Riding out the currency volatility in overseas property

/ The Edge Property |

September 30, 2015 10:00 AM SGT

Should investors sit on the sidelines or make that plunge into property as the Australian dollar and Malaysian ringgit weaken to historic lows against the Singapore dollar?

For overseas property investors, currency exchange has always been an important consideration. It becomes more critical when comparison is drawn between the recent turbulence in the global equity and currency markets and the 2008/09 global financial crisis and 1997/98 Asian financial crisis. “The current crisis is different from what we experienced during the global financial crisis,” says Doris Tan, JLL’s head of international residential property services. “What we are experiencing now involves China, which is still seeing economic growth but not as fast as before. With stocks falling drastically, investors may turn to property as a form of investment diversification.”

According to Tan, who has been marketing international properties for over three decades, savvy investors with a geographically diversified property portfolio were also “saved” during the Asian financial crisis. “When their own country’s currency depreciated, these investors took the opportunity to cash out of their properties in the UK and the US, selling them at record-high prices to save their own homebased portfolio,” she recounts.

Will the plummeting Australian dollar and Malaysian ringgit relative to the Singapore dollar spur investors to make that plunge into overseas real estate? Developers and property consultants reckon some will.

Many did so when the British pound dived 32% against the Singapore dollar — from a high of $3.07 in June 2007 to $2.09 at the end of December 2008 when the global financial crisis started. The pound has lingered at the $2 level against the Singapore dollar ever since, dropping to its lowest at $1.885 in March 2013 before revisiting the $2 to $2.20 band. It closed at $2.163 on Sept 1.

London example If someone had bought a property in London in 2013 when the pound was at $1.90 against the Singapore dollar, he or she would be sitting on a pure currency gain of 15% today, reckons Linda Chern, Knight Frank’s head of international project marketing. This does not include the capital appreciation of 20% to 25% resulting from the rise in housing prices in London over the past two years, she adds.

London is the second most actively marketed overseas city after Melbourne, says Sarah Nicholson, CBRE’s director of international project marketing. In 1H2015, 44 new UK projects were launched in Singapore, compared with 32 in 1H2014, according to CBRE. “However, the market has slowed,” she concedes. There are many reasons for the slowing takeup rate of UK project launches. They include the type of properties being launched in Singapore as the domestic UK market strengthens; financing restrictions in the UK, which make it more difficult for people to get loans on assigned contracts and more challenging for investors looking for a quick flip prior to completion; and seasoned investors who have already bought property in London and are now looking to diversify their portfolios.

Over the weekend of Sept 5 and 6, there are at least two major UK projects being launched. They are Berkeley Homes’ South Quay Plaza at Canary Wharf, which is marketed by JLL, and Keybridge at Vauxhall, London, which is marketed by Knight Frank.

South Quay Plaza is priced at an average of just under £1,000 psf ($2,166 psf), while Keybridge is priced at an average of £1,200 psf. Such prices are attractive to Singaporean investors, compared with the recent launches of luxury projects at Nine Elms, which were priced at £1,700 to £1,800 psf, says Chern.

“For those who have yet to invest in the UK, I would advise them to consider as London is a safe haven and will always attract investors from around the world,” says JLL’s Tan. “Properties that are well located are rentable, and property prices are expected to appreciate over time.”

London will continue to see strong buying, although the market is also affected by macroeconomic factors, says Donald Han, managing director of Chesterton Singapore. Han has been handling sub-sales of London property on behalf of Singaporeans who had bought units at weekend exhibitions here two to three years ago. “They are now selling just before completion and realising gains of 20% to 25%, as well as a slight upside in terms of currency,” he adds.

Revisiting Australia The Australian dollar had plummeted 26% against the Singapore dollar from a high of $1.35 in February 2012 to 99.85 cents on Sept 1. The last time the Australian dollar sank below parity against the Singapore dollar was six years ago. For those planning a holiday or enrolling in a university in Australia, currency savings alone can be as much as 25% to 30% from 2009.

“As the Australian housing market does not have an issue of oversupply and banks are prudent as they are reluctant to lend to speculative developers, it’s a good time to buy on currency dips, especially if you believe that the Australian economy is fundamentally sound, given that it’s resource-rich,” says Han.

Developers have been quick to seize this opportunity to tap investors from Singapore. The result is that the number of new property launches from Australia was up 38% in 1H2015, compared with the three years from 2012 to 2014, according to CBRE. While the majority of these new launches are from Melbourne, CBRE foresees more launches from Sydney, Brisbane, Perth and Gold Coast later this year.

The weekend of Aug 29 and 30 saw at least three project launches from Australia. Malaysian developer UEM Sunrise launched its second Melbourne project, Conservatory. The project was “well received” with initial launches in China and Singapore. To date, close to 50% of the 446 units in Conservatory have been sold. The project will be launched in Malaysia, Hong Kong and Australia in the coming months, according to CBRE, the marketing agent. The first project, Aurora, which is also located in the Melbourne CBD, was launched globally last November and saw 95% of the units sold within a fortnight.

Meanwhile, Australian property developer Crown Group launched its condominium project, Infinity, in Sydney, Singapore and Jakarta on Aug 29 and 30. The first day alone saw more than A$380 million worth of units sold. Infinity is part of a mixed-use development located at Green Square Town Centre, a 14ha urban renewal site in Sydney. Of the 326 units, more than 70% were purchased by Australian residents and citizens.

Beyond Melbourne That same weekend also saw Danny Psaros, CEO of Psaros Development, a leading mid-tier Perth-based property developer, introducing his latest project in Singapore. Called Sundance, the 100-unit condo is located in the suburb of Scarborough in Perth. The project has a mix of one- to three-bedroom apartments, with prices ranging from A$379,000 ($376,165) for a one-bedroom unit to A$499,000 for a two-bedroom unit and A$899,000 for a three-bedroom unit. The project was marketed by Knight Frank.

Of the 400 apartments he has sold in Perth over the years, a good 35% of the buyers have come from Singapore, Malaysia and China. “A big extension of our business is in Southeast Asia,” says Psaros. “What’s interesting is that a lot of people from Singapore, Malaysia and China have been riding on the Sydney and Melbourne markets.” However, he feels that Perth presents a buying opportunity for investors at the current price levels.

Over the past three to four years, the housing prices in Perth have remained relatively flat, while those in Sydney and Melbourne have soared, adds Psaros.

According to CBRE, the Perth market has struggled to gain momentum since the global financial crisis. However, since 2007, Perth has recorded the fastest population growth in Australia and is currently the third most populated city in the country. Contrary to popular belief, the major source of employment in Perth is healthcare (11%), followed by construction (10%) and retail trade (10%), and not mining, says CBRE. Mining only makes up 7% of jobs in Perth.

The population in Perth is increasing even with the downturn in mining, according to CBRE. The median price of Perth apartments now stands at A$442,000. “At this level, Perth apartments present excellent value for money with tremendous potential for capital upside,” says CBRE’s Nicholson. This compares with Sydney’s median price of A$580,000 and Melbourne’s A$445,000.

“Both Melbourne and Sydney will continue to be on investors’ watch list for their high-premium assets, but Perth and Gold Coast will be the next favourites for savvy investors,” adds Nicholson. “The Gold Coast apartment market historically commences a new property cycle when the Sydney market reaches a peak.”

Increased foreign property investment has also led to outcries among local Australians that house prices have been driven beyond their reach. Therefore, the government of the state of Victoria introduced a new stamp duty surcharge of 3% on foreign buyers of residential property. This came into effect on July 1 and will affect foreign investors buying into Melbourne. “We haven’t seen any impact on the market yet,” says Nicholson. “It is a minimal amount and purchasing costs are still relatively low compared with other options, so we do not predict that this will have much, if any, impact.” She adds that seasoned investors are also starting to diversify their portfolio beyond Sydney and Melbourne.

Sundance, a 100-unit project in the suburb of Scarborough, Perth

Source: Psaros Development

Malaysia: Opportunity amid turbulence? Ever since the ringgit weakened against the Singapore dollar at the start of the year, sliding from RM2.70 in January to a historic low of RM3.02 on Aug 29, more Singaporeans have been motivated to make that trip across the Causeway for a weekend getaway or just to shop. Many have flocked to buy shoes, watches and handbags. Whether they will capitalise on the exchange rate savings to buy a big-ticket item such as property remains to be seen.

Singapore developers Macly Group and Roxy-Pacific Holdings are certainly betting on that eventuality. The duo have a joint-venture project called The Colony in Kuala Lumpur, located next to Quill City Mall on Jalan Sultan Ismail. They plan to soft launch the project in 4Q2015, with the official launch targeted for early next year. The developers have already started gathering interest in both Kuala Lumpur and Singapore.

“Actually, the ringgit is undervalued,” says Herman Chang, Macly’s managing director. “The market is very sentiment-driven. There are two schools of thought: While there are some who think that it’s best to wait and see, others are of the belief that the Malaysian economy is still sound despite the current political situation.”

Chang has been considered a pioneer of “shoebox apartments” in Singapore since he launched Mackenzie 138 in 2003. The 35-unit boutique condo project was completed in 2006. It contains studio units of 409 to 624 sq ft and two-bedroom units of 764 to 883 sq ft. These units are larger compared with some of the shoebox apartments today, he says, where the smallest is 258 sq ft for Suites @ Guillemard by listed property developer Oxley Holdings.

While Iskandar Malaysia has been plagued by fears of an oversupply, Kuala Lumpur and Penang appear to be more stable investment markets, notes Chesterton’s Han. The ringgit has depreciated some 28.5% from a high of RM2.295 in May 2013 to close at RM2.95 on Sept 1. “Even if you were to sell a property you had purchased 20 years ago, you could see a currency conversion loss as the ringgit has weakened, and fears are that it could weaken further,” he adds.

However, Chang is unfazed. Macly and Roxy-Pacific purchased the 1.4-acre freehold site three years ago. “It’s a prime location,” he says. A monorail station located in front of Quill City Mall will be connected to the highspeed rail station in the future, he adds. From the monorail station, it is just two stops to KLCC Suria Mall and three stops to the Bukit Bintang shopping hub.

Pricing advantage The project has a pricing advantage, says Teo Hong Lim, executive chairman of Roxy-Pacific. The project is priced at RM1,380 psf ($463 psf), while many other condo projects in the vicinity are pitched at the luxury segment and priced in the range of RM2,000 to RM3,000 psf. “Like Singapore, the luxury condo market in Kuala Lumpur is facing the same challenges of lacklustre sales,” he observes. “We feel that given the location, the price point of our project is just right.”

Teo does not believe in timing the market. “I’ve launched projects during the global financial crisis,” he recalls. “I remember launching a project after the collapse of Bear Sterns [in March 2008] and just one week after the collapse of Lehman Brothers [in September 2008]. While the gestation period was longer, most projects typically sold out within one to 1½ years.”

The Malaysian government tightened credit by capping mortgages for the third residential property purchase to 70% loan-to-value ratio. In late October 2013, the government also unveiled a set of property cooling measures, which increased capital gains tax to 30% for foreigners who sell within the first five years of purchase and raised the minimum purchase price for foreign buyers to RM1 million from RM500,000 before.

The property cooling measures, added to a weakening stock market and currency, have also made Malaysian property buyers more price-sensitive, notes Macly’s Chang. The developer has therefore created compact dual-key apartments in the first phase of The Colony, with sizes ranging from 755 to 1,055 sq ft.

The dual-key units give homeowners the flexibility of renting out part of their unit and living in the other, or alternatively, using one part of the unit as an office and the other as their apartment, explains Chang. “It’s ideal for owner-occupiers as well as investors,” he adds.

Macly intends to launch the project in two phases: The first phase will be a tower containing 423 units, while the second phase will be a tower with 300 units. The first phase is scheduled for completion in 2019. “We have seen some sales in Kuala Lumpur,” says Chang. About one-third of the units are priced just below RM1 million, and therefore cater for Malaysian buyers, since foreigners are restricted to properties priced from RM1 million. According to Chang, sourcing construction materials within Malaysia and engaging Malaysian contractors are a form of natural hedging. “The land cost is not an issue as it was purchased three years ago,” he says.

Roxy-Pacific’s Teo sees a growing trend towards inner city living in Kuala Lumpur owing to the traffic congestion. “People don’t mind buying a small apartment for their own use on weekdays, as long as it’s near a shopping mall and an LRT station,” he says. “Then, on weekends, they can go back to their homes farther out in the suburbs.” While the drop in currency may attract Singaporean investors, the bulk of the buyers of The Colony are expected to be domestic buyers, he adds.

Even though the Malaysian government has ruled out introducing capital controls like what it did 17 years ago, there is still speculation that it may do so, says Han. This is due to an economic task force set up by Prime Minister Najib Razak recently, which includes former Second Finance Minister Nor Mohamed Yakcop, who helped design Malaysia’s capital controls and currency peg during the Asian financial crisis in 1998.

This article appeared in the City & Country of Issue 693 (Sep 7) of The Edge Singapore.

Tags: