Singapore real estate – steadfast and sure while the billows roll

Recent market turbulence had sown fear in the hearts and psyche of investors in Asia and Europe. In the recent melee, investors have been hard pressed to find reasonable yielding investments with an adequate safety rating. Of course, the flight could be back to AAA-rated bonds and treasuries. That is for investors with a mandate to switch between equities and fixed income securities. What about individuals, businesses and private equity firms who do not have that option open to them?

Well, investing in real estate is one investment alternative. It may sound counterintuitive that real estate is even recommended when governments around the world are trying to cool asset prices and interest rates are eking to rise. There is a catch though when we recommend real estate at this moment. That caveat is that investors should look at markets that are fundamentally sturdy, adherence to the rule of law, where supply if constrained by geographical factors and demand is increasing and prices are not toppish. Singapore real estate certainly checks out these requirements very well, particularly in the high end residential sector and also in the business of developing. As global uncertainties increase, looking at the factors impacting our market today, we shall argue a case where as a global investor, it is now an opportune time to take a position in Singapore’s real estate.

With a host of cooling measures in place, Singapore’s high end properties have not gone into frothy territory. Prices for luxury non-landed residential properties are currently 11% off the peak in Q1/2013. As a comparison, general private residential prices are off 6.7%. The reason behind the drop is not that there had been a lack of affordability to begin with, but rather, because of our rapidly rising household balance sheet, there had been too much of it. The more appropriate way to look at how the Singapore’s residential market has been performing is that prices are not in free fall. It is only the volume of transactions that had fallen significantly. More importantly, whilst many cities are experiencing real estate price inflation, the measures in Singapore brought order back to the market. After 2 years of engendering an orderly market decline, the measures have conversely made it more resilient to shocks. Investors should be aware that that these measures are not permanent in nature. It has been 2 years since the last policy implementation to cool the market and one can say that we are closer to the bottom now then we were before.

This point contrasts us with a city like Hong Kong. Although the latter have cooling measures that are almost a mirror reflection of those in Singapore, Hong Kong experienced rising prices whilst we saw prices falling. The strong sovereign nature of Singapore can be said to be a strong positive for overseas entities seeking to diversify from other markets. However, despite this factor being in our favor, prices softened. This means that the measures here, particularly for high end residential properties, have been calibrated at too high a level and would need adjusting.

Some investors have bemoaned the relatively low rental yield from Singapore’s office and residential properties. However, the low yield is a reflection of the strength of country’s fundamentals rather than anything else. With a AAA sovereign credit rating (by S&P), Singapore, rental returns from real estate are bound to track similar rated investments like bonds. Although the 10-year bond was yields increase significantly from 2.27% in March 2015 to 2.69% in June 2015, there is nevertheless still a positive net rental yield spread for most sectors of our real estate market. In particular, Grade A office rental yields still have a 0.9% spread over the government bond yield.

The recent turmoil and subsequent stabilization efforts by the Chinese authorities to bring back order to the Shanghai stock market highlights an important point about real estate. For minority shareholders, they are placing faith in companies which they neither own nor control. Also equity holders rank at the bottom of the food chain amongst creditors. Extreme equity price swings often exposes dubious companies which may be stock market darlings when the going is good but can overnight have the lights turned out on them. Taken in conjunction with the AAA-rating and also the sovereign nature of Singapore, in a worse case economic scenario, investing in real estate here would still ensure that one still has title to the asset, more so if the gearing levels are low.

Two recent centres of instability leads us to the importance of investing in low risk sovereigns. One is China. The need to buy safety is gaining imperative especially amongst there investors as the recent buffeting of the Shanghai and Shenzhen stock markets had proved to be a painful lesson to those deeply immersed in them. Chinese institutions in particular are likely to speed up their construct of a complementary portfolio to their Chinese holdings. With the expected launch of the second Qualified Domestic Individual Investors program dubbed QDII 2, the flow of high net worth Chinese money (those with at least RMB 1 million or S$219,000 can apply) is expected to boost the liquidity in the recipients’ capital markets. Initiatives of this nature, which are part of Beijing’s plans to internationalize the yuan should inject greater liquidity in equity markets overseas and eventually trickle down to real estate.

The second is Greece which though had averted the country leaving the Eurozone but is now caught in between the differing approaches the IMF and the EU has towards the country’s debt restructuring program. Also, further potholes lie ahead on this issue of Greece. Whilst each impasse may be resolved, it nonetheless spawns bouts of volatility across global markets which in turn upset the pension funds. They need a more serene investment landscape.

That Singapore’s net rental yields are low is undeniable. However, this merely reflects the low risk environment that we engender. Presently, there is this general view amongst overseas investors that yields here are too challenging to meet their hurdles. However, the recent outbreaks of volatility may force overseas investors to rethink their notion of risk and return, in particular that of low risk assets. Should they increase their weighting of safe assets, real estate in a country like Singapore stands to benefit even more from the already high levels of global liquidity.

This article appeared in The Edge Property Pullout of Issue 687 (July 27) of The Edge Singapore.

Alan Cheong is head of research and consultancy at Savills Singapore. The views expressed here are his own.