Monday, June 11, 2012

Tiny 'shoebox', big questions

Straits Times: Mon, Jun 11
THE headline numbers could not have painted a rosier picture: New private home sales in April climbed to a three-year high of 2,487 units.

But take a look at the stock market, and the lacklustre performance of the property counters does not reflect the same confidence as shown by home hunters in their buying frenzy.

This is unlike previous property market rallies, which inevitably triggered a sharp run-up in listed real estate developers' shares.

Sure, the deepening gloom in the world's financial market plays a part in dampening investors' appetite for equities. There is also the risk of further measures by the Government to remove the froth that may be forming in the property market.

But one can also argue that property counters make ideal safe havens for risk-averse investors to park their nest eggs, given the buoyant sales they are enjoying.

So why is it that the shares of listed property developers are not getting any positive re-rating from investors in their current flight to safety?

Maybank Kim Eng analyst Wilson Liew observed in a May 16 report that the exuberance in the residential property market is mainly confined to the mass market, where 'shoebox' units that have areas of 550 sq ft or less are being eagerly snapped up.

In contrast, sales in upmarket condos have stayed subdued, while the resale property market is fairly quiet.

This could be due to the 'affordability' factor, according to Citi Investment Research analyst Wendy Koh, who estimated that about half of the shoebox unit buyers had been HDB heartlanders.

As she observed, prices have shot up by 30 per cent in the past three years, yet heartlanders can still afford to buy shoebox units as they are priced below $1 million because the size of the units have shrunk below 600 sq ft.

While the stock market and residential market are very different in nature, what is interesting is that similar 'affordability' arguments have been used in touting the merits of buying penny stocks and shoebox units.

The intended audience is also broadly similar - the average HDB heartlander with some cash to spare.

This has led to a belief among some stock market strategists that heartlanders may have forsaken the stock market to make big wagers on shoebox units, lured by the ultra-low mortgage rate of 1 per cent.

Buying a new apartment offers another benefit: The buyer incurs only a small monthly cash out- lay after making his initial downpayment. This essentially gives him a long-dated purchase option, as he waits for his condo to be built.

If he then sells it when the unit gets its temporary occupation permit (TOP), this works to his advantage, since the Government now levies a stamp duty on a sliding scale on homes sold within four years of purchase.

But therein lies the concern: The penny stock rally always ends in grief once the liquidity is removed. This raises the question as to whether a similar fate awaits a shoebox unit buyer, if interest rates are jacked up sharply.

There is another observation at recent property launches worth highlighting - the slow pick-up in new condo sales after the initial buying frenzy.

Daiwa analyst Tony Darwell said: 'While the initial weekend launch sales have been firm with take-up rates of between 25 and 30 per cent, sales slow down significantly after that.'

This has caused the total inventory of unsold units to jump to 13,167 units in April, from 12,833 units as at the end of last year.

The worry about this inventory accumulation is that it may escalate into a huge oversupply of condos as more of them, built on Government Land Sales sites, are launched.

The redeeming grace is that so far, the resale market seems to be holding up well. There were 2,551 resale non-landed transactions in April and last month. This is already higher than the 2,117 units sold in the first three months of the year.

But analysts have noted that while the appetite is still good for condos whose sizes are 1,000 sq ft or more, the popularity of shoebox units in the resale market is untested, even though the supply is expected to grow from the current 2,500 units to about 9,700 by 2015.

This raises another question, as to whether the market can absorb the large number of resale transactions that may emerge when the units sold now get their TOPs a few years down the road.

There is also no guarantee that they can be rented out as this will depend on the economic climate and employment conditions then.

Of course, some will argue that the Government can try to stir up housing demand by removing some of the curbs it has put in place, like the additional stamp duties levied on residential property purchases by foreign buyers.

But unless the global economic picture improves dramatically by then, the world's would-be property buyers will be spoilt for choice.

It may explain why investors are steering clear of buying property counters, unless the exuberance witnessed in shoebox units is repeated in the rest of the real estate market...
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Team Marshe
Martin Koh/ Sherry Tang
9383-3992/ 9844-4400

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