Property remains a popular asset class in Singapore..
Just two weeks ago, flash estimates from the Urban Redevelopment Authority (URA) showed a fifth straight quarter of rising private home prices.
Overall prices, however, rose by a smaller quantum of 0.9% quarter on quarter in the second quarter of 2021 (2Q2021), compared to 3.3% in 1Q2021 and 2.1% in 4Q2020.
Meanwhile, Singapore’s central bank, the Monetary Authority of Singapore (MAS), is keeping a close watch on these numbers.
MAS managing director, Ravi Menon, thinks that the property market is not overheated for now but that the team is “watching it very closely”.
This statement had led to speculation that the central bank may impose further cooling measures should prices rise unabated.
Investors should be concerned as well.
Should MAS clamp down on rising property prices, related sectors may be adversely impacted.
Property developers
The first in line to get hit by a residential property cool down is the property development sector.
Property giants CapitaLand Limited (SGX: C31) and City Developments Limited (SGX: C09), or CDL, will face dampened demand for their Singapore residential projects.
For CapitaLand, its residential, commercial strata and urban development division made up just 15% of its total assets of S$84.4 billion as of 31 December 2020.
We do not know how many of these developments are from Singapore, however, this division made up close to 44% of the real estate conglomerate’s operating profit.
Sales momentum for the second half of 2020 has been healthy, with sales value and the number of units sold being almost five times higher than the first half of the year.
CapitaLand expects healthy sales to continue into this year but the situation could head south should the authorities clamp down on rising prices.
CDL has an upcoming launch pipeline of more than 1,200 units for its Singapore residential division.
Around 89% of the group’s land bank of 3.5 million square feet as of 31 December 2020 has been designated as “residential”.
Cooling measures may adversely impact buying sentiment and add to CDL’s troubles as the group is already grappling with trouble at its joint venture investment Sincere Property Group.
Real estate brokerages
Another sector that will be adversely impacted is real estate brokerages as they thrive on property transaction volume.
Companies such as PropNex Ltd (SGX: OYY) and APAC Realty (SGX: CLN) will suffer should cooling measures be implemented.
According to APAC Realty, primary private residential market transactions (excluding executive condominiums) surged by 63% year on year to 3,493 units in the first quarter of 2021 (1Q2021).
The secondary market saw even more activity, with transactions more than doubling year on year to 4,607 units.
As a result, the group’s revenue soared by 70% year on year in 1Q2021 to S$153.1 million, while net profit increased by 114% year on year to S$7.5 million.
Elsewhere, PropNex also reported a healthy increase in transaction volumes due to the strong take-up of new project launches.
The group’s revenue rose by 63.3% year on year for 1Q2021 while net profit nearly doubled year on year to S$16.2 million.
The strong results have not gone unnoticed.
Share prices of APAC Realty and PropNex have risen by 68% and 136% year to date.
Should MAS clamp down on residential property, the duo’s share prices may take a hit.
Banks
Local banks such as DBS Group (SGX: D05) and OCBC Ltd (SGX: O39) may witness a dip in housing loans if MAS tightens borrowing limits to rein in property prices.
As of 31 December 2020, housing loans made up almost one-fifth of DBS’ gross loan book and around 22.4% of OCBC’s gross loans.
Previous cooling measures had targeted the loan-to-value (LTV) ratio for Singapore housing loans.
In 2010, the LTV was lowered to 80% in February and 70% in August that year. By 2012, the LTV was lowered to just 60% for buyers with no outstanding residential property loan.
The LTV was further tightened in July 2018 by another five percentage points, lowering it to just 55%.
Do note, however, that the lower limit of 55% applies only under two conditions — the loan tenure exceeds 30 years (or 25 years for HDB flats), and the loan period extends beyond the borrower’s age of 65 years.
If these two conditions are not met, then the loan to value limit will be set at 75%.
It’s been three years since the last tightening measure was announced, and a further tightening of the LTV may crimp demand for mortgage loans, thereby affecting the banks’ loan growth.
Get Smart: Remaining vigilant
It’s not all bad news, though.
One tailwind for sustained demand in private property is the projected rise in the number of millionaires in Singapore.
A global wealth report by Credit Suisse has predicted a close to 62% jump in the number of millionaires here from the current 270,000 to 437,000.
The jump in the number of rich people should prop up demand for residential property and ensure the three sectors above enjoy continued business.
However, investors need to remain vigilant.
If inflation rears its ugly head, countries around the world, including the US, may start raising interest rates.
Singapore, being an open economy, may have to follow suit.
Rising interest rates act as a natural dampener for property prices as it makes mortgage loans more expensive.
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Disclaimer: Royston Yang owns shares of DBS Group.
