High expectations for strong recovery in high-end residential in 2016

By Ong Kah Seng

/ R'ST Research, The Edge Property |

October 11, 2015 9:00 AM SGT

Gone are the good old days of 2007, when high-end residential properties — generally those in Districts 9, 10, 11, 1 and 4 — saw keen interest from buyers even though prices were extremely high. In the past two years, prices of high-end properties fell about 10%. The price fall varied significantly among such properties because they have very different characteristics.

It seems high-end residential property prices are stabilising, though. According to URA statistics, non-landed properties in Core Central Region (CCR) fell only 0.6% q-o-q in 2Q2015 and 1.3% q-o-q in 3Q2015. Prices of non-landed properties in Outside Central Region (OCR) fell 1.1% q-o-q in 2Q2015 and 1.6% q-o-q in 3Q2015.

It is widely expected that after General Election 2015, if the cooling measures are lifted at least gradually in 2016, the high-end residential segment will be the first to recover — compared with suburban condominiums and city-fringe apartments, which are less differentiated. That was the case when high-end residential properties led the price recovery in the mid-2000s, after the SARs period.

If cooling measures were gradually lifted in 2016, a recovery for high-end property prices is definite, but a strong price recovery is unlikely. We should factor in key trends for high end home buying, which developed during the past few years when the high-end residential segment was in the doldrums. Some of these trends are not simply a result of weak property times. They are new mindsets formed for the buying, owning and selling of high-end residential properties — and are quite set to persist.

In the weak property environment, buyers and owners have formed a new perspective of high-end homes in Singapore. They have a new definition of such property in terms of how endearing it is. A high end property is a luxury item, and there is a psychology surrounding people’s decision to buy such items. Such psychology seems to have emerged more prominently in recent years. In addition, the local high-end residential market is unlike the mass-market condo segment. Demand for the latter is generally domestic, but the former faces competition from luxury properties in key cities worldwide. The underlying demand for high-end properties is more international than for suburban condos.

Opportunity buying versus buying high-end homes at steep prices

The first new trend to note is the profile of buyers of high-end residential properties in recent times. There may be a revival in sales activity of such properties, but the purchasers are generally opportunity buyers. They are mainly wealthy local and foreign buyers, but from savvy, cost-sensitive and practical backgrounds. They include home-grown business owners who built up their wealth from scratch through frugality and practicality, hence the decision to pick up luxury property recently at depressed prices. There are also affluent foreigners from developing countries who tend to favour practicality over frills. They are unlikely to pick a unit at high prices.

This profile of buyers is set to continue into 2016. Conversely, high-end residential property buying in 2006/07 was dominated by the rich locals and wealthy foreigners from Indonesia, Western countries and more developed Asian countries. Such buyers were very picky about the positioning of luxury properties in Singapore. The couple of years of sluggish performance may make such buyers feel high-end property prices in Singapore might not withstand the test of time.

The recent years have seen wealthy home buyers generally drawn into buying properties in other countries, which are very different in operating systems and country dynamics compared with Singapore. These include buying properties in cities that boast dynamic, unparalleled styles, and perhaps are known as “the city that never sleeps”, for example. In contrast, the recent profile of homebuyers for Singapore luxury homes trends towards those who value the city-state for its stability, cleanliness and neatness, transparent property system and environment that is conducive to family development.

Note fundamental differences across cities before comparing

The local luxury residential market undoubtedly faces competition from around the world. There have been endless comparisons between high-end properties in Singapore and Hong Kong. We have to understand, however, that Singapore and Hong Kong — both key financial hubs in Asia — differ in operating systems and the layout of the city. The visual feel of the cities is essentially different.

Singapore, for instance, does not have the benefit of terrains for visual plays in different housing forms. Most buildings are constructed on fairly flat land. In hilly Hong Kong, soil conditions are tougher, enabling high-end homes to be built on elevated grounds. The Peak and Mid-Levels are such examples. This gives a “social status distinction” that some wealthy homebuyers probably enjoy. Homes in Repulse Bay are also very up-market properties in Hong Kong. Singapore’s high-end homes are in prime locations and generally built on flat land, presenting a quaint, linear, visual effect. These essential differences in city experience cater to wealthy buyers with different innate requirements.

On the other hand, cost-conscious and practical buyers, including wealthy mainland Chinese, are increasingly eschewing buying properties in Hong Kong, preferring instead properties in Singapore. These buyers feel that Hong Kong property design, ideology and planning systems are very different from those of Singapore. Hong Kong is hilly and beautiful but increasingly seen as “claustro-city”. Properties there lack value-for-money for practical buyers. Property prices are also very high in Hong Kong and opportunities are tapering off for foreign buyers. So, Singapore, which in recent times seems to be stronger than Hong Kong as a financial city, is increasingly a choice pick for buyers with practical mindsets.

Understanding ‘temperament’ of luxury-item buyers

There is such a thing as “temperament” when it comes to purchasing luxury items, and it has been much ignored. It seems quite certain that the total debt servicing ratio is here to stay, as it ensures prudence in property buying. If that is so, then it is hoped that the additional buyers’ stamp duty can be lifted. The removal of ABSD will benefit high-end residential property buying, because buyers of high-end properties have their “temperament”. They do not like to be bound by restrictions, even if they can well afford the levy.

Major corporates expected to continually tighten housing allowances

Since 2011, when there were US and Europe economic headwinds, MNCs that had regional headquarters in Asia have been tightening expenditure, even though Asia has presented a more positive picture. Expatriates in Singapore were generally hired on local terms, with either limited or no housing allowances. Senior expatriates seconded to Singapore were also on reduced housing allowances, and many are contented with average-size luxury property or have even been open to renting an apartment on the city fringes. Most city fringe locations are quaint and unique in character, so the property is considered very comfortable even for senior expatriates. This trend has significantly reduced the leasing demand for apartments in prime Districts 9, 10 and 11. Smaller-size apartments, measuring less than 1,200 sq ft, are more well-received by expatriates on single — instead of family — relocation packages.

Even if global economic conditions were to eventually recover, it is unlikely that corporates will adopt generous relocation packages and housing allowances again. The challenging years of extreme savings have significantly helped in improving corporates’ bottom line, and many MNCs will continue to embrace the frugality in staff’s relocation packages, as part of a total effective operational and profitability strategy. This will mean continued weakened leasing demand for high-end apartments and investment interest. Interest in high-end property will come mainly from owner-occupiers.

Sellers of high-end homes are increasingly open to moving on

Sellers of high-end properties are now increasingly realistic and more open to lower prices of their property. Owners are also increasingly open to finding reasons to justify any of their loss. If a loss can be justified, the seller today is more willing to proceed with the deal and move on. An owner-occupier of a high-end property can treat the loss as a utility value. In other words, this is akin to the rent that an owner-occupier paid to enjoy a luxury property over the years. Investors of high-end property who eventually make a loss are also increasingly justifying the loss with fact that they once owned a prime property with intrinsic value.

Such open mindsets will mean that owners who are ready to move on from the failed investment experience will spend less effort haggling over prices, even though sale activity for high-end properties is improving. As such, the stalemate between buyers and sellers in negotiating the prices of high-end properties is set to improve.

Rosier picture, but gradual recovery likely

There is high expectation for high-end residential properties in Singapore to see a strong price recovery, if residential property cooling measures are lifted in 2016. But we also saw how new owners’ and buyers’ mindsets have been formed for local high-end residential properties during the lacklustre years, especially from 2013 to 2015. So, we can expect a rosier picture ahead for high-end properties, but such a recovery may be downplayed, as new mindsets and demand patterns have developed, and buyers’ perspective towards high-end properties in Singapore has changed somewhat.

The demand base — buyers of local high end residential property — is set to be those who have a predominantly practical mindset. While high-end homes in the city-state may no longer appeal to buyers with highly sophisticated requirements — because such buyers increasingly prefer to buy homes in other exciting cities that boast 24/7 buzz and glitter — we can expect high-end homes in Singapore to be increasingly valued by wealthy buyers who are from down-to-earth backgrounds.

Developers have experienced tremendous pressure to sell or lease their properties to ensure the resident profile is compatible with the project. As such, some luxury developments are generally unoccupied because the developer is less inclined to offer the units to less sophisticated, yet wealthy, buyers and tenants. Perhaps an interesting trend that will develop is that some luxury projects may have higher vacancy rates, as the developers look to sell or lease the units only to very sophisticated buyers residents with high lifestyle requirements, whereas other high-end developments will see a wider mix of residents from diverse backgrounds. The latter includes those who want to enjoy Singapore’s unparallelled stability, which is priceless.

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Ong Kah Seng is director of R’ST Research. He can be reached at kahseng.ong@rstresearchcom.sg.

This article appeared in The Edge Property Pullout, Issue 698 (October 12, 2015) of The Edge Singapore.

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