A housing glut on the horizon?

A Singaporean who only wants to be identified as Ms Tan bought her brand new four-room HDB flat in Toa Payoh under the Selective En Bloc Redevelopment Scheme (SERS) six years ago. At the time, she paid just $250,000 for the 980 sq ft unit, which is within walking distance of the Toa Payoh Hub and MRT station.

According to HDB resale prices, similar-sized, mid-floor units in Toa Payoh Central fetched prices of $725,000 to $740,000 in November. An enterprising real estate agent recently suggested that if she were to sell her flat at similar prices, she could buy two private apartments — a shoebox apartment and a compact two-bedroom unit. Tan admits she was tempted by the proposition, but having thought it over, she says: "I'm not sure if it's worth it after taking all the penalties and loan restrictions into consideration," she says. "And if I were to decide to buy a three-room granny flat in the future, I will have to sell both private properties."

Anecdotal evidence is that with HDB prices at an all-time high, and interest rates at an all-time low, many in her shoes have taken the plunge in private property. But instead of selling their HDB flats, they are sub-letting them if they meet the minimum occupation period (MOP) for the resale of HDB flats, which was extended from three to five years to curb speculation in the HDB resale market.

With the extended MOP and more dual homeowners clinging to their HDB flats, the supply of units in the resale market has dwindled. HDB resale transactions fell 6% from 7,011 in 2Q2012 to 6,560 deals in 3Q2012. The number of HDB sub-lettings in 3Q2012 rose by 4% q-o-q from 6,891 in 2Q2012 to 7,142 units in 3Q2012. This brings the total number of HDB flats approved for sub-letting to 42,920 units in 3Q2012 from 41,814 units in the previous quarter, according to HDB in an Oct 29 report. Cash-over-valuation (COV) has reportedly jumped from $30,000 in September to $33,000 in November. "That means there are more owners sub-letting their HDB flats today rather than putting them on the market for sale," observes Donald Han, special adviser to HSR Property Group.

Dual homeowners who have sub-let their HDB flats are seeing rental yields of about 4%. "This is better than the sub-1% rental yield for a luxury condo today," says a property consultant. In Ang Mo Kio, Bishan and Toa Payoh, even three-room HDB flats can fetch rental rates of $2,000 a month, while five-room flats are going for $2,800 to $2,900 a month, according to HDB's median sub-letting rents for 3Q2012.

Risk of more government measures
If growth in HDB prices cannot be moderated, will there be another round of government measures? This might take the form of "an equaliser", says Han, where an HDB owner could be forced to sell the flat if he or she buys a private condo. This could either be within six months of purchase if the private condo is already completed, or within six months of the project obtaining temporary occupation permit if purchase was made at a new launch. "Such a measure will make people think twice about selling their HDB flats," he reasons.

So far, the government has been trying to tame property prices by pumping in new supply. This year alone, it has rolled out 27,084 new HDB flats under the Built-to-Order scheme, which is the highest number in a decade. Another 7,153 units were re-launched for sale under the "sale of balance flats" scheme, which brings the grand total of new flats launched this year to 34,237 units.

The government is also applying the same supply-driven strategy in the private residential sector. The persistent rise in HDB prices has supported prices in the mass-market and mid-tier segments of the private residential market. In the government land sales (GLS) programme for 1H2013 released on Dec 14, private residential development sites released could yield a potential pipeline of 14,035 new homes. This is on par with the 14,185 units made available in 2H2012 and another 14,140 units under the 1H2012 GLS programme, notes Colliers International.

The worry right now is the the impact a flood of new supply, coupled with the prospect of slowing economic growth, a tightening foreign labour force and stricter migration policies, could have on rental yields in the next two years.

New highs
To be sure, 2012 has registered record new home sales and residential leasing transactions. New home sales are expected to exceed 21,000 by year-end, estimates Joseph Tan, executive director of residential at CBRE. Singaporeans have been active in the residential market, including the prime condo segment in 2012, as they are taking advantage of their "second home quota", he says.

Unlike foreigners who are hit by a 10% Additional Buyer's Stamp Duty (ABSD) for all residential property purchases from December last year, Singaporeans are only impacted by an ABSD of 3% on their third and subsequent residential property purchases. Consequently, the percentage of private homes purchased by Singaporeans remained high at 77% in the first half of 4Q2012, according to Savills data.

Property analysts speculate that new curbs could take the form of further tightening in bank borrowing for the purchase of residential properties. This would be in line with the recent measure announced on Oct 5 when the Monetary Authority of Singapore put a cap on loan tenure at 35 years. It also reduced the borrowing limit for those whose loan term exceeds 30 years, or if the loan period extends beyond the retirement age of 65.

Rising vacancy rates
Meanwhile, the number of private units being rented out in Singapore should reach a new high in 2012. Figures from a Savills Research leasing report on Dec 12 show the number of condo leases hitting 37,886 for the first 10 months of 2012, which is just slightly lower than the full year transactions of 40,222 in 2011. Based on data released by URA, island-wide median rents for condos and apartments (excluding executive condos or ECs) reached a new high of $3.75 psf per month in October, says Savills. This translates into a 7% y-o-y increase.

However, 2013 could see the completion of 17,000 new private homes, along with 22,000 HDB flats and about 2,200 EC units, according to Nomura analysts in a Nov 20 report. The surge in new home completions is likely to put further pressure on already-low rental yields, say the analysts.

"The number of vacant units is set to increase in the months ahead as an avalanche of new homes will be completed within the next two years," cautions Alan Cheong, Savills' head of research. "The growing supply of new homes poses a significant risk to investors who have bought private homes for rental investment, particularly if interest rates should rise."

Signs are that vacancy rates have already risen. From the trough in 1Q2011, the number of vacant units has increased by 32.5% from 12,740 to 16,877 units in 3Q2012, notes Savills Research in its Dec 12 report. This has pushed the vacancy rate up from 4.9% to 6.1% over the same period. As at 3Q this year, the number of vacant condos stood at 14,198 units and vacant houses at 2,679 units.

Even the rental market for high-end homes has softened for the sixth consecutive quarter, says Savills. Rents of high-end condos tracked by Savills showed a 1.4% quarter-on-quarter dip to $4.88 psf per month in 4Q2012. On a y-o-y basis, prime rents fell by 7.4% from $5.27 psf per month in 4Q2011.

"The fall could be due to more intense competition from an increased supply of high-end condo completions over the past few months and a fewer number of big-budget tenants who are concurrently facing rental budget constraints," reckons Savills' Cheong. He expects the trend to continue in 2013.


This story first appeared in The Edge Singapore weekly edition of Dec 31, 2012-Jan 4, 2013.


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