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New engines drive expat rental hubs

Posted on 25 Mar 2010 | Comments Off

DESMOND SIM says demand likely from financial, biomedical sectors

THE leasing market for non-landed homes showed signs of recovery in the final quarter of 2009, going by Urban Redevelopment Authority numbers. Median rents saw their first quarter-on-quarter growth of 0.5 per cent following five quarters of continued decline from a peak in Q2 2008. The monthly median rent in Q4 2009 was $3.02 per sq ft. Occupancy rates also jumped, achieving 94.5 per cent in Q4 2009 – a level previously seen only in 2006/2007.

While these indicators may suggest a recovery in the leasing market, the strength and sustainability of this positive turn are yet to be ascertained.

Overall, leasing demand has been rising over the years as a result of a boost in the foreign workforce. Singapore’s strategy to open its employment market to more foreigners has benefited the leasing market as this transient group looks for short-term housing in the private residential market. The population of Singapore has grown from 4.03 million in 2000 to 4.99 million in 2009. The number of foreigners grew in tandem from 754,500 in 2000 to 1.25 million in 2009.

On the back of better economic performance, the Ministry of Trade and Industry has revised its growth forecast for 2010 from a range of 3-5 per cent to 4.5-6.5 per cent. Job creation has improved, marked by the doubling of total employment from 14,000 in Q3 2009 to 37,500 in Q4 2009. The result is the creation of some 37,600 jobs for the whole of 2009 – a remarkable feat considering the economy was in a recession.

Although the number of foreigners employed has declined by 4,200 in 2009, there are still some 1.05 million of them working in Singapore. The job losses were mainly in the manufacturing sector. The construction and services industries, on the other hand, gained 19,700 and 10,400 new hires respectively.

Demand by industry

Anecdotally, leasing demand remains driven by the financial industry. This sector is making a strong rebound from the financial tsunami, with total employment in Q4 2009 turning a positive 3,000. This trend is expected to continue, further supported by recent poll results from the Business Expectations for the Services Sector Q4 2009 survey by the Department of Statistics. The financial services sector has the most positive outlook in terms of employment and general business expectations.

In addition, based on the latest report on wages in Singapore by the Ministry of Manpower, the financial services sector recorded the second highest median gross wage in 2008 at $9,170 per month for managers aged 35 to 39.

The other emerging leasing demand driver is the biomedical industry. Under the government’s aggressive drive to develop Singapore into a biomedical hub, the country reportedly bagged some US$2 billion worth of investments over the past four years. They include plans to set up six new biologics manufacturing plants that are expected to create some 1,380 jobs. Despite the manufacturing sector reporting negative 4.1 per cent growth in 2009, biomedical manufacturing expanded by 11.5 per cent.

Looking ahead, new leasing demand is likely to come from either the financial or the biomedical industry.

Demand profile

The foreign employment market today is different from what it was a decade ago. Currently, instead of the traditional top management hire, foreign employment involves more middle management to executive levels with a limited housing budget. These expatriates are likely to be young executives working for a financial institution or researchers and laboratory executives. Despite the increase in foreign employees, the average housing budgets have remained relatively low. These new expatriates are likely to be given a housing allowance and are motivated by cost savings. They either downsize or seek discounted rents whenever the opportunity presents itself. As a result, smaller residential units close to their workplace or with good accessibility to public transport remain the main attraction.

Based on rental transactions recorded by URA Realis and sorted by districts, several observations can be made from the rental transaction volume over the decade.

While the prime districts of 9, 10 and 11 remain the traditional hot spots for leasing, the number of leasing deals there has been observed to be falling. At the same time, the Central Area (CBD/HarbourFront) comprising districts 1 to 5 has gained popularity as can be judged from the increase in leasing volume. A key factor is the revival of inner city living with tenants attracted by the proximity to the CBD, the arts and cultural activity, and other amenities within the area.

In addition, there are two emerging regions where we expect strong leasing demand in the future.

Based on the backroom operations of multinational financial institutions such as Credit Suisse, Citigroup and Standard Chartered Bank, residential projects in the vicinity of the Changi Business Park will be in demand. As such, we expect leasing demand growth in Simei, Upper East Coast and Tampines (Districts 16,17 and 18).

With the biomedical industry expected to expand in Biopolis, leasing demand in residential projects in the vicinity of this purpose-built biomedical estate (District 5) is also expected to increase.

The drivers and leasing profiles have changed dramatically over the decade. This has influenced developers’ product offerings and also recently caught the attention of investors who have been making a beeline to these areas.

Evolving supply

Over the decade, developers have also been tweaking their product offerings to match changing demand. Overall, the market supply is shifting towards smaller apartments. Smaller units are easier to lease while maintaining a high per sq ft rental value. Similarly, smaller units are also more palatable in terms of absolute quantums paid. At the same time, developers are able to maintain their selling price on a per sq ft basis. Using a sample of major launches in the prime districts (9,10 and 11), an analysis of the composition by bedrooms was done. Studio apartments were excluded from the analysis.

There is a stronger focus on units with fewer bedrooms. Increasingly, one and two-bedroom apartments are found in the new supply. Based on the sample comparison study, one and two-bedroom apartments account for half the supply launched currently. This compares with 2000, when two-bedroom apartments made up just 15 per cent of the supply (with no count of one-bedroomers). This sample comparison shows that while demand has shifted over the decade, developers are also redesigning their product offerings to accommodate these changes.

Market outlook

After a challenging 2009, Singapore, along with the rest of Asia, is expected to experience a strong economic recovery this year. Financial markets are reported to have stabilised, while trade flows and industrial production have also picked up strongly. However, the recovery in Europe and the US remains weak. A pan-continental movement of talent from Europe and the US to Asia can be expected.

As Singapore continues to attract top talent here, leasing demand is also expected to grow. This is coupled with the improved economic outlook and the planned business expansions that are scheduled for the second half of this year. Island-wide rents are expected to grow in the region of 3-5 per cent by end-2010. However, rents will still remain affordable as they have generally come off during the recent economic downturn. Further rental upside is expected in the Central Area (Districts 1-4), Buona Vista (District 5) and Simei/Tampines and Upper East Coast (Districts 16,17 & 18).

The writer is associate director, research and consultancy, Jones Lang LaSalle

Source : Business Times – 25 Mar 2010

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Appealing to the mass market

Posted on 25 Mar 2010 | Comments Off

Developers shift focus to affordability, say NG WEI EN and CHUA CHOR HOON

LAST year saw the second highest volume of private residential transactions in history, with the 30,830 caveats lodged falling short only of the 37,304 recorded in the 2007 boom.

A combination of factors helped to boost demand for residential property. These were pent-up demand from those who had missed out on the previous boom, low interest rates and a lack of alternative investment options, after the debacle with financial products. These, coupled with the appearance of ‘green shoots’ in the economy and a rally in the stock market, helped the residential market stir to life in late Q1 2009.

The mass market was the star performer of the residential market. Of the 30,830 caveats lodged in 2009, 23,240 – or 75 per cent – were for transactions outside the prime districts of 9,10,11, the Central Business District and Sentosa/Harbourfront areas.

Quick-thinking developers rode the popular wave of affordable homes by altering their plans – downsizing units and releasing mass market projects to appeal to the buyers who were then dominating the market.

Buyers with HDB addresses accounted for 41 per cent of total buyers in 2009, almost double the 22 per cent in 2007 when higher-end projects were leading the rise in the market. Many in 2009 saw the opportunity to upgrade to private housing, which was also supported by rising HDB resale prices.

Affordability

Over the past year, we have seen a 13 per cent rebound in the average price of secondary mass market units recovering back to the peak level in Q4 2007.

Through this period, the affordability index has also moved up 13 per cent to 136. The affordability index tracks the minimum gross household income required to qualify for an 80 per cent loan-to-value mortgage for the purchase of a private home. It takes into account property prices, CPF contribution rates, as well as interest rates. The lower the index, the more affordable it is as a lower income is required to qualify for a mortgage from the bank.

In other words, a higher income is now required to purchase a mass market unit compared to a similar one in Q1 2009.

Nevertheless, mass market units are more affordable now than they were in 2007. This is largely due to the difference in the mortgage rates as the three-month Sibor rate has fallen close to two percentage points during the period (Figure 1).

Furthermore, according to the Key Household Trends 2009 survey, the average monthly household income from work for 2009 in the 81st to 90th decile is $12,290, which is higher than the $11,330 in 2007.

Based on the affordability index, mass market units at end-2009 were more affordable compared to the period between Q1 2006 and Q3 2008. However, as interest rates are at an all-time low, it is a matter of time before they head north. A one-percentage-point increase in interest rates will result in a 14 per cent rise in the affordability index with no change in price. If prices were to increase by five percentage points at the same time, the index would rise by 19 per cent to 162 (Table 1).

There is no hard and fast rule as to the threshold index level at which buyers would find mass market purchases affordable as this also depends on income level.

However, there exists an inverse relationship between the affordability index and the number of home buyers with HDB addresses. During periods when the index declines, the proportion of buyers of HDB addresses increases.

Looking at the more recent period from 2006 to the present, the proportion of buyers with HDB addresses fell to below 30 per cent when the affordability index was above 150, indicating that this could be the threshold level. In most quarters, the proportion of buyers with HDB addresses was above 40 per cent.

Hence, mass market housing could become generally less affordable if: (i) prices were to increase by more than 10 per cent; (ii) prices rise by 5 per cent with a 0.5-percentage-point increase in interest rates, or (iii) interest rate rises by one percentage point with no change in prices.

Besides affordability, recent government measures affecting both the public and private segments would have some impact on the volume of transactions and are likely to check the increase in prices to less than 10 per cent this year.

At the moment, despite more new projects being launched at prices above $800 per sq ft, there are still a number of projects in the resale market available for less than $700,000 for unit sizes of above 1,000 sq ft. This shows that affordable units still exist and that purchasers are not restricted to micro-sized and high-priced residential units (Table 2).

Greek historian Thucydides once said: ‘Few things are brought to a successful issue by impetuous desire, but most by calm and prudent forethought.’

For potential buyers, it would be prudent to look beyond the current interest rates to assess the ability to repay the monthly mortgage payments over the next 20-30 years when interest rates move up eventually.

Ng Wei En is research analyst and Chua Chor Hoon is head of research, South-east Asia, DTZ

Source : Business Times – 25 Mar 2010