Fourth-quarter data released last Friday by the Urban Redevelopment Authority (URA) point to a massive, unprecedented wave of upcoming supply in the residential, commercial and industrial segments, sounding a clear warning to investors who may have entered the market recently at high prices.
Four quarters ago, the expected private home completions for last year and this year were 8,430 and 8,116 units, respectively. As we can see from Chart 1, we ended last year with 12,469 units completed, 48 per cent higher than the number published four quarters ago. The number for this year has also been revised upwards to 13,308 units, about 64 per cent higher than the 8,116 we were told to expect last year.
Let’s examine the data in Table 1. Included in the expected 31,001 units that are expected to obtain TOP (temporary occupation permit) in 2015 are 9,501 units that were already under construction in 4Q2011. To have 9,501 units taking another up to four years to complete is unlikely. Most residential projects are completed between 24 and 36 months after piling begins. Therefore, the bulk of the 9,501 units should be completed in 2013 or 2014.
Looking ahead, we can expect the completion of residential projects to be ahead of schedule, i.e. the wave of supply will hit us sooner. This time round, the avalanche of supply might coincide with a faltering global economy amid weak occupier demand. Investors should seriously take these “earlier-than-expected supplies” into consideration before making their investments.
The rate of vacancy of private homes have already crept up from 5 per cent (or 12,883 units) at the end of 2010 to 5.9 per cent (15,980 units) last December. The imminent flood of supply will likely push this higher.
The oft-heard counter-argument goes like this: There’s nothing to worry about because most of these units have been pre-sold by developers way before TOP is obtained. In the last few weeks, despite the introduction of the fifth round of cooling measures with the Additional Buyers’ Stamp Duty, we saw rapid take-up at developers’ mass-market projects such as Watertown in Punggol and The Hillier in Hillview.
Backed by a fast pace of pre-sales, developers have also rushed to replenish their land banks. The Government Land Sales (GLS) programme is well subscribed, or over-subscribed in the case of choice sites connected by transportation infrastructure or rare sites such as the plot for landed homes in Chestnut Avenue. Since early 2010, developers have actively tendered for residential land parcels and turning around the projects for launch within nine months – and even the introduction of repeated sets of cooling measures did not dampen the number of bidders for each tender.
From Table 2, the developers’ appetites seem insatiable because they are backed by the fast pace of pre-sales at launch and, therefore, the GLS must keep rolling on. Because, as the rationale goes, increasing land supplies can lead to a cooling of prices. Perhaps. Perhaps not.
OTHER PROPERTY SEGMENTS
Table 3 shows the current total stock, including public sector stock, of floor space in the commercial and industrial segments. In each segment, the proportion of the upcoming supply versus the current available floor space is around 15 per cent, with the Business Park segment seeing the fattest pipeline of supply at 33 per cent of current stock.
Given the weakening macro- economic environment, market analysts are revising downwards the rental values for these segments. Vacancy rates are also expected to increase as the pace of business expansion slows on the back of the strong supply.
PAIN LIES AHEAD
The flood of supply seems to be sweeping across almost all segments. While holding power is strong today due to low interest rates, real estate valuations may deteriorate quickly once the macro-economic environment collapses, causing pain especially to the recent investors who have bought high.
By Ku Swee Yong – chief executive of real estate agency International Property Advisor and author of Real Estate Riches – Understanding Singapore’s Property Market in a Volatile Economy.