Where is the bottom?

December 8, 2014 10:56 AM SGT

SINGAPORE: Rising mortgage costs on the back of an increase in interest rates are expected to exacerbate an environment that is already seeing softening rents and slumping prices amid climbing new-home supply. How much will prices correct?

Until recently, Sentosa Cove conjured up images of lapping water, man-made beaches and luxury homes with breathtaking sea views.

Prices of waterfront bungalows scaled new heights, reaching a peak of $39 million in February 2012, and luxury condominiums crossed $3,000 psf, bringing the prices of these 99-year leasehold properties on a par with those of their freehold counterparts in the prime districts on the mainland of Singapore.

Many of these waterfront homes were purchased by wellheeled foreigners, some as primary residences, but more as holiday or weekend homes.

Now, Sentosa Cove has come to represent the epicentre of distressed sales in the luxury residential market.

The tide of foreign capital has since gone out, swept away to other shores by a slew of punitive property cooling measures and the introduction of the total debt servicing ratio (TDSR) loan framework in Singapore.

A number of these high-end condos have shown up like beached whales in local banks’ non-performing loan (NPL) books.

For 3Q2014, United Overseas Bank (UOB) reported a 12.3% q-o-q rise in NPLs in its Singapore and Malaysian housing loan portfolio to $502 million.

The defaulted loans are said to have a loan-to-value ratio of 75%, based on current market valuations, according to Maybank Kim Eng in a report on Oct 31.

“The management does not expect more to be recognised,” says Maybank Kim Eng’s analyst Ng Wee Siang.

In Singapore, the main problem was the mortgage portfolio, where further provisioning was taken for “a Sentosa development project” as prices fell, explains CIMB analyst Kenneth Ng, in his Oct 30 report.

Jimmy Koh, managing director and head of investor relations at UOB Group, says: “We are confident we’re on the other side of this issue and we are confident about the resilience of the rest of our housing loan portfolio.” In July, a local bank offloaded two units at Sentosa Cove at up to 45% below their original purchase prices.

Both were 2,777 sq ft, four-bedroom apartments at an upscale condo called Turquoise.

One unit on the third floor was sold in a private treaty deal by Colliers International for $3.88 million ($1,397 psf), according to a caveat lodged with URA Realis on July 22.

This was 45.4% less than the $7.1 million ($2,558 psf) the original buyer had paid for the property in November 2007.

The other unit, on the second floor, was sold by DTZ in a closed tender for $4.03 million ($1,450 psf).

This was a markdown of 43.2% from the previous owner’s purchase price of $7.09 million ($2,553 psf) in Nov ember 2007.

The two recent buyers of the units at Turquoise were believed to be Singa poreans, while the original owner of both units had been a foreign national.

The 91-unit luxury project was first launched by developer Ho Bee Land in late 2007, and completed in 2010.

Close to half the units at Turquoise have been sold, with the rest held by the developer for investment, and are fully leased to date.

More mortgagee sales According to property consultants, there are more mortgagee sales lurking beneath the surface elsewhere in Sentosa Cove.

For example, two units at The Marina Collection were put up for mortgagee sale towards the end of last year — one in September, and the other in October, recalls a property consultant who declined to be named.

However, those units have since been withdrawn completely from the auction market.

One of the units at The Marina Collection is a 2,185 sq ft, four-bedroom- plus-study apartment on the third floor, while the other is a 2,099 sq ft, three-bedroom-plus-study unit on the first level.

The bank is said to have decided to hold them for rental income instead of selling them in the current market.

According to a source, it is reluctant to sell at the prices which the mortgagee sales at Turquoise had fetched four months earlier.

The local bank is said to be still indicating around $6 million for each unit.

Another unit at The Marina Collection was put up for sale by its private owner at JLL’s auction on Oct 30.

The three-bedroom, 1,873 sq ft apartment on the third floor is currently tenanted.

It was put up for auction with an opening price of $4.4 million ($2,349 psf), but was withdrawn as there were no bids.

The opening price was already below the original purchase price of $4.87 million ($2,600 psf) in December 2011.

The 124-unit upscale condo was developed by Lippo Realty and completed in 2011.

Units in the development are located next to One°15 Marina Club, and enjoy views of the marina as well as the sea.

When The Marina Collection was first released in December 2007, units were sold at prices ranging from $2,620 to $2,912 psf between December 2007 and June 2008.

This was at the peak of the market, just before the global financial crisis.

It was re-launched in 2010, to coin cide with the debut of two other luxury condos in Sentosa Cove.

One was City Developments Ltd’s (CDL) 228-unit Residences at W, which sold some units at prices ranging from $2,521 to $2,968 psf, according to caveats lodged in 2010.

The other was the 151-unit Seascape, a joint development by Ho Bee Land and IOI Group, where units had direct sea views and were sold at between $2,537 and $3,146 psf, according to caveats lodged.

CDL has reportedly sold about 10% of its units at The Residences at W, and is holding the rest for rent.

The joint venture that owns Seascape sold about a third of the units, and has successfully leased out the remaining units.

Another collaboration between Ho Bee Land and IOI is the 302-unit Cape Royale, completed last year.

Units have not been released for sale, and are only available for lease.

Identifying ‘hotspots’ Sentosa Cove is not the only “hot spot” for mortgagee sales.

Grace Ng, deputy managing director of Colliers International, is seeing more mortgagee sales in other prime districts, such as Marina Bay and the traditional Orchard Road districts of 9, 10 and 11.

As units in these prime districts tend to have higher absolute prices, generally above $3 million, buyers expect steeper discounts at auctions.

This is because fewer buyers can afford these properties with the TDSR in place, explains Ng.

Demand from foreigners has also fallen as a result of the additional buyer’s stamp duty (ABSD) of 15% levied on all residential property purchases, in addition to the TDSR.

As for auction properties in the mass- market segment, typically priced at $1.5 million or less, a lower discount is generally offered as their prices are within the reach of most buyers, she adds.

For example, at Colliers’ auction on Oct 29, two units at the high-end freehold condo, The Laurels on Cairnhill Road, were put up for mortgagee sale.

One was a 1,302 sq ft, threeplus- study corner unit on the 11th floor that had an opening price of $3.6 million ($2,765 psf).

The other was a 1,926 sq ft unit on the first level overlooking the swimming pool.

It has the same three-bedroom-plusstudy configuration, but comes with a large private enclosed space.

The opening price at the auction was $4.1 million ($2,129 psf).

Both units at The Laurels did not receive any bids and have been withdrawn until the next auction.

“There was a lot of interest in those units.

It’s just a matter of price,” notes Ng.

The 229-unit freehold The Laurels was completed last year, and is fully sold to date.

A residential condo that found a buyer at the Colliers auction on Oct 29 was a 1,302 sq ft unit at The Medley on Lorong G Telok Kurau.

It fetched $1.412 million ($1,084 psf).

JLL’s auction the next day saw the same reception for the mortgagee sales of larger prime condos.

A 1,873 sq ft, three-bedroom unit at the 99-year leasehold Orchard Scotts on Anthony Road with an opening price of $3.2 million; a 3,175 sq ft penthouse at Taipan Jade in the east with an opening price of $2.1 million; and a four-bedroom unit at the newly completed Flamingo Valley in Siglap (also in the east) with an opening price of $2 million, were all withdrawn as no bids were received.

Meanwhile, a mortgagee sale that found a buyer at JLL’s auction last week was a 1,399 sq ft, freehold apartment at Haig Court, off Haig Road in the east.

It went under the hammer for $1.75 million ($1,251 psf).

Haig Court is a 360-unit freehold condo that was completed a decade ago.

“This may be a good time for astute buyers to pick up properties in these prime districts at good prices,” says Colliers’ Ng.

“Some of the older developments may also have enbloc potential over the long term.”

Rising mortgage costs — who’s at risk? More casualties are expected in the residential market.

“Investors who have stretched themselves financially are more at risk,” points out Ong Teck Hui, JLL’s national director of research and consultancy.

“It could be a double whammy — interest rates rise, leading to higher loan repayments, while the rental market softens simultaneously, leading to lower-than-anticipated rental income to service loans.” The most vulnerable are investors who have taken out loans for multiple property purchases prior to the TDSR in June last year, reckons Lee Lay Keng, DTZ’s regional head of research for Southeast Asia.

Colliers’ Ng agrees.

The market exuberance of recent years was underscored by a rise in the number of multiple property investors, some of whom had snapped up units with friends or family members, with the intention of “flipping” them for a quick profit prior to completion, she notes.

Such investors may now be caught as they are unable to offload the units quickly.

More of such distressed sales may occur, especially if the buyers had purchased the properties at peak prices, she adds.

Distressed sales are expected to mount next year and DTZ’s Lee reckons they will largely be confined to the high-end condo market.

The majority of new completions are in the suburban areas.

No doubt, some investors had purchased units in suburban condos and now face difficulties securing tenants amid the stiff competition.

They may then be forced to sell if they are not able to service their mortgages, she says.

The prime districts may have suffered the most, both in terms of weakened demand and plummeting values.

But alarm bells are also ringing elsewhere.

For example, many shoebox or micro apartments have been sold in the suburbs, JLL’s Ong warns.

In a rental market downturn, those near the MRT stations and amenities are likely to fare better than those in locations that are less accessible, as it is more challenging for the latter to secure tenants, he notes.

A couple of shoebox units surfaced as mortgagee sales at auctions recently.

A 388 sq ft unit at EiS Residences on Haig Road was put up for auction by Knight Frank on Oct 21 with an opening price of $620,000 ($1,598 psf), but found no takers.

Another shoebox unit, a 420 sq ft studio apartment at Casa Aerata on Lorong 26 Geylang, was said to have fetched $550,000 to $560,000 in a private treaty deal recently.

It was also a mortgagee sale.

Casa Aerata is a boutique 78-unit freehold apartment block, expected to be completed this year.

With the property cooling measures remaining intact, housing demand is likely to stagnate further, “especially in the face of possible rising mortgage costs and a large supply of newly completed units”, says DTZ’s Lee.

“The expectation that interest rates could possibly increase should have been factored into buyers’ decisions.” Colliers’ Ng says the TDSR has built in an increase in interest rates for financial institutions to calculate home buyers’ affordability.

A 3.5% rate is applied for residential property purchases; for commercial property purchases, a higher rate of 4.5% is used.

If the increase in interest rates is gradual against the wider backdrop of an improvement in the US economy, and the Singapore economy continues to see positive economic growth, DTZ’s Lee expects the property market to hold up, and widespread distressed sales forestalled.

‘Selling pressure’ According to JLL’s estimates, 17,000 to 18,000 new private homes are likely to be completed in 2014, substantially more than the 13,150 completed last year.

And 2015 and 2016 will see more than 20,000 units completed each year.

“This will intensify competition in the leasing market and exacerbate the softening in rentals,” says Ong.

He sees a “substantial drop in rents” affecting some investors adversely, especially if they had not anticipated the decline when they purchased their units under buoyant market conditions in the last few years.

Most investors will try to ride out the rough patch in the hope of capitalising on the next peak, says Ong.

This was what happened in previous market downturns.

But those who are unable to hang on will face selling pressure, he cautions.

Colliers’ Ng advises investors to hold on to their properties, “even if monthly rental income is insufficient to cover the entire mortgage payment”.

She reckons it is better to get a regular income stream and continue to top up the balance with cash.

“This is not the right time to sell, unless owners are prepared to reduce their asking prices.

Buyers are opportunistic now and tend to ask for hefty discounts in view of falling property prices.

They will only commit to a purchase if they get a real bargain.” Downside risks continue to mount.

It’s not just the strict financing and regu latory framework which has curtailed demand and weighed down prices, says Ng.

Global uncertainty is also creating turbulence in the financial markets and, therefore, hampering growth in the domestic economy, she adds.

With homebuyers maintaining a cautious stance, the take-up of new homes in 2014 could potentially fall to between 7,000 and 8,500, which is a contraction of 43% to 53% from last year’s 14,948 units.

Ominously, this year’s projected sales would be the lowest annual sales since 2008 (4,006 units), when the global financial crisis hit.

Island-wide, prices are expected to see a full-year drop of no more than 5%, according to Colliers.

Meanwhile, the luxury-condo segment is expected to see a steeper slide in prices of some 10% by year end.

Deutsche Bank research analyst Joy Wang is forecasting a further drop of 10% in 2015.

What’s clear is that there will be more pain ahead.

This article appeared in the City & Country of Issue 651 (Nov 10) of The Edge Singapore.

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