Friday, March 1, 2013

Staying ahead of the curve

Three key developers look at the challenges ahead and how they can tap the opportunities presented by the market

The Business Times
MARCH 01, 2013


Wen Khai Meng, chief executive officer, CapitaLand Singapore

Chia Boon Kuah, chief operating officer of property sales and executive director, Far East Organization

Liam Wee Sin, president (property) UOL Group

The Business Times gathered three established Singapore property developers for a discussion on the key challenges they are facing as they navigate through uncharted waters - created by unprecedented supply on one hand and strong liquidity on the other. Rising construction cost due to curbs on foreign labour is a common concern. Creating further upward pressure on property prices is rising land cost. And when interest rates do start to rise, that will have an impact on both developers and home buyers. The developers also let us in on some of their plans to tap the opportunities being presented in the market.

Q: The Singapore property market is seeing unprecedented supply on one hand and strong liquidity on the other. How are you navigating through these uncharted waters?

Chia: Property continues to be an important asset for homeowners and investors, bringing with it their aspirations of secured long-term value and lifestyle progression. This is particularly so with the current economic volatility in global markets, high liquidity in Asia, negative real interest rate environment, and limited choices to invest hard earned savings. In the Singapore property market, the supply situation means more options for buyers and added impetus for developers to differentiate ourselves with distinctive concepts that deliver value to the market.

There is steady underlying demand and we have seen buyers respond favourably to well-conceived products in desired locations as the market adjusts to a new price-value equilibrium. In the long term, our focus is still to develop attractive products that meet the needs of the changing market and being customer centric by delivering innovation that adds value and good service.

Wen: We believe in the long-term prospects of the housing market in Singapore. As such, we will continue with our disciplined approach in acquiring sites through Government Land Sale tenders and private en bloc sales to add to our residential development pipeline.

Liam: The prolonged low interest rate and high liquidity environment continues to support the property market amid the economic uncertainties. This has resulted in a record level of housing transactions last year and rising end-sale prices. The concern is the large supply of completed units in the coming years and whether we will be faced with an oversupply situation. We therefore adopt a cautious stance as the economic horizon is still cluttered and there are still downstream risks.

Q: What are the major challenges facing your group?

Wen: We are operating in an open, transparent, and competitive market and it is getting increasingly challenging to acquire sites at good prices. The latest round of market cooling measures announced in January 2013 aims to curb investment demand. Transaction volumes and prices will moderate this year due to higher cost of purchase, higher cash downpayment, and lower loan-to-value borrowing limits. Apart from managing the impact of the measures, the real estate industry also has to manage other challenges such as rising construction costs due to foreign labour crunch and restrictions in working hours at construction sites.

Liam: The Singapore property market is a very small market with the private sector comprising less than 20 per cent. Being a safe haven, it has also attracted many new entrants and foreign players. This has resulted in steep competition and escalating cost of land. The several rounds of cooling measures, though necessary to check excessive speculative buying and runaway property prices, causes uncertainty and has resulted in distortions in certain sectors of the property market.

Retail malls have to contend with tenants cutting back on their expansion plans or even scaling down due to the tightening of foreign worker intake. We are also concerned with rising construction costs due to higher labour and material costs and the high volume of infrastructural works coming on-stream.

Chia: In the context of highly urbanised land-scarce Singapore, the availability of land for development is vital to the continued operation of our business. The high land cost puts further upward pressure on property prices. In the midst of an uncertain global economy that is vulnerable to shocks, a situation of rising land cost and a surge in property prices is a major risk to the property market and the overall economy.

Adding to the challenge, construction costs are going to be impacted by the restriction of foreign labour, particularly for new projects. Moving forward, we will need to factor these considerations into our business planning and we have to keep upping the ante in terms of our products and our services to deliver value and stay ahead of the curve. It means being nimble to respond to the market and our customers.

Q: What pitfalls do you envisage for developers as well as for home buyers?

Liam: Historically, the Singapore property market has suffered major corrections due to external factors such as the Asian and global financial crises, Lehman's collapse, and the Sars outbreak. This time round, the surge of quantitative easing in the developed countries to support their economies is causing cheap money to flow elsewhere. There is, however, a concern that interest rates may not continue to remain low. Ironically, it is when the economies of the major economies are back on track that interest rates may start to creep up.

Wen: Developers are exposed to market and regulatory risks. Interest rates are expected to rise at some point in time. When interest rates rise, developers will have to bear higher holding costs. Rising interest rates will also impact some homebuyers' ability to service their housing loans. For property investors, their ability to lease out properties is likely to be affected due to the expected reduced inflow of foreigners.

Q: In some circles there is a view that the measures introduced to curb foreign buying as well as to cool the property market generally are blunt instruments. What other options do you think the authorities could have introduced?

Liam: The overall intention of the cooling measures is to moderate prices, provide a more stable and sustainable property market, and to prevent a more serious correction further down the road. Cooling measures may have their limitations and unintended knee-jerk effects. The prospect of having to pay ABSD on their next property purchase may cause some sellers to hold back divesting their property and thereby reducing the supply of properties available for sale in the secondary market. The rush to beat the midnight deadline when the latest property curbs were announced on the evening of Jan 11 resulted in a surge in transactions. Overall, nobody wants a property bubble. Not even developers.

Chia: The cooling measures discourage speculative buying, not long-term home ownership. They are macro prudential policies to rein in asset price inflation and avoid a build-up of imbalances amid the present extraordinary conditions of a low interest rate environment and abundant liquidity. It is reassuring that the authorities have made clear these measures are short term and will be reviewed as the market returns to more normal conditions. A stable and sustainable property market in Singapore is ultimately to the benefit of all stakeholders.

Wen: Eighty-two per cent of Singapore residents live in HDB flats (according to Department of Statistics' Population Trends 2012 report). Singapore residents living in private homes account for only a small percentage. To address the imbalances in housing supply and demand, the government should look into the supply situation of Housing & Development Board flats and ensure that they remain affordable to everyone.

Q: Please share your perspective on how the property market is changing and how you are responding to the challenges as well as the opportunities.

Wen: With the government's focus on enhancing accessibility by providing an extensive public transport infrastructure and building urban centres in various parts of Singapore, including Jurong Lake District, one-north, Paya Lebar Central, Tampines, Woodlands, and Punggol, many areas in the Outside Central Region will become increasingly attractive to homebuyers and businesses. All these present opportunities for developers.

Liam: Singapore is transforming into a bustling and globally integrated metropolis amid strong competition from other cities for businesses, talents, and tourists. Given the constraints on land availability, we need to intensify and optimise use of land, infrastructure, resources, and services. A high-density city can, however, be efficient, liveable, and sustainable if it is transformed into a compact city through good city planning and architecture. We can create a work-live-play environment with high connectivity and yet preserve sufficient green space to fulfil one's innate affinity towards nature.

As a developer, we can contribute to this goal by promoting quality developments through product innovations and architectural excellence, offering housing choices and creating commercial nodes for employment and leisure activities. Above all, strong emphasis must be placed on sustainable developments to maintain liveability for future generations.

Chia: With increasing affluence, consumers today are exposed to a broader array of ideas and lifestyles. They are more discerning and global in their outlook and expectations and therefore demand much more than basic shelter and functional space. They now seek to be inspired by their surroundings and to get more out of their live-work- play spaces, while addressing both functional and lifestyle needs.

To stay ahead of the curve, we will also continue to seek partnerships with enlightened architects and designers, as well as with developers who can bring complementary experience, to come up with exciting concepts. Our recent efforts include the Far East Soho concept and mixed-use developments like The Hillier/HillV2 and The Tennery/Junction 10, to cater to a new market of real estate consumers who value the convenience, connectivity, and multiple space functionalities of properties in affordable "trans-urban" locations (ie, local areas that are transitioning to urban centres). To cater to the luxury segment, we launched our Inessence collection of bespoke designer homes in prestigious locales.

We have also introduced integrated housing concepts in projects such as euHabitat, Hillsta, and eCO which offer varied housing options within one development. Moreover, we offer unique cluster housing developments that bring together the exclusivity of a private landed estate with attractive condominium facilities. This year, we intend to roll out fresh interpretations of the Far East Soho and Inessence brands, as well as mixed-use concepts, in varied scales and locations, to cater to different customer segments.

Q: Is your business in terms of geographical spread as well as business segments likely to change in the next three years?

Chia: Far East Organization's business is grounded in our real estate expertise. In addition to residential property development, we also have an established and growing hospitality business; industrial and commercial properties including offices, medical suites, and retail; and are incubating other real estate dependent businesses such as restaurants and franchised food.

We do have assets and business interests in the region such as Malaysia. We are also looking to expand our footprint beyond Singapore. Singapore will continue to be our base and priority. On business prospects outside of our shores, we will seek to have a sustainable, meaningful involvement, rather than an ad hoc, one-off approach. If there are appropriate sites or partnerships that come our way, we would be happy to evaluate and consider expanding our reach.

Wen: CapitaLand has realigned into four main businesses - CapitaLand Singapore, CapitaLand China, CapitaMalls Asia, and The Ascott Limited (Ascott). With this change, it is better positioned to focus on its key markets of Singapore and China. CapitaLand will continue its business strategy of focus, balance, and scale to build on the company's strong fundamentals and track record. We will continue to acquire suitable sites for both our residential and commercial pipeline in Singapore and China.

For our shopping mall business, the key markets of Singapore, China, and Malaysia will continue to grow this year. Retail sales are also expected to grow in these three markets and this bodes well for the performance of our shopping malls.

CapitaLand's service residence business unit, Ascott, is the world's largest international service residence owner- operator with more than 31,000 apartment units in over 200 properties. Its portfolio spans more than 70 cities across more than 20 countries in the Asia-Pacific, Europe, and the Gulf region. Ascott will continue to grow to achieve its target of 40,000 apartment units globally by 2015. Besides expanding its presence through securing more management contracts and forming strategic alliances, Ascott will seek investment opportunities in Singapore, China, capital cities of South-east Asia, London, Paris, and key cities in Europe.

Liam: There will be no major shift in our business strategy. Our focus will still be Singapore, and China and Malaysia will remain as our key overseas frontiers.

Q: Many Singaporeans are being drawn to overseas property markets because of the various rounds of property cooling measures at home. What advice do you have for them?

Chia: Over the years, Singaporeans have become more interested in overseas property, on the back of growing affluence and also as our lives become increasingly global. We've seen the example of parents purchasing property for their child who is studying abroad, partly for the child to use, but also as an investment; or Singaporeans who buy property abroad while they are posted overseas for work and retain this asset when they return, and so on.

It is not always easy being an absent owner or landlord, particularly if the invested property is too far away. Generally, the considerations should include: the level of familiarity the buyer has with the overseas market; tax implications; the management of the property in terms of regular maintenance, rent, or sale; and the overall cost versus return on investment.

Wen: Property investors should be aware that overseas regulatory frameworks can be quite different from Singapore's. If investors do not understand the regulatory framework, it may impact their ability to realise their investment objectives. In addition, investors should also take into account the political risks, exchange rate risk, and track record of overseas developers when investing overseas.

Liam: Given the low interest rate and inflationary environment, there are people seeking to put their money to work and invest in residential property in Singapore for wealth preservation. The imposition of the additional buyer's stamp duty (ABSD), however, may cause some to invest overseas instead. But this has its own risks and pitfalls such as the lack of transparency, unfamiliarity with the market and taxation policies, currency exchange fluctuations, and other hidden costs. It is important to know one's motivation for buying and to do one's due diligence.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C

Senior Sales Director
DTZ Property Network Pte Ltd (L3007960A)

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