An extract from Phillips Securities:

Singapore Residential Property 14 February 2007

Vacancy at 10-year low, demand to outpace supply in 2007 and 2008

In this report, we present a comprehensive study on the overall residential property outlook in Singapore for 2007 and beyond, together with the updated 4Q06 statistical data released by the Urban Redevelopment Authority (URA).

Squeezing supply, growing demand and vacancy rate at 10-year low. As at the end of 2006, there are a total of 233,364 units of private residential properties available, including both landed and non-landed. With the demand kept at a high level, vacancy rate drops to a 10-year low. We expect the vacancy rate to continue downtrend as a result of the reduction of supply via en-bloc sales and the surge of demand due to rapid inflow of foreigners.

Where the demand comes from? We investigate the demand based on a few sources:
(1) The number of foreigner’s inflow
(2) The growth of Singapore residents – including PRs
(3) The number of marriages and divorces and
(4) Replacement units for en bloc sellers.

According to URA, 5,031 private residential units are expecting completion in 2007 and 6,989 units in 2008. We forecast the demand for private housing to reach 15,000 units per annum in 2007 and 2008. In general, we are expecting the demand to outpace supply in the next 2 years (2007 and 2008) and the vacancy rate could drop to as low as 5.5% in a year time. Huge supply will only arrive in 2009 when a total of 18,447 units are completed.

Bullish on residential property outlook. We identify two major change waves that will stimulate Singapore’s residential property market in the long run – The two Integrated Resorts and Singapore as a destination hub for education. Although speculation is happening, particularly in properties close to the two IRs, we have yet to see an island-wide property frenzy, as was observed in 1996. Many areas in Singapore still have not seen their property prices rebound since bottoming out in 1Q04. So far, only the luxurious segment and district-specific properties have strongly benefited from the recovery. We reckon that the property market is in its early-to-mid recovery stage at present, with mass market to follow suit in near term. We do not see the risk of government intervention in curbing speculation yet, as the current property price appreciation is still confined to a very small segment of the property market. Unless the mass market’s affordability of homes stands to become jeopardized, we do not foresee any drastic measures being implemented anytime soon. Therefore, we are bullish on properties for 2007.

Tourism boom to boost the demand for housing. In 2006, Singapore set a record in attracting over 9.7 million visitors, driven by the strong efforts put up by the government. Going forward, the two integrated resorts - Marina Bay Sands and Resorts World at Sentosa - will be the pillars of support for Singapore’s economy in the next 3-4 years. Jobs will be created as construction progresses, thereby giving the SMEs a boost. When completed in 2009, some 35,000 jobs will be created in the services sector, including 10,000 jobs in the Integrated Resorts. The two new tourist developments have the propensity to push Singapore into a new era of tourism, and to change the scene of city living. The two IRs will also play an instrumental role in propelling property prices further north, when the demand for housing rises due to the inflow of foreigners taking up new jobs.

New jobs created at all time high. In the fourth quarter of 2006, Singapore created 48,800 new jobs, an all time high. Total employment stood at 2.5 million. Overall in 2006, a total of 173,300 jobs were created, with Singaporeans grabbing 51% of the new jobs. The rest went to the foreigners, hence, creating huge demand for housing with the inflow of foreigners.

Inflow of foreign students. Singapore sets to becoming the world’s education destination by capitalizing on its low costs, safe living and world-class education system. The Government has pumped in significant initiative to tap into this S$3.7 trillion global education market. As a result, Singapore has attracted many prestigious institutions to set up their presence in Singapore in recent years, such as INSEAD in 1997, Chicago Graduate School of Business in 2000, University of New South Wales in 2004, SP Jain Center of Management in 2005 and etc. Besides, local education institutions such as NUS and NTU have also been very successful in increasing foreign student enrolment. By 2015, Singapore targets to attract 150,000 foreign students. The demand for housing will be boosted significantly by the inflow of these foreign students.
Affluent society and it is growing fast. With the global high net worth individuals (HNWIs) growing 6.5% to 8.7 million in 2005 as compared to a year ago, Singapore’s HNWIs saw a double-digit growth of 13.4% to 55,000 (according to ML-Capgemini). Real estate remains one of the most favoured investment vehicles among the HNWIs. Approximately 16% of their assets are parked in real estate investment. We believe that given the growing trend, Singapore’s property market will continue its upbeat, especially in the luxury homes. In addition, we also saw the average monthly nominal earnings in Singapore increased steadily over the past 10 years, from S$ 2,347 in 1996 to S$ 3,444 to 2005, and we project its 2006 number to reach S$ 3,565

Property price appreciation – Led by the high-end segment and district-specific. In general, residential property prices soared 10.2% in 2006 as compared to only 3.9% in 2005. We saw the prices of non-landed properties out-performed the landed properties, with 11.1% and 6.7% increases respectively. Nevertheless, the soaring prices are concentrated at district-specific. By breaking down the non-landed prices into three regions – Core Central Region (CCR), Rest of Central Region (RCR) and Outside Central Region (OCR) – we can see that the percentage appreciation is very much divided. CCR, RCR and OCR achieved an increase of 17%, 3% and 4.2%, respectively in 2006.

Rentals surge on squeezing supply and growing demand. Rentals of private residential properties set a record jump of 14.1% yoy in 2006, given the low supply situation. We believe this could be due to the spillover effect from the large number of en bloc sales that took event over the past two years, where the en bloc sellers have to look out for short-term residences.

Population growth at fastest pace since the 1997/98 Asian Financial Crisis. Population growth and demographic trends have always been strong indicators on how an economy can progress, as they directly affect the production, investment and consumption activities. More importantly, they indicate the demand for housing. As at 1H06, Singapore’s population stood at 4.48 million, within which 0.88 million are non-residents. This translates into a growth rate of 3.3% yoy or a CAGR of 2.4% since 1980. Another significant observation is the widening gap of population between residents (Singaporeans and PRs) and non-residents (foreigners). Presently, foreigners comprise almost 20% of the total population as compared to a mere 5.5% in 1980. The substantial growth would explain the high demand for housing due to inflow of foreigners. In 2006, we saw a jump of 9.7% yoy or 77,000 foreigners coming into Singapore. Assuming three persons per household, there is a need for 25,667 residential units to accommodate, regardless of whether it is purchased or rented, private or HDB residences. Based on a proportion of 80% in HDB and 20% in private residences, we forecast the demand for private residences at 5,133 units.

There is a belief by some that the demand for housing could decrease in the time of recession or during crisis, as foreigners would leave the country. True to some extent, there is evidence of such trend. Non-residents (i.e. foreigners) population reduced by 2.4% after the Asian Financial Crisis in 1999 and 5.7% during SARS in 2003. However, as a net effect, we do not see a drop in the total population, owing to a steady growth of Singapore residents.

Stable number of marriages but all time high in number of divorces. From 2000 to 2006, the number of marriages stabilized at an average of 22,700, after a sharp drop of 12% in 2000 from a high of 25,600 in 1999. However, a historical high in the number of divorces is observed, with 6,900 cases in 2005. We believe these statistics have an impact on the demand for housing. We estimate the demand for housing to surge by 25,000 units per annum, where the private housing could see a demand of at least 5,000 units.

Impact of En-bloc sales – Short-term surge in demand. According to Savills, approximately 6,000 residential units were lost through collective sale in the last two years. Just recently, we saw the biggest-ever en bloc site - Gillman Heights – successfully acquired by CapitaLand, who paid S$548 million for the site. Some other en bloc sites being transacted recently are The Albany (S$65 million), See Breeze apartments (S$53.8 million), The Parisian (S$228.1 million). Others being put up for en bloc sales recently are Hillcourt Apartments (S$370 million), Holland Crest (S$67.5 million), Tulip Garden (S$456 million), Tampines Court (S$527 million).
With the en bloc fever not cooling down any soon, we could expect more homes to be torn down, hence, reducing supply in the short term, typically within a one year period. The sellers involved in the en bloc sales would have to find replacement units to move in, and therefore, generating large demand in the short term. We could see a demand from this segment as high as 5,000 completed units in a year.

Preference of buyers – HDB or private? In general, the HDB resale market has under-performed the Singapore property market in the past few years. According to ERA, the number of HDB flats transacted in the resale market fell by 4.3% yoy to 29,723 units in 2006 as compared to 31,056 units in 2005. The HDB resale price index has recorded a rather sluggish performance since 1999. We think that the robust Singaporean economy in the last 2 years has sparked a strong interest among the middle-class Singaporeans and yuppies to go for private residences, even if they are first-time buyers. HDB properties have been neglected as a result, and this situation is more than likely to remain, given the improvements in remuneration and bonus packages in 2006/07.

This is evident from the statistical data, which shows that the percentage of resident population staying in HDB flats is reducing. We saw a straight 6-year in a row with reduction, from 86% in 2000 to 82% in 2006, and this number is likely to continue, as observed from the trend. Nevertheless, the population living in HDB flats has continued to increase. This means that more people are moving into private residences as compared to HDB flats. Besides, we are seeing a slow down in the supply of HDB flats, with the number of completed units dropping from 55,520 units in 2000 to 12,571 units in 2006.

Who is buying? In 2006, we achieved a record high in the number of foreign buyers in the residential properties. A total of over 2,000 transactions were recorded in 2006, compared to approximately 1,500 transacted in 1996. Singapore PRs also created a big jump in the units transacted, from 1,000 in 1996 to 2,700 in 2006. However, Singaporeans purchases are maintained at 15,000 transactions in both 1996 and 2006. As a whole, foreigners and PRs occupy 10% and 13% of the total sales, respectively in 2006. Another significant change observed in the last decade is the purchases under companies. We saw a big drop in company ownership, from 7% share to 1%.

In terms of nationality of the purchasers other than Singaporeans, we saw a big shift from a more dominated group to a more diversified group. In 1996, ‘Companies and others’ took up a big pie in the total purchases (53%), followed by the Indonesians (13%), Malaysians (13%) and Hongkongers (7%). Last year, ‘Companies and others’ buyers only made up a 10% share. We saw a huge jump in Malaysian purchases, with 20% share, surpassing the Indonesian, which has a 19% share. Other fast growing groups are from India (11%), UK (9%) and China (7%). The number of Hongkongers purchases recorded a big drop from 7% (in 1996) to 1% (in 2006). In addition, there are many new groups of nationality emerging, such as that from Europe, Korea, Australia, Philippines, Cambodia, Maldives, Mauritius, Myanmar, Iran and Pakistan.

Speculators market or genuine buyers? We think the Singapore property market has just started to recover, and there is no indication that the current boom will lose steam anytime soon. However, we are also beginning to see speculations taking place, such as that which was observed with the 428-unit Marina Bay Residences, which was completely sold out immediately after launch. Many of these units were then put up in the sub-sale market by speculators to make a quick profit. Similarly, the sub-sale market is also active in the Sentosa Cove development. What we are seeing today is only the opening scene of speculators’ play. According to the data captured by URA, there were about 1,000 sub-sale transactions that had taken place in 2006, still a far cry from the numbers seen at the peak of 1996, where over 3,600 units changed hands within a year.

The breakdown of the sub-sale number by district reveals a presence of huge concentration of sub-sale activities in Districts 9, 1 and 4 in 2006. Unsurprisingly, District 9 (Orchard, Cairnhill, River Valley), which made up of 18% of the total sub-sale transactions in Singapore, is always the most favourable residential area for expatriates. Coming in at second and third places are Districts 1 and 4, where the Marina Bay Sands and Resorts World @ Sentosa Integrated Resorts will be located, respectively. Looking back in 1996, when the property boom was at its peak, sub-sale activities were mainly towards the fringe areas. Topped the list were District 21 (Upper Bkt Timah, Clementi Park, Ulu Pandan), followed by District 10 (Ardmore, Bkt Timah, Holland Rd, Tanglin) and District 9. We are beginning to see a shift of interest to city living from the fringe areas, particularly near to the IRs.
In Singapore, sub-sale activities are known to be the thermometer of speculation heat. We monitor these activities on quarterly basis, and found that the speculation activities are still tolerable, even there is an up trend. We normalized the number of sub-sales with total sales, to compare more meaningfully with historical data. During the property market bubble in 1995/96, the normalized number was as high as 31%. In comparison, we only observed 7.5% in 4Q06. We believe that the number is not alarming at the present state, given that most of the sub-sale activities are confined to the luxurious market and district-specific. However, it should be noted that the number might not reflect the true situation, as caveat lodge is not compulsory under the law.

Expecting a property bubble? – Not quite there yet. Although speculation is happening, particularly in properties close to the two IRs, we have yet to see an island-wide property frenzy, as was observed in 1996. Many areas in Singapore still have not seen their property prices rebound since bottoming out in 1Q04. So far, only the luxurious segment and district-specific properties have strongly benefited from the recovery. We reckon that the property market is in its early-to-mid recovery stage at present, with mass market to follow suit in near term. We do not see the risk of government intervention in curbing speculation yet, as the current property price appreciation is still confined to a very small segment of the property market i.e. the luxurious homes. Unless the mass market’s affordability of homes stands to become jeopardized, we do not foresee any drastic measures being implemented anytime soon. Therefore, we are bullish on properties for 2007. Nevertheless, we do see the risk from external factor, such as bird flu pandemic that will jeopardize the market sentiment.

SESPROP Index is leading the property prices by six months. We observe that the movement of housing prices and rental rates are led by the property stock market index (SESPROP) by 3 to 6 months (Figure 16). With that indicator as a forecast tool, we can expect the property price index to increase over 10% yoy for the next two quarters (i.e. 1Q07 and 2Q07).

New residential properties launches. In 2006, we saw more than 10,000 units of uncompleted units being sold by developers, and we expect 2007 to be another comparable year. In recent months, we saw the luxury residences such as [email protected], Marina Bay Residences and One Shenton being snapped up like hot cake soon after launches. Some of the high profile properties that would be launched in 2007 are The Orchard Residences by CapitaLand / Sun Hung Kai, Reflections at Keppel Bay by Keppel Land, Kim Lin Mansion Suite by City Developments, Scotts Square by Wheelock and MarQ on Paterson Hill by SC Global. Luxury apartments/condominiums are set to lead the property market again in 2007 as it did in 2006. We can expect to see record prices being fetched on these properties, hence, giving another boost to the bottom line of property developers. According to Colliers, luxury residences made up 15% of the total units launched in 2006. The percentage is expected to be as high as 29% in 2007.