Bread-and-butter housing products

As market conditions in Singapore worsened progressively from the start of 2014, many developers from Singapore ventured overseas. No surprises that most would start with markets they feel they know well: the UK, Australia, Malaysia and China. A few ventured into relatively newer markets for Singapore companies, such as Cambodia and Japan. And a few largesized Singa pore developers rekindled their property development activities in Vietnam and Indonesia after some years of hiatus.

Almost every developer that went overseas has planted its flag in the middle-to-high-end residential segments of the cities it chose. And some are now realising there are not enough buyers for skyscraping luxury condominiums, for example in Malaysia, Cambodia, Vietnam and Australia.

It is probably coincidental that they all chose the same segment of the property market in the various countries. However, I do wonder whether they have considered a segment of the market that is much bigger and where demand will outpace supply for the next 15 years. I am pointing to the affordable housing segment in markets such as Cambodia, Indonesia, Myanmar and Vietnam.

But why have the Singapore developers not dipped a toe into this segment? We can clearly learn from the successful example of HDB’s towns, where 80% of Singapore families are sheltered.

It seems that developers from Singapore have an aversion to building cheap housing overseas. Developers may not want to be associated with a segment that is perceived to have a stigma and which may look unglamorous. They may also be under the impression that the margins are thin and government laws for affordable housing unclear, and dismiss the segment with [the rationale], “anyway it is the government’s job to provide housing for the masses”.

As shown in the table below, the governments of Cambodia, Indonesia, Myanmar and Vietnam have estimated that they need a total of about two million new homes a year. To put things in perspective, HDB in its over 50-year history has built about 1.1 million dwelling units in Singapore. Therefore, the potential for Singapore’s developers to build mass affordable housing in neighbouring markets is huge!

A company called National Housing Organization (NHO) had a stellar start in Vietnam, developing about 5,000 affordable housing units in the last four years. Tan Tee Keon, a Malaysian investor who co-founded the company, successfully adapted lessons learnt from affordable housing projects in Thailand and Singapore to build mid-scale developments of around a thousand apartments each in Hanoi, Danang and Ho Chih Minh City.

With the World Bank and the Vietnamese government estimating that they need another 374,000 dwelling units a year until 2040, and that most of the demand will be concentrated in the mass affordable category around major cities and industrial parks, it looks like NHO has a very long-term, stable and sustainable business in Vietnam.

In the four countries of our focus, the United Nations estimated that their total population will increase by about 77 million by 2030. So, there is no denying that market demand will continue to grow. But how do we even begin to tap into this vast market of homebuyers?

Amazingly, there is a rule of thumb for developing affordable housing. And we know how Singaporeans love formulas, don’t we?

While we know demand for affordable housing is very high, we have to note that buyers’ ability to pay is limited by their household income. The general guideline is to appropriately size and price the houses or apartments at no more than three times the annual household income of the target buyers. As an example, a developer planning such a project around the fringes of Bandung City in West Java could reference the minimum wage guidelines of about $250 per month, multiply that by 36 months and then double it for a young couple, to derive a selling price of $18,000 for the homes. Developers targeting households whose occupants are university graduates may begin to price their homes from $36,000 as graduates who get married at age 24 or 25 generally earn over $500 per person a month.

Based on the selling price, investors should then select reasonably priced sites and manage the construction costs to enjoy modest profit margins, backed by large transaction volumes.

This is my message for developers venturing outside of Singapore: There are abundant long-term opportunities to develop mass-market, afford able housing within Asean for as little capital as, say, $5 million. We will be able to do well as we are satisfying the hunger for comfortable housing by supplying “bread and butter”. The high-end market is oversupplied with foie gras and truffles. We might take a leaf from the books of Hong Kong. While its residential market has set world records for prices of luxury housing time and again, as an advanced economy and a global financial centre, many residents in Hong Kong cannot afford a comfortable night’s rest. There is a lack of affordable housing in that first-world city, where younger and lower-middle income families need to save 20 years of their salaries to buy their first homes. The real estate development world will herd towards mass affordable housing. Salted eggs is already the new truffle. Singaporean developers should lead that charge.