to their higher household income but they could not afford private housing. Since 2013, the government had implemented cooling measures and other policies to moderate the demand for EC. The demand for EC has dropped as a result. In August 2015 the government raised the income ceiling for eligible HDB flat buyers and EC homebuyers. This move increased the pool of buyers who are eligible to purchase EC. However, the expected surge in buying demand for EC did not materialize. One of the reasons is that the cooling measures and curbs on home loan have moderated demand for EC. Another reason is that the increase in the income ceiling of eligible HDB flat buyers has enlarged the group of potential public flat buyers, which in turn had sapped the demand for EC. In the other words, some of the homebuyers who could buy either a HDB flat or EC has chosen to buy the former. The government has also increased the supply of EC by selling more EC development land parcels in 2012 and In the GLS programmes of these two years, the government sold a total of 21 EC land parcels that yielded 11,173 EC units. The 21 EC land parcels sold in these two years is about 1.5 times the total number of EC sites sold in the previous two years of 2010 and By curbing the demand and increasing the supply of EC, the government has put EC developers in a bind. With the implementation of the ABSD, developers must complete the EC development and sell all the EC units within 5 years from the date that they acquire the development site. EC developments are usually fairly large. The average size of the 35 EC sites sold in the past 5 years is 560 units. By comparison, the average size of the 78 private GLS residential land parcels that were sold within the same 5-year period was 480 units. This means that developers have a limited time to sell all the units in a relatively large residential housing project. With the slowdown in home buying demand, it is assumed that some developers may be forced to lower the prices of their EC projects, which may be the intention behind the government s curbs on the EC market. Hence, some prospective Nicholas Mak Head of Research & Consultancy nicholas.mak@zacdgroup.com Chart 1: EC Sales Volume and Median Price Chart 2: Unsold ECs 01

2 buyers are adopting a wait-and-see approach, longing for further price reduction from the developers. For the potential EC buyers, the question now is how low EC price can fall given that the majority of the development cost for the EC project is already committed by the time the project is launched. How low can price fall To determine the pricing flexibility of EC, the land costs, development costs and developers profit margin will be analysed within the framework of the various government policies regulating EC developments. One of the cooling measures states that developers who acquire EC development sites after January 2013 can only launch the EC project at least 15 months after the site was acquired. Most developers would have locked in a large part of the development costs within the first twelve months after the EC land is acquired. Chart 3: EC Development Cost The total developments costs include the land purchase price, construction cost, taxes and other development costs. The non-construction development costs such as financing cost, professional fees and marketing costs generally make up approximately 15% to 22% of the sum of total land cost and construction cost. Total development cost has been rising since 2010 until It explained why even though the real estate market showed sign of weaknesses, many developers were still reluctant to cut prices. However, it may be timely for the developers who bought land in 2015 to adjust prices of new ECs as land prices started to drop to less than S$300 per square foot per plot ratio (psf ppr) in this year which led to lower EC total development cost., RLB Chart 4: EC Developers Profit Margin In Chart 4, the average new sale prices for the EC projects were based on the year in which the development site of the projects was sold, and not based on the year in which the EC projects were launched. The launch year would typically be one-year after the year of tender award. In other words, if the developers bought the land in 2014, he would realize the profit in the following years., RLB For the developers who purchased land from 2010 to 2012, they were able to achieve a profit margin of at least 10%. However, in order to deal with huge amount of unsold stocks in the market, the developers who bought the land in 2013 started to accept a lower profit margin. EC developers who purchased land in 2014 were worst hit as their profit margin shrank to only 4%. Note: (*) Worst case scenarios for projects which land tenders awarded in Hence, the expected selling price would be for these projects to be launched in onwards (**) Best case scenarios for projects which land tenders awarded in Hence, the expected selling price would be for these projects to be launched in onwards 02

3 As the total development costs decreased significantly due to declining land prices, EC developers might be able to lower the price and at the same time maintain a decent profit margin. By examining the worst case and best case scenario for projects which land tenders awarded in 2015, assuming a worst profit margin of 4% in bad time and a best profit margin of about 13%, average new sale price for EC projects could be at about S$730 psf on average. However, there are still unsold units of projects which land sold in previous years when development costs were at the peak cycle. Therefore, prices of EC in the primary market would not be cut too much. Increase in Income Ceiling to boost demand in the long run One of the changes to housing policies which was announced on the SG50 National Day by Prime Minister Lee Hsien Loong is the highly anticipated increase in the eligible buyers income ceiling for HDB flats and Executive Condominium (EC). Specifically, the monthly income ceiling will go up from $12,000 to $14,000 for buyers of new EC. The new ceiling has added 80,870 resident households to the pool of EC potential buyers, enlarging the pool by 9.5%. The increment in potential buyers for ECs accounted for about 6.6% of the total resident household population. Some of the tightening measures imposed by the Government have made it more difficult for property buyers to purchase a residential unit in Singapore. The adverse effects of all these property measures seem to outweigh the impact of the raise in income ceilings at least in the short term. Specifically, even though more eligible buyers are added to the pool, the sales for the ECs which were launched after the income ceiling rules came into effect on 24 August 2015 were not that fantastic. Signature at Yishun and The Criterion are the two projects that were launched right after the rule changed. Hovwever, the sales in the first month of launch were only accounting for 17.7% and 8.1% of the total numbers of units in Signature at Yishun and The Criterion respectively. 03

4 Table 2: Sales volume of ECs launched just before and after August 2015's Income Ceiling Increase Project Name Launch Date Total No. of Units % Sold in the 1st Month of Launch Sales Volume of ECs launched before August 2015's Income Ceiling Increase THE AMORE 17-Jan % WESTWOOD RESIDENCES 30-May % THE VALES 18-Jul % THE BROWNSTONE 10-Jul % SOL ACRES (Phase 1) 22-Aug % Sales Volume of ECs launched after August 2015's Income Ceiling Increase SIGNATURE AT YISHUN 26-Sep % THE CRITERION Early Oct % However, increase in the pool of potential buyers might have positive impact on demand in the long term when economic conditions improve from the current uncertainties. Limited supply of land for EC The Government has been cutting the supply of ECs through the land sales programme. It released less sites for EC development over the years since Limited future supply of EC might provide the market with more time to absorb the unsold stock. Table 3: GLS Programme from 2012 to Year of GLS programme No. of EC Site released Total GFA (sq ft) Estimated No. of Units ,426,245 6, ,279,251 5, ,920,852 3, ,084,381 1, , Increasing demand and reducing supply in the long term would bring the market back to equilibrium and facilitate the soft landing for price correction in the EC market. 04

5 Conclusion As the total development costs for EC have started to decrease, sale prices of EC would become less sticky to its previous level. However, in order for the developers to achieve a decent profit margin, prices cannot head south too much. Additionally, the increase in income ceiling to enlarge the pool of buyers as well as the restricted supply of new EC launches in the near future due to less sale of EC sites in 2014 and 2015 could lessen the negative effects of the current oversupply of EC. In turn, this would reduce the pressure to cut prices. Moreover, some EC developers may wish to incorporate more innovations or unique design to their developments to entice prospective buyers, instead of just focusing on re-pricing strategy. Disclaimer This report is prepared by Research & Consultancy Department, for the ZACD Group ( ZACD ).The information contained in this document is for general information purposes only and does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. This report is confidential. This report may not be published, circulated, reproduced or distributed in whole or in part by any recipient of this report to any other person without the prior written consent of ZACD. The information or views contained in this document ( Information ) has been obtained or derived from sources believed by ZACD to be reliable. However, ZACD makes no representation as to the accuracy or completeness of such sources or the Information and ZACD accepts no liability whatsoever for any loss or damage arising from the use of or reliance in whole or in part on the Information. ZACD and its connected persons may have issued other reports expressing views different from the Information and all views expressed in all reports of ZACD and its connected persons are subject to change without notice. ZACD reserves the right to act upon or use the Information at any time, including before its publication herein. The recipient should not treat the contents of this document as advice relating to legal, taxation or investment matters. Any person or party interested in further pursuing the matters contained herein is advised to make their own independent investigations and verification of the Information and any other information such persons or parties may consider to be relevant or appropriate in the circumstances. This document does not, nor is it intended to, constitute an offer or a solicitation to purchase or sell any securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities, nor does it contain a description of securities of any entity in existence. 05