COMMENTARY
Resilient GCB market can weather market shocks
The cooling measures lowered the profitability of these homes, but owners can usually wait to sell.
Wed, Sep 09, 2020
Nicholas Mak
GOOD Class Bungalows (GCBs) are arguably the most exclusive and expensive pieces of real estate in Singapore.
The most recent market shock before the Covid-19 pandemic this year was the property market cooling measures introduced by the Singapore government on July 5, 2018.
In this report, we look at the performance of the GCB market in two periods of 18 months - immediately before and after the introduction of the mid-2018 cooling measures.
Transaction volumes steady
The transaction volume and prices of GCBs were not severely affected by the 2018 government intervention.
The sales volume of GCBs remained largely stable and even increased by some measures. The total transacted value of all types of bungalows in the GCB areas increased 6.5 per cent to S$1.39 billion.
Investors and homebuyers were willing to pay more for bungalows in GCB areas in terms of land rate during the 18-month period after the cooling measures.
This was evidenced by an increase in average land rate across all types of transacted detached houses in GCB areas by 2.4 per cent to S$1,429 psf of land.
A possible reason why the GCB market was less affected by the cooling measures was that a large majority of the buyers could avoid the Additional Buyer's Stamp Duty (ABSD), which was a key component of the cooling measures.
The large amount of ABSD that was potentially payable for each GCB transaction was a strong motivation for the buyers to avoid the tax.
The buyers of GCB were mostly Singapore citizens - and any Singaporean buying his sole residential property would be exempted from the ABSD.
Hence, to avoid paying the ABSD, the Singaporean buyer would simply ensure that he did not own any residential property at the time when he bought the GCB.
In addition, after recovering from the initial shock of the unexpected cooling measures in 2018, many market participants soon came to terms with the new curbs.
Furthermore, the property market sentiment was largely sanguine last year, partly due to the positive economic environment in 2018 and 2019.
However, the cooling measures could have caused some buyers to be more budget-conscious, leading some of them to turn to smaller, cheaper bungalows.
These include non-GCB detached houses. There was a 25 per cent increase in the number of transacted non-GCB detached houses in the GCB areas, to 35 houses, in the 18 months after mid-2018.
Most expensive GCBs
According to available data, the most expensive bungalow transacted from 2017 to 2019 was a freehold GCB at 81, Dalvey Road. With a land area of 4,836 square metres (sq m), it was purchased for S$93.9 million in September 2018, after the cooling measures were implemented.
The most expensive GCB transacted in terms of dollars-per-square-foot-of-land in the three-year period of this study was at 3, Jervois Hill. This bungalow in the Chatsworth Park GCB area sat on a 1,402 sq m plot, and was transacted in June 2018 at S$2,729 psf of land.
Profitability analysis
The results of the profitability analysis of transacted bungalows in GCB areas generally point to a reduction in profitability after the 2018 cooling measures.
Although the gross profit margin increased, the gross profit amount and the compound annual growth rate (CAGR) declined in the 18 months after mid-2018.
Impact on gross profit
The effects of the 2018 cooling measures reduced the average gross profit of all types of transacted bungalows in GCB areas. However, it had the opposite effect on the average gross profit margin.
Generally, the average gross profit earned by the owners of these houses sold in the 18-month period after the 2018 cooling measures was S$7.28 million, 23 per cent lower than the average gross profit gained in the corresponding period before the middle of 2018.
However, the average gross profit margin of 94.8 per cent post-cooling measures was higher than the 81.4 per cent gross profit margin gained in the 18-month period before mid-2018.
The contributing factor was that a higher number of smaller non-GCB detached houses within the GCB areas were sold in the 18-month period after the cooling measures. As a result, the average gross profit per transaction was smaller.
However, the bungalow owners were compensated by a higher average gross profit margin.
Holding periods
GCB owners are generally patient people. They are also aware that fewer than 0.1 per cent of Singapore's population has the financial means to buy a GCB. Therefore, it would also take some time to sell a GCB.
The cooling measures led to an increase in the holding periods for GCB owners before they parted with their properties, as it took longer to find buyers.
On average, a property owner would hold on to a GCB for nine years before selling it in the 18-month period before the 2018 cooling measures. The average holding period increased to 11.5 years in the subsequent 18 months.
Annualised growth rate
Although the average gross profit margin of transacted bungalows in GCB areas increased after mid-2018, the longer average holding period reduced the CAGR.
The average CAGR of transacted detached houses fell from 6.1 per cent in the 18 months before mid-2018 to 4.5 per cent in the subsequent 18 months.
The maximum CAGR achieved was also reduced after the cooling measures were implemented.
The highest CAGR achieved from GCBs sold in the 18 months before the 2018 cooling measures was 28.2 per cent. This figure was reduced to 10.7 per cent in the 18 months after mid-2018.
A large majority of the GCB transactions were profitable for the sellers. After all, most of them would simply choose not to sell if the prices offered were not high enough for their liking.
The GCB market is not immune to market shocks, but it is able to weather such shocks fairly well. This could be due to the financial strength of the owners, given the long durations that these high-net worth individuals have held on to such real estate.
The writer heads the Research and Consultancy Department at ERA Realty.
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