The case for investing in prime residential property in Singapore

February 2016

Source: Demographia, JLL estimates

Figure 3: Home price to income ratio for Singapore and global citiesSource: JLL estimates

Figure 1: Price change from the last peak for Singapore

Prime resi

Suburban resi

Suburban retail

Prime office

Orchard retail

Logistics

Business Parks

25%

20%

15%

10%

5%

0%

3.53.02.52.01.51.00.50.0

Price decline from peak Years from peak

20

2015

5.6

SingaporeAuckland

LondonTokyo

San FranciscoVancouver

San JoseSydney

MelbourneHong Kong

7.3

19

11.4

2010

1816141210

86420

Source: JLL estimates

Figure 2: Price gap in USD between Singapore and global cities

London,92%

Tokyo,14%

New York,82%

Hong Kong,165%

-20%0%

20%40%60%80%

100%120%140%160%180%

2007 2008 2009 2010 2011 2012 2013 2014 1H15

The average home price to income ratio of 7.3 times in Singapore was similar to other global cities excluding Hong Kong in 2010. However, by 2015, after prices in Singapore fell while those in other cities rose, Singapore’s home price to income ratio of 5.6 times is a third lower than the 8 to 9 times for other global cities.

Price declines have been aggressive

Affordable prices for a global citySingapore ranks amongst the top global cities together with London, New York, Paris, Tokyo and Hong Kong. Forbes named Singapore as the 4th most visited city globally. Mercer ranks Singapore as the top city in Asia for quality of living and the 4th most expensive city in the world for expatriates.

Yet, prime residential prices in Singapore are significantly more affordable than these global cities, especially as Singapore prices have fallen sharply while other cities’ prices have continued to climb in the last four years. Prime home prices in Hong Kong are now 165% higher than Singapore. Prime home prices in New York and London were 10-30% higher than Singapore in 2010 but these are now 80-90% higher in 2015. This is because prices in New York and London rose 20-25% in the last five years while those in Singapore fell 20%.

Singapore prime residential prices have been falling since 2012. JLL estimates that the average luxury prime residential price of S$1,991psf in 4Q15 is about 20% below the peak in 2011. Amongst all the asset classes in Singapore, prime residential property prices have corrected the most in the last four years. Office, retail and industrial prices have corrected by just 4-6% while suburban residential prices have declined by 12%.

2 JLL

Source: URA, JLL estimates

Source: JLL Research, URA Realis

Source: Dept of statistics, JLL estimates

Figure 4: Resale residential transactions in Singapore

Figure 5: Mortgage payment as a percentage of gross income

6,000

5,000

4,000

3,000

2,000

1,000

-

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

201 1

2012

2013

2014

2015

Table 1: Change in incomes and home prices since 2003

2003 2015 %change

81-90th percentile household montly income

9,142 17,265 89%

Prime residential price S$psf

1,175 1,991 69%

Suburban resale residential price S$psf

540 958 77%

Suburban home price to income (years)

5.91 5.56 -6%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

20%

25%

30%

35%

40%

45%

50%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E20

17E

30.1%

2.00%

%gross income in mortgage payment Mortgage rate

Prices are close to 2003 recession levels in real terms

We believe prices are already reflecting this. While prime residential prices are 70% higher than 2003 levels, the median household income in Singapore has risen 90% since 2003. Therefore, in real terms, prime residential prices are more affordable in 2015, than they were in 2003. We estimate that a private home now costs around 5.6 years of income, compared to 5.9 years in 2003.

Mortgage servicing ratio is also similarly healthy at 30%Sentiment for Singapore prime residential market is extremely weak. This can be seen in the resale transactions, which fell to 800/year in 2014-2015, similar to levels in previous recessions in 1998, 2001 and 2008.

The case for investing in prime residential property in Singapore 3

Source: MAS

Figure 6: MAS’s estimated impact of recent cooling measures on Singapore residential market

Prices in 2Q14 Transactions 1Q10 to 2Q14 Mortgages from 1Q10 to 2Q14

40%

35%

30%

25%

20%

15%

10%

5%

0%Tax measures and lending measures

New stamp duties

LTV lending TDSR cap Supply

Source: JLL estimates

Source: IRAS, JLL estimates

Figure 7: Estimated cost of buying, selling and holding residential investment property

Figure 8: Singapore residential property tax rates

Cost of buying Cost of selling

30%

25%

20%

15%

10%

5%

0%

Hong KongTokyo

Singapore Paris

Holding (5 years)

SydneyNew York

London

San Francisco

Dubai

Shanghai

Owner Occupied Non Owner Occupied

Tax on property value for holding 5 yrs1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%2 5 10

Residential Property Value S$m15 20

Suppressed prices are largely attributable to policy changes

Transaction costs not significantly higher than other global cities

A positive Catch-22?We believe this policy backdrop is ideal for investments as a positive catch-22 situation exists to limit price declines. Should economic conditions deteriorate, the government could remove some cooling measures to mitigate price corrections. Yet, prices could gradually rise to catch up with global and regional peers.

Despite the increase in buying and selling stamp duties, the cost of property ownership (including buying, holding and selling) in Singapore of 19% is comparable to that of other global cities which range from 14-26%.

The Monetary Authority of Singapore (in its Financial Stability Review, November 2015) assessed that Singapore residential prices could have been 17% higher if the government had not introduced property cooling measures since 2010. These measures include lower loan-to-value limits, additional stamp duties for property purchases and sales, a cap on total debt servicing ratio and increased land supply for residential development.

These curbs successfully reined in excessive mortgage growth and foreigner buying. The MAS stated it will stay vigilant for signs of renewed froth in the market. The authority would also monitor the market for risks of a sharper-than-warranted price correction with spill-overs to the banking sector.

To remove friction in the market and allow more transactions, the government could consider replacing the various additional buyer and seller stamp duties with higher property taxes. Currently, non-owner occupied residential taxes do not differentiate between residents and foreigners and this can be tweaked.

4 JLL

Source: URA, JLL estimates

Figure 10: Estimated unsold units by year of completion

Unsold units Subject to QC charges Seeking block deals

900800700600500400300200

0100

Residential units

2013 2014 2015Year of completion

2016 2017 2018

Source: JLL estimates

Figure 9: Singapore private residential rents

Prime rents Mass rents Occupancy rate

6.506.005.505.004.504.003.503.00

1.502.002.50

95%94%93%92%91%90%89%88%

86%87%

2016

F20

17F

2017

F20

17F

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2015

FSGDpsfpm

Opportunity may lie in bulk deals for residential units in the prime districts

Rental yields are low but could rise with occupancy rates

Prima facie, average rental yield for Singapore prime residential property looks low at 1.8%, close to the mortgage rate of 1.6-2.0%.

Prime rental yield has been stable since 2010 as prices corrected in tandem with rents. However, we expect rents to rise after 2016 as supply in the prime districts is limited. Prime residential rents are now 40% below 2008 levels and are just 8% above the level in 2000. In comparison, the median household income has risen 100% since 2000.

The recent rent decline in the prime districts was due to a compounded average growth of 4.7% in supply in 2010-2013. A large portion of the new units came from enbloc redevelopment projects that were initiated in 2006-2009. The scope for such redevelopment projects have reduced significantly after new stamp duties were imposed in 2011.

We believe there will be more opportunities to buy residential units in bulk in 2016. In Singapore, the Residential Property Act prevents landbanking by non-Singaporean persons or companies. Developers that buy residential land have to complete construction within five years and sell the units within two years of completion, or pay extension charges of 8%/16%/24% of land price of unsold units for 1st/2nd/3rd year respectively. For prime residential units that were completed in 2012, several developers have transferred unsold units to 100% Singapore-owned entities or sold them in bulk at lower prices in 2014-15. This further suppressed prices in a challenging market. We think developers could seek to sell around 1,000 units in bulk in 2016-18 if the market does not improve expediently.

The case for investing in prime residential property in Singapore 5

Source: URA, HDB, JLL estimates

Source: Dept of statistics, JLL estimates

Figure 11: Increase in residents and expatriates in Singapore

New Citizens Expats TotalPerm Residents

90

7080

605040302010

-20-10

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 12: Demand and supply of housing units in Singapore

Ch. In supply Vacancy rateCh. In demand

30,000

25,000

20,000

15,000

10,000

5,000

0

10%

9%

8%

7%

6%

5%

4%

2005

2000

2001

2002

2003

2004

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

E20

16E

2017

E

Source: Land Transport Authority, JLL estimates

Figure 13: Estimated operational MRT lines and population in Singapore

Population (mil) Rail Network (Km)

6.5

6.0

5.5

5.0

4.5

4.0

3.5

2702502302101901701501301109070

2005

2018

2019

2020

2003

2004

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

The key risk to our investment thesis could potentially be stagnant prices due to continued low population growth. The Singapore government has cut population growth to 1-1.5% since 2012 by reducing immigration. In contrast, supply of new residential units is high in 2014-18. This is to compensate for the severely low supply in 2006-2013. Most of the new supply will be in the suburban private residential areas and in public housing estates.

The cut back in population growth was in response to public feedback that population growth since 2006 has outpaced infrastructure and residential development. Since 2010, the government has invested heavily in infrastructure including mass rapid transit, residential development and healthcare facilities. The bulk of these projects would be completed by 2017. Potentially, the government could allow for higher population growth in the next five years.

Risk of continued low population growth

6 JLL

About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 230 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $56.4 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

JLL has over 50 years of experience in Asia Pacific, with over 32,000 employees operating in 83 offices in 16 countries across the region. The firm was named ‘Best International Property Consultancy’ and ‘Best Property Consultancy Asia Pacific’ at the International Property Awards Final 2015 as well as number one real estate advisor in Asia at the 2015 Euromoney Real Estate Awards. www.jll.com/asiapacific.

Regina Lim is National Director, Advisory and Research, Capital Markets, at JLL Singapore. Prior to joining JLL, Regina was the Head of Singapore Equity Research and Head of ASEAN Property at Standard Chartered. She has over nine years of experience covering Singapore developers and SREITs in UBS and Standard Chartered. From 1998 to 2006, Regina worked for Singapore’s Urban Redevelopment Authority, where she undertook property research, land sales policy and planning policy studies. She graduated from Oxford University with a Masters in Engineering, Economics and Management.

About the author

Regina Lim National Director Advisory & Research, Capital Markets Regina.Lim@ap.jll.com +65 6494 7068

The case for investing in prime residential property in Singapore 7

www.jll.com.sg

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