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Is fear of residential supply glut overblown?

By Feily Sofian, Lin Zhiqin / The Edge Property | October 24, 2015 8:00 AM MYT
Tags: residentialsupply glutvacancyrentpriceGDPSIBORexchange rateoverseas
Landlords may opt to leave their properties vacant if rents fall beyond a certain level as they would not justify replacement costs for the wear and tear inflicted by tenants. As a result, the dreaded supply glut and sky-high vacancy rates alone may not translate into a steep rental decline. Landlords may also prefer to wait for a market recovery rather than commit to a low rent over the next one to two years.

Therefore, it may sound counter-intuitive but a study by The Edge Property shows the correlation between vacancy and rental performance weakens as vacancy rates trend up.

When vacancy rates of private non-landed homes were within a healthy range, rents behaved according to market expectations. For example, when vacancy rates were between 6% and 6.9%, rents increased by 0.6% per quarter on average. And when vacancy rates climbed to between 7% and 7.9%, the rental increase slowed to 0.5% per quarter. As vacancy rates trended up to between 8% and 8.9%, rents declined by an average of 0.8% per quarter. No surprise here.

However, when vacancy rates were at 9% to 9.9%, rents declined by just 0.1% per quarter on average. Similarly, when vacancy rates were at their historical high of 10% to 10.9%, rents slipped by just 0.2% on average per quarter (see Table1). In other words, high vacancy rates of 9% or more did not cause rents to nosedive.



Table 1: High vacancy rates above 9% did not cause rents and prices to plunge


Source: URA, The Edge Property



There were a total of 23 quarters between 1Q1999 and 2Q2015 when vacancy rates were at least 9%. Out of that, 13 quarters witnessed rental increase and only 10 saw rental decline.

A simple linear regression between vacancy rates and rental index showed an R-square value of 0.48. Another regression between vacancy rates and percentage change in rents showed an even weaker R-square value of 0.16.

The same can be said about prices. Between 2Q1988 and 2Q2015, there were a total of 31 quarters when vacancy rates were at least 9%. However, out of that, about half or 17quarters witnessed prices declining, while the remaining 14 saw prices increase. Hence, the average price decline when vacancy rates hit at least 9% was just 0.8% quarter-on-quarter (q-o-q) on average.

Historically, rents and prices only fell by a significant magnitude during a recession, when homeowners’ primary incomes were under threat. In 4Q2000, for example, rents fell 3.2% q-o-q as the global economy was hit by the Nasdaq crash. Similarly, prices fell 2.7% in 3Q2000, followed by 3.6%in 4Q2000 and another 4.5% in 1Q2001. Separately, rents fell 5.7% q-o-q in 4Q2008, followed by 8.8% in 1Q2009 and 5.6% in 2Q2009, amid the global financial crisis. Concurrently, prices dipped 6.4%, 15.1% and 4.7% respectively.

Singapore’s residential property market is bracing for a potential supply onslaught of 11,105 non-landed units in 2H2015 and another 20,381 units in 2016. In the worst case scenario, we expect the vacancy rate to hit 12% over the next six months, given the average take-up of just 7,700 units annually over the past decade. As illustrated earlier, sky-high vacancy alone may not single-handedly topple rents and prices. It is worth noting, however, that vacancy rates could hit an unprecedented high in 2016. In the meantime, recessionary risks continue to mount with economists polled by The Edge Property projecting anaemic economic growth into 2016.

Against this backdrop, The Edge Property is expecting the current rate of rental and price decline of 1% q-o-q in recent quarters to accelerate to 2%, leading to a total decline of around 5% over the next six months for private non-landed homes. Notwithstanding, the prospect will be uneven across different segments and prospective buyers who do not need to rely on rental income should scout for value deals and defensive assets such as those in growth corridors, near MRT stations and amenities or with unique location attributes.

We also polled four market experts for the outlook of private non-landed homes for the next six months. Here’s more from them:



Alan Cheong, Head of research, Savills Singapore

We believe there will be greater interest from local and overseas buyers in the high end segment in 2016 when they realise that it represents an attractive relative value proposition when compared with London and Hong Kong. Rents, however, may remain subdued because headcount and budget cuts amongst multinational companies will translate into lower demand from expatriates. Expect high-end prices to rebound 2% over the next six months while rents are likely to continue southbound, between 5% and 10%.

Overall, prices in the city fringe will be determined by the tug of war between developers’ pricing and resale transactions. The former will continue to command steady pricing at levels similar to pre-TDSR (total debt servicing ratio) levels, while the latter will be under downside pressure from individual holders who need to transact.

Rents will also be under pressure, but less so than for the high-end and mass- market segments as the city-fringe area has the convenience of being located close to major work and play districts. Foreign nationals who previously could afford to rent in the high-end segment will gravitate towards homes in the city fringe. We expect prices of homes there to stay flat over the next six months and rents to trend down by another 5%.

Like for those in the city fringe, new projects in the mass-market will command higher prices than those in the resale market. Consequently, the overall prices may remain flat in 2016. For rents, the flood of completions in 2016 will suppress rents even more than those in the city fringe as tenants have a large array of newly completed units to choose from. Expect mass-market rents to decline by 10%.



Donald Han, Managing director, Chesterton Singapore

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