Introduction

The old trend has re-emerged in the real estate market right now, that is, the ‘second act’ of small-size apartments, be it 4-room HDB flats or sub-900 sq ft condominium units (which sold like hot cakes in the February/March 2009 period).

In fact, the transaction volume of 4-room HDB resale flats broke a 5-year high record, hitting 1,013 deals in March 2009. In the meantime, flat owners from the heartlands are flocking to developers’ show-flats and snapping up smallish units with a vengeance – like the good old days.

However, on the larger front, the Singapore economy, as well as the rest in the civilized world, is not providing any good reading in the health chart. The unemployment rate in Singapore is still hovering at high level and our banks are still watching their own bottom-line. The euphoria at the showrooms might be giving out the wrong signal at the wrong time.

(A) The big picture of the larger economy

[A.1] Lenders less adventurous in a cautious market

Contrary to the upbeat reporting on the performance of the new home segments in recent months, some property buyers in the secondary market are having eggs on their face after the lending banks reduced the loan quantum at the eleventh hour. This may disqualify the buyers from the purchase as the shortfall between the two amounts (one in the letter of in-principle approval and the other in the letter of offer) must be paid in cash. And if the borrowers were to walk off from the loan offer, there is a punitive 1% to 1.5% cancellation fee.

In the meantime, more real estate salespersons are cursing their luck when their prospects are in such predicaments – it means more works, worries and uncertainties for the salespersons as long as the deals are still hanging in the balance.

[A.1.1] Sliding valuation prices to be blamed

The banks have attributed the cause of the predicaments to the valuers, on whose advice the banks approve the loan quantum. But the valuers rightly pointed out that the inherent time lag in the relay of property sales information makes it difficult for them to come up with the most up-to-date opinion.

And there is nothing neither of the parties can do as the loan offer is usually approved based on a current indicative valuation, but before the loan is disbursed, the bank will call for a formal valuation which is yet again based on the latest transaction data.

[A.1.2] Low SIBOR does not help

The three-month Singapore Interbank Offered Rate, or Sibor, is now near historical low stooping at 0.68% in February 2009. The lowest Sibor had gone down was at 0.63% in June 2003.

However, new borrowers of home loans will have none of the advantages. This is because to compensate for increased risk and the higher cost of capital, most banks have increase the spreads that they charge above Sibor, making Sibor-pegged home loans more expensive.

Sibor is the rate at which banks lend to one another. It has been dropping since September last year, and is expected to stay low.

[A.2] Export slump in Singapore continued

According to figures released on 16 March 2009 by trade promotion agency International Enterprise (IE) Singapore, Singapore’s non-oil domestic exports (NODX) tumbled 23.7% from a year ago to S$9.73 billion in February 2009. A month ago, Singapore's NODX plunged a record 34.8% from a year earlier, along with other Asian exporters such as South Korea and Taiwan. The two months’ figures effectively mean that the recession in Singapore has deepened.

[A.2.1] Both the government and private sector pessimistic

The private-sector economists had forecast an 8.5% fall in gross domestic product (GDP) in the first quarter (Q1) of 2009. Likewise, Minister Mentor Lee Kuan Yew told Reuters on 4 March 2009 that the contraction in export could probably drag down Singapore’s GDP growth by as much as 8% in 2009, despite the government’s earlier forecast of a 2% to 5% contraction this year.

Meanwhile, the Prime Minister also said that Singapore's GDP could shrink by 8%, if the manufacturing slump was not compensated by growth in other sectors. The Singapore economy grew only 1.1% in the whole of 2008 compared with 7.8% in the previous year.

If the slump continues, the real estate market will be hit as private businesses which had used the appreciated value of their homes or other non-residential assets for working capitals may be forced to sell their security in order to cover the margin in the credit lines.

[A.2.2] Singapore dollars may be re-valued in April 2009

Citigroup said that the trading band for the Singapore dollar could be adjusted downwards as early as April 2009 to combat the negative effects of the export slump. An expensive Sing dollar could further dampen demand and prevent export recovery.

Cheaper Sing dollars will be better for Singapore as it will boost manufacturing activity and help the service sector which does not rely on import.

However, it would mean more expensive imports for the construction sector which will also mean higher substitution costs for the real estate market. The positive effect will be higher development costs for property and thus capital appreciation for existing home owners.

[A.3] Expect more actions at property auctions

While the requests for invitations as well as the turnout at auctions have been overwhelming so far this year, only one out of the 23 properties placed under the hammer was successfully sold. The rest were withdrawn after some opportunistic bids which went below the reserve price.

An auctioneer observed that buyers might still be apprehensive that the current price level was still not the lowest. Another auctioneer said that the bidders might be unwilling to pay the seller’s price for fear of not being able to obtain financing.

Property consultants insist that the healthy turnout at the events should be interpreted as an indication of strong underlying demand.

[A.3.1] Auction transaction value up

In a separate report on 28 March 2009, Colliers International said that there were 41 foreclosed private homes put under the hammer in the first quarter (Q1) of 2009. This is an 18% increase from the fourth quarter (Q4) of 2008.

In Q1 2009, there were a total of 189 auctions, including private homes put up for sale by the owners. Though only 6% were sold successfully, it was better than the 5% success rate in Q4 2008.

In March 2009, eight properties worth a total of S$12.955 million were auctioned off, bringing the total auction transaction value in Q1 2009 to S$17.94million. This is a 234% increase from Q4 2008.

Prepared by Sam Gian - Independent Real Estate Sales Trainer