Soft market, hard-nosed investments

Keep a sharp eye on cashflow when buying an investment property and it could turn into a cash cow later

IS this the right time to buy? That’s the question we are often asked these days – obviously by people who have managed to sidestep the worst of the current crisis and have the spare cash to consider buying property.

Importance of location: Areas with potential for capital appreciation are those the government has earmarked for major projects and has undertaken to spend millions of dollars on infrastructure or developments, such as the Jurong Lake District (above) or One North

While Singapore has gone through recessions before, this time around the general feeling is that the downturn could last longer than usual. As such, nobody can accurately call the bottom of the property market or figure out when it will start to recover. This uncertainty increases the challenges for those who are trying to time the market. To help home buyers along, we highlight some factors they should consider as they go house hunting.

Timing. Everyone wants to buy low and sell high but in reality, very few of us can catch the bottom or the peak of the market. Even the experts are not always successful! When buying for your own occupation, the timing of the purchase is not the single most important factor. Rather, it is finding a property that fits your needs, be it in terms of location or design. The current soft property market has presented many good buying opportunities because prices have fallen significantly.

No one can pin-point the day when property prices will hit bottom. Very often we realise that the market has bottomed only after we have passed that point.

Unlike other assets such as shares and gold, real estate is a heterogeneous product. No two properties are perfectly identical. If you find a property that you really like but delay the purchase in the hope that the price will fall further, you may discover that it is no longer available. For investors, now is the right time to start looking and to take advantage of negotiable deals.

Location, present environment and future potential. Regardless of market conditions, location is still the most important factor when buying a property. All homebuyers should start looking out for property launches in their target area, as project launches in some locations are few and far between.

Property prices in certain locations may have upside potential if new projects or infrastructure are going to be developed in the vicinity. For example, if a major new university were to start operating in a certain location, there would be higher demand for leased accommodation in the surrounding area from students and foreign staff.

For investors looking for rental income and capital appreciation, it is important to study what potential a location offers. Carefully sieve for projects that are close to MRT stations as these properties would be the most rentable. One should also look at the potential of the location. Similarly, an up and coming business park will have the same impact.

Other areas with potential for capital appreciation are those districts where the government has drawn up big plans and has undertaken to spend millions of dollars on infrastructure or developments such as the Jurong Lake District or One North.

Price. In a soft market, buyers have the upper hand and this is the best time to get a good deal. However, one still needs to do some homework to become familiar with prices in the surrounding area. Bankers these days tend to be conservative, so if they can give you a loan or valuation that matches your purchase price, you can be assured that the property is priced reasonably.

However, be careful not to over-stretch your budget. And make sure that your bank can provide you the financing before you pay a deposit or the option money.

Cashflow. Planning your cashflow is critical as we do not know how long this recession will last. Using history as a guide, the last two downturns in 1986 and 1997 saw a recovery after two years of falling prices. Do not use all your cash upfront to pay for the property; instead, set aside enough cash or CPF funds to service the loan for the next two to three years. This is a defensive strategy that ensures your ability to service the loan even if you are unlucky enough to lose your job at some point.

In a situation where you have the funds but they are not immediately available (for example, enbloc sale proceeds have yet to be paid, a fixed deposit that has not matured), or you prefer to keep some cash for a rainy day, you can opt to buy a new property under the interest absorption scheme. Most developers are offering the scheme. It is similar to the now- defunct deferred payment scheme, where a buyer can defer paying the mortgage until the development is completed. This is especially useful if one is tight on cash and would need to sell the existing home to help pay for the new one.

Time-frame. Speculative activity is definitely not advisable with so much market uncertainty. Instead, one should take a longer-term view as the market will ultimately recover. A five-to-seven-year investment time-frame will allow you to experience recovery in the property market and reap some handsome gains. One should also have a longer investment horizon so that in the event of limited capital appreciation, one can still rent out the property.

A down market offers the best opportunity to look for a good buy. Just be careful about cashflow. And when the economy recovers you are likely to find yourself sitting on a cash cow.

The writer is executive director (residential) at Knight Frank

Source : Business Times – Mar 2009

Rents in prime areas head south

Rentals of apartments falling by 15% as new units become available and expats move out

Tenants looking for apartments in prime districts are having it good as rents there head south.

Right now, rentals of these units are falling faster than those in the mass market.

Luxury condos like St Regis and Grange Residences now have units available for rent from as low as $5 psf a month. — PHOTOS: ALAN LIM, BT

Among the reasons: New supplies have entered the market. A number of new condominiums have sprung up in prime districts – many of which have been bought by investors planning to rent out their units – in the past year.

Also given the economic downturn, some expatriates are leaving while others have their housing budgets cut. So landlords in prime districts 9, 10 and 11 face the need to bring down their rents come renewal time so as to keep their tenants.

Prime rents are now halfway through heading south, said Cushman & Wakefield Singapore managing director Donald Han.

‘We expect the rents in districts 9, 10 and 11 to come down by close to 15 per cent this year,’ he said.

‘From the middle of last year till now, they would have fallen by 15 per cent to 20 per cent. We are seeing an outflow (of expat tenants), not an inflow. It’s a net exodus.’

Rents in non-prime and suburban areas have also fallen by 15 per cent to 20 per cent and are set to slip by another 10 per cent this year, said Mr Han.

It will be a comparatively smaller fall because there are not as many units available for rent in these areas compared with prime areas, he said.

Another property consultancy, Jones Lang LaSalle, said residential rents have fallen by about 10 per cent to 30 per cent across the island so far this quarter, compared with last year’s fourth quarter.

Rents of prime properties have dipped by an average of 15 per cent quarter-on-quarter, it said.

There was additional pressure on rents at The Sail, a huge 1,111-unit condominium in downtown Marina Bay, as more and more units entered the leasing market, said Jones Lang LaSalle’s head of residential, Singapore, Ms Jacqueline Wong.

Unit owners started collecting their keys from the middle of last year.

For instance, the transacted rents for one-bedroom units of 690sq ft in size now stand at $3,200 a month, down from $4,500 in June last year, said MsWong.

Other recently completed condos include Domain 21 in Delta Road, The Beacon in Cantonment Road, The Azure in Sentosa Cove and St Regis Residences in Tanglin.

Condos like Rivergate in Robertson Quay have just joined the list, offering plenty of new units for lease.

There is increasing rental pressure on the still vacant units in recently completed prime projects, such as the super-luxurious, 173-unit St Regis, where a lot of units, including large penthouses, are up for rent.

Anecdotal evidence suggests the St Regis rents start at $7,500 for the smallest three-bedroom, 1,507 sq ft unit and $20,000 for the 3,757 sq ft, four-bedroom unit, which will put the starting rents for such sizes at just between $5 per sq ft (psf) and $5.30 psf a month.

Jones Lang LaSalle Research’s average rent record for Grange Residences, a prime but slightly older condo, is at $6.20 psf per month at the end of last year.

‘There are now too many apartments chasing too few tenants,’ said Chesterton Suntec International’s head of research and consultancy, Mr Colin Tan.

In particular, the older prime condos that developers bought collectively and are now keeping for lease are suffering more, as their conditions may not warrant market rents, experts say.

The rental market for private homes is in ‘a state of flux’ at the moment, said Mr Tan.

‘The rental you are quoted this month can and does change, so much so that some tenants whose leases are expiring soon are seeking temporary extensions – three to six months – to their current lease before settling on something more permanent. The savings can be substantial,’ Mr Tan said.

Given this situation, Mr Han advised landlords to be flexible.

‘Sometimes, it is better to find a tenant who is willing to take up the property early at a slightly reduced rental than to keep it empty.’

Property consultants say that, for now, high-end homes are still able to secure tenants as falling rents have attracted new tenants.

‘We are seeing some movements of tenants from outside the central area coming in,’ said Mr Han.

But the falling rents of such flats may result in more owners dipping into their own pockets to help foot their monthly mortgage payments instead of relying on just the rent.

Currently, with mortgage rates still reasonably attractive, landlords should still be able to cover much of their instalment payment at today’s rentals, said Mr Han.

‘However, for the high-end properties completing in the second half of this year, the potential rental income may not be sufficient to cover mortgage payments,’ he said.

Source : Sunday Times – Mar 2009

 

Singapore slips as office rents slow

Occupancy costs in Middle East the fastest growing

THIS is one ranking that Singapore would be happy not to climb: Cities with the fastest-growing rentals.

According to a semi-annual survey of office markets worldwide, Singapore now ranks 13th in terms of posting the fastest-rising rents among 172 markets, slipping from No 3 position six months ago.

Here, occupancy costs – which include expenses for management and basic building maintenance – rose 27.8 per cent from a year ago in September, CBRE said in its Global Market Rents survey out yesterday.

The pace was much slower than in Abu Dhabi, where occupancy costs in local currency shot up 94.6 per cent from a year ago. The emirate and two other Middle Eastern cities dominated the top three positions in the list of fastest-growing rentals.

”Our current perceptions are greatly affected by the current economic malaise and we tend to forget how fast rents and occupancy costs were rising over the last 12 months,” said Dr Raymond Torto, CBRE’s global chief economist.

In terms of pricing, Singapore is still rather expensive. Rents of US$135.13 per square foot (psf) per year made it No 9 among the world’s most expensive office market in absolute terms. It was in the same position during the survey in May, but ranked 11th in the November survey last year.

The results bode well for Singapore’s competitiveness, said Chesterton Suntec International research head Colin Tan, especially when compared with rival cities like Hong Kong.

Hong Kong’s office rental market is more expensive than Singapore’s – as the Chinese territory ranks No 12 in the category of fastest growing rents – while Hong Kong office rents of US$234.73 psf per year make it No 3 among the world’s most expensive.

Mr Tan expects Singapore to slip further in future rankings: “One of the Government’s major policy is to ensure our competitiveness, and it is more deliberate in Singapore than elsewhere.”

He added that the Government’s recent efforts to increase office supply through the release of transitional office sites would further ease rents in the months ahead.

Worldwide, rents jumped 8 per cent compared to a year ago, almost double last year’s world inflation rate, the survey noted. Still, Dr Torto noted that the rate of change is generally slowing and in some markets, the pricing direction is down. This will bring “some relief to occupiers” but “angst to owners”.

However, he said, “unlike previous downturns, which have occurred simultaneously with extensive overbuilding, the real estate market globally today is in a stronger position to weather the difficulties than in the past”.

Today –  Nov 2008

Retail rents: S’pore keeps 4th spot in Asia”

SINGAPORE is still the fourth most expensive centre for retail rents in Asia, though its global ranking has slid a couple of notches given faster rises elsewhere, a new survey has found.

The Republic fell to 16th position globally from 14th last year, according to the survey by consultancy Cushman & Wakefield.

Rents in Orchard Road, Singapore’s premier shopping belt, rose 9.3 per cent in the year ended June 30 from $42 per sq ft per month to $45.90.

But because of US dollar movements, that is reflected in the survey as a 25 per cent jump from US$325 psf per year to US$405.

CB Richard Ellis put out a similar report yesterday, which placed Singapore in 22nd spot in the world’s fastest growing destinations for retail rents.

The market today, however, is changing fast in the light of the global financial crisis. Singapore is seeing lower tourist arrivals. Retail sales, excluding motor vehicles, have started to dip.

A number of factors will determine the rate of rental changes for the rest of the year and next year, said Ms Letty Lee, director of retail services at CBRE.

‘The full impact of the financial meltdown on the job market is still unknown. Meanwhile, consumers will remain cautious and may cut spending as a result,’ she said. ‘The financial turmoil will also impact tourism arrivals, which will affect consumer spending. Landlords may be pressured to reduce rentals as a result.’

Still, Cushman & Wakefield’s managing director Donald Han believes that Orchard Road prime rents will be flat next year despite new supply as it is still the first stop for new brands here.

But suburban malls will see a softening of rents, he said.

‘While the weakening economic environment has started to pass through to retail rentals towards the fourth quarter, we believe that the rentals would remain well supported in the medium term by the comparatively undershopped characteristic of the Singapore market,’ said the Cushman & Wakefield report.

Source : Straits Times – 20 Nov 2008

Private property prices, rents fall

 

URA’s private-home price index down 2.4% in Q3; industrial property prices, rents make gains

OFFICIAL data released yesterday confirmed that the private property market has started sliding backwards, while analysts tried to work out how much of its recent gains it would eventually give up.

Price and rental indices for private homes, offices and shops fell in Q3 over the preceding quarter – for the first time since the market bottomed in 2004. Industrial property prices and rents still managed to register quarter-on-quarter gains in Q3, albeit at a slower pace than the increases reported in Q2.

Urban Redevelopment Authority’s (URA) price index for private homes declined 2.4 per cent in Q3 over the preceding quarter, more pronounced than the 1.8 per cent drop indicated in a flash estimate earlier this month.

The Q3 private-home price index is still 8.3 per cent higher than a year ago, leading some analysts such as JPMorgan’s Chris Gee to say the official price indices are lagging market expectations. ‘If you wanted to close a condo sale today, you’d expect the price to be around 20-30 per cent lower than last year’s peak.’

Between the trough in Q1 2004 and the peak in Q2 this year, URA’s price indices appreciated 68 per cent for offices, 58 per cent for private homes and 39 per cent for shop space. The question is how much of these gains will be surrendered during this downcycle and how long the slump will last.

The optimistic view is that about half the gains could be lost in a downcycle lasting until end-2009.

Some pessimists suggest the downturn will drag for around two to three years, and see prices easing back to the previous trough, that is, all the gains will be lost. ‘Although the Singapore economy is much broader-based today than a few years ago, financial services was a key driver of recent economic growth and had a disproportionate impact on the high-end residential and prime office markets. So if the financial industry tanks, the impact will be greater on these two property segments,’ said an analyst with a US bank.

A property industry veteran said: ‘This property slump will be much worse than the one during the Asian financial crisis; this time, we have a global crisis. We still don’t know what the entire suite of knock-on effects will be. Right now, it’s consumers lacking confidence. Failures may come from many other sources, some of which will be unexpected. The downtrend has begun and is not expected to reverse any time soon.’

URA’s data showed that developers sold 1,558 private homes in Q3, up 2.2 per cent from 1,525 units in Q2. The 3,845 private homes developers sold in the first nine months of this year are about a quarter of the 14,811 units they sold for the whole of last year.

A property analyst pointed out that an even more alarming trend was the decline in resale transactions of private homes, which have slipped from a high of 7,776 units in Q2 2007 to 1,974 units in Q3 this year.

‘Resale transactions are sometimes seen as a proxy for the level of genuine demand, whereas the primary market tends to attract more investment/speculative demand and the subsale market is an even more direct proxy for the level of speculation,’ the property analyst from the US bank said.

The number of private-home subsales islandwide fell 10.8 per cent quarter on quarter to 462 in Q3. Subsales accounted for 11.6 per cent of total private housing transactions in Q3, down from a 12 per cent share in Q2.

In the Core Central Region, subsales made up 24.1 per cent of total transactions in Q3, an increase from a 22 per cent share in Q3. The rising subsale share in the region was on the back of a 29 per cent drop in developer sales in Q3.

Meanwhile, URA’s Q3 price indices for non-landed private homes fell 2.7 per cent quarter on quarter in Core Central Region, 2.4 per cent in Rest of Central Region and 1.5 per cent in Outside Central Region (OCR).

The official price indices for office and shop space declined 3.9 per cent and 0.3 per cent respectively in Q3. The all-industrial property price index rose 0.9 per cent.

The public housing market continued to buzz, with Housing & Development Board’s resale flat price index rising 4.2 per cent quarter on quarter in Q3.

Colliers International director Tay Huey Ying said that developers’ sales failing to keep pace with launches led to a surge in the stock of launched but unsold private homes in uncompleted projects to 3,570 units in Q3, almost 30 per cent higher than Q2’s 2,755 units and more than double the recent low of 1,658 units in Q2 2007.

Knight Frank director Nicholas Mak expects the decline in private home prices and rentals to persist. ‘With the slowdown in the private residential market, it is anticipated that developers could sell between 4,900 and 5,400 units in 2008, which would be only about one-third of the primary market sales last year,’ he added.

Business Times – 25 Apr 2008

Grade A office vacancy doubles to 1.2% in Q3

GRADE A office vacancy has doubled in the third quarter of 2008, rising from 0.6 per cent in the previous quarter to the current 1.2 per cent.

This is also the first time in eight quarters since Q3 2006 that Grade A office vacancy has risen above the one per cent mark.

CB Richard Ellis (CBRE) says market fundamentals have changed and sentiments have ‘deteriorated’ with pre-commitment rent levels likely to come under pressure.

CBRE executive director Moray Armstrong added: ‘There is an increase in vacancy as certain occupiers have relocated to less expensive cost options in lower grade and, or, decentralised locations.’

According to CBRE, office rents have also plateaued with both Grade A and prime office rents remaining static at $18.80 per square foot per month (psf pm) and $16.10 psf pm respectively.

CBRE had earlier anticipated rents would only soften beyond 2010. But with the events of the past few weeks, it now believes that the correction will be fast- forwarded to early 2009.

‘Landlords are adopting more reasonable asking rents, although in the immediate term occupiers will still face rentals that are at all-time highs. We will continue to monitor the trend over the next few months to see how swiftly the fast approaching new office supply allied with slowing demand will combine to bring down rents from today’s levels,’ added Mr Armstrong.

There were increases in vacancy rates for most micromarkets in the third quarter of 2008 – with the exception being Orchard Road, which saw a one percentage point drop in vacancy due to higher occupancy at the newly completed Visioncrest and at StarHub Centre.

Mr Armstrong said that occupiers are ‘understandably cautious’ given the challenging financial and economic environment, but he pointed out that a number of recently announced pre-commitments demonstrate that there is underlying confidence in Singapore’s relative position.

Still, he noted that many occupiers are also chasing lower costs and are relocating to decentralised locations, built-to-suit facilities and business park space.

CBRE estimates the confirmed new office supply over the next five years is now slightly higher at 10.64 million sq ft.

CBRE said the increase stemmed from increases in proposed net lettable area from developments under construction.

‘We do not consider this volume of supply excessive based on our estimated average annual demand of 1.6 million sq ft,’ said Mr Armstrong, highlighting that about 26 per cent of the new supply has already been pre-committed.

Mr Armstrong explained that the 1.6 million sq ft demand figure represents its projected five-year average office take-up level over the period 2008-2012.

He believes that this figure represents a realistic take-up figure that has factored in lower GDP going forward.

By comparison the past three-year average office take-up level was just under 2.2 million sq ft.

Business Times – 3 Oct 2008

Rents falling at most condos

New supply of homes and weak demand could mark start of downward trend
By Fiona Chan, Property Reporter

Two in every three projects with a substantial number of leases saw rents drop in the second quarter from the previous three months, according to the latest data from the Urban Redevelopment Authority (URA).

This marks a reversal from the last two years, when private home rents soared, especially in expatriate-friendly areas, due to an insufficient supply of rental homes and an influx of expat tenants.

Now, rents are dipping in almost every location around the island, but particularly in the two areas most popular with expats – East Coast and the central region around Orchard Road.

This could mark the start of a downtrend that experts say may worsen with more home completions, especially in the prime areas, where rents have reached stratospheric levels.

URA’s data analysed rents in developments with at least 100 units and that have 10 or more leases each in the first and second quarters this year. Of the 124 projects in this category, 80 – or about 64 per cent – saw rents drop between the two quarters.

But URA also has a more comprehensive rental index that covers all rental transactions, including those at projects with fewer than 10 leases. This showed that rents across the country rose 2.5 per cent overall in the second quarter, the smallest rise in three years.

Rents are taking a hit largely because the stock of homes available for rental has risen, property consultants said.

Several major projects have recently been completed that were heavily bought into by investors planning to rent out their units. These include the 640-unit Icon in Tanjong Pagar, a 430-unit tower at Sail @ Marina Bay, the 600-unit Citylights at Lavender, and the 546-unit Sea View in Amber Road.

Ms Tay Huey Ying, director of research and advisory at property firm Colliers International, said the ‘peakish’ rents could also be due to the current run of high inflation, pushing up living costs in general and making expats more resistant to any rental rises.

Another source of rental demand, collective sale sellers, has also dwindled due to the delay in demolishing several en-bloc sale estates amid a slow property sales market, she added.

Colliers’ own research showed that monthly rents of luxury apartments fell 3 per cent in the first six months of this year. A 1,000 sq ft apartment was fetching S$6,730 in June, down from S$6,930 in December last year.

But Ms Tay said luxury rents are unlikely to fall by more than another 10 per cent in the second half, as Singapore remains attractive to expats.

Mr Colin Tan, head of research and consultancy at Chesterton International, agreed that the rental declines in the prime central districts will be ‘more gradual than elsewhere as their central location means there will be no lack of demand’.

‘At the other end of the rental market, in far-flung locations such as Changi and Pasir Ris, the declines are expected to be more pronounced as they will face the twin problems of weak demand and declining rentals,’ he added.

Source: Straits Times – 30 July 2008