Friday, March 1, 2013

The enduring appeal of ECs

The enduring appeal of ECs
The capital appreciation potential for this hybrid housing form will continue to draw buyers, says LEE SZE TECK

The Business Times
MARCH 01, 2013

The Executive Condominium (EC) market has come a long way since its introduction to the Singapore property market in the mid-1990s, which also coincided with a period of runaway property prices.

The Urban Redevelopment Authority's private residential price index skyrocketed more than 350 per cent from the bottom of the market in Q2 1986 to Q1 1995, translating to a staggering average annual increase of at least 35 per cent during that period. This meant that some of the middle income families or the "sandwiched class" were priced out of the market. The provision of ECs was envisioned to help this group of buyers and perhaps keep private home prices in check.

At that time, the gap in prices between a new mass market private condo and an EC could be as much as 100 per cent. However, buyers must meet a set of eligibility conditions before they can buy an EC unit. (See Table 1)

The EC scheme was put on hold in 2004 when the private residential property market was struggling to recover after a series of unfavourable external events. The suspension was to avoid competition with the private home market at a time when private home prices were affordable to most.

From 1996 to 2005, developers launched 23 EC developments for sale. The last EC launched during that period was La Casa. The EC scheme was re-introduced in 2010 amidst escalating private property prices which jumped almost 40 per cent in one year from the bottom of the market in Q2 2009.

Strong demand for EC units and a bumper supply of land for EC developments saw developers launch 17 EC developments within a short span of three years from 2010 to 2012. There are another seven EC developments which have not been launched for sale yet, of which Forestville and Twin Fountains could be released soon.

As of December 2012, there were a total of 47 ECs developments - 23 completed, 17 launched for sale but not completed yet, and seven which had not yet been launched. In all, there will be an estimated 23,236 completed EC units by 2017. (See Tables 2 and 3)

What is the appeal of ECs that even buyers who can afford private condominiums are snapping them up? Also, with the Government implementing measures to rein in excesses in the EC market and monitoring the sector, will EC developments see continued interest?

Why ECs are popular?

Improved design and features. From building simple gated communities with facilities in the initial days, developers are now offering more bells and whistles to attract buyers wishing to upgrade to subsidised private residential lifestyle living. Heron Bay, for instance, lures buyers with an ensuite private pool with a jacuzzi. CityLife@Tampines, on the other hand, tempts buyers with a 4,349 sq ft presidential penthouse costing $2.05 million, a first in an EC development. Even design features like dual-key units found in condominiums have made their way into EC developments, prompting the Government to step in to regulate the ownership of dual-key units in EC developments for fear of abuse.

Comparable capital appreciation to condominiums. Between 1996 and 2007, the median price of new EC units was relatively stable, hovering around $400 per sq ft (psf) going by caveats data, before jumping to around $700 psf from 2010, in response to rising private property prices and reaching $730 psf in the fourth quarter of 2012. This is a rise of about 80 per cent from 1996.

As for completed EC units transacted in the resale market, their median price nearly doubled between 2001 and 2012, from $370 psf to $730 psf.

Private property prices, on the other hand, moved according to market and economic conditions. The median price of new private non-landed properties was around $740 psf in 1996 and plunged to a low of $408 psf in Q4 1998. It hit a high of $1,130 psf in Q4 2012, a 177 per cent increase from the bottom in Q4 1998. The median resale price of mass market private condos also doubled in the period from 2001 to 2012, from $460 psf to $940 psf.

The price appreciation of resale EC units is therefore comparable to mass market resale condominiums but the entry price for the EC market is relatively lower. This trend is not lost on buyers deciding between an EC and a condominium, which is why many EC developments launched between 2010 and 2012 are almost sold out.

Revised income ceiling. The EC market was given another boost in August 2011 when the buyer's monthly household income ceiling was raised from $10,000 to $12,000. This expanded the pool of buyers who could qualify to buy an EC to include some of those who are contemplating buying a private condo.

Assuming an 80 per cent loan, mortgage service ratio (MSR) of 40 per cent, loan tenure of 30 years and interest rate of 1.5 per cent per annum, a family with a gross monthly income of $12,000 can borrow up to $1.39 million to purchase a $1.74 million EC. Using the median price of $730 psf, a buyer can buy a 2,384 sq ft EC with a budget of $1.74 million. If the MSR is 60 per cent, the buyers can purchase a $2.61 million EC. Even the most expensive EC to date at $2.05 million falls within this price bracket. (See Table 4)

Larger living space at affordable prices. Similarly, buyers who are looking for a larger living space turn to EC developments as the solution. For example, with a budget of $1 million, the largest unit a buyer can buy is a 1,647 sq ft private condo at River Isles in Punggol. But for the same budget, a buyer can get a 1,981 sq ft EC at RiverParc Residence, also in Punggol.
The bigger units in EC developments get sold faster than the smaller units. This demand for larger living space led to developers designing large EC units or more penthouses in some EC developments like CityLife@Tampines and The Topiary.

The eye-popping price of $2.05 million for the 4,349 sq ft presidential penthouse EC at CityLife@Tampines, however, raised questions on whether the size and lofty price tag is appropriate for subsidised housing and if the housing product is attracting the right group of buyers. This prompted the Government to step in to limit the size of EC units to 1,722 sq ft.
Large ECs, however, are nothing new. Many EC developments have units above 1,722 sq ft or even larger than 2,000 sq ft. Furthermore, the higher prices seen for ECs were partly due to the increase in income ceiling. Before the income ceiling was raised in August 2011, the most expensive EC based on caveats was a 2,583 sq ft unit at Esparina Residences sold for $1.3 million in November 2010. After the revision, more units in new EC developments have been priced above that.

No resale levy. ECs appeal to HDB upgraders because there is no resale levy payable to the Housing and Development Board on the sale of their flat. In some instances, HDB upgraders can constitute as high as 50 per cent of buyers in a new EC project.

Deferred payment scheme. Although the deferred payment scheme (DPS) for uncompleted residential properties was withdrawn in October 2007, the scheme remains available to EC buyers. This makes ECs even more attractive as buyers who opt for DPS do not need to service the loan during the construction period.

Moving forward

With the Government stepping in to regulate the EC market in January this year, the landscape for ECs will be changed. Gone will be the days of large EC units as well as big private enclosed spaces (PES) and private roof terraces (PRT). PES and PRT are now counted as bonus gross floor area (GFA) for all non-landed residential developments (including ECs and private condos). Bonus GFA is capped at 10 per cent above the Master Plan control and subject to payment of development charge.

It is likely that developers will omit these features from EC projects as buyers in this market segment are more price-sensitive. The variety of designs for ECs could be limited in the future.

The limit on the size of EC units, however, may not keep them affordable as developers still have the flexibility to raise the psf price. Taking $1.74 million as a guide and the maximum EC unit size of 160 sq m (1,722 sq ft) stipulated as part of the January 2013 property cooling measures, the unit can be sold for as high as $1,010 psf.

But if there is ever a chance that prices of ECs will shoot past economic fundamentals, there could be more regulations such as an MSR for ECs which currently applies only to HDB flats.

Notwithstanding all the controls, ECs will be an alternative to private condos and continue to find favour among home buyers. The high prices for condominiums and the capital appreciation potential for ECs will swing eligible buyers over to the EC market.

The Government's plans to increase the number of professional, managerial, executive and technical (PMET) workers from 850,000 in 2013 to 1.25 million by 2030 will increase the pool of buyers for ECs. The absence of resale levy and availability of DPS will also ensure the attractiveness of ECs for years to come.

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

Senior Sales Director
DTZ Property Network Pte Ltd (L3007960A)

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