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So when will freehold condo prices fall to match those of leasehold?

FREEHOLD condominium ownership is no longer forever in Singapore, yet the myth of freehold property being held in perpetuity and resultant higher pricing linger on.

While it may seem like Singaporeans will have a hard time letting the myth go, it may only be a matter of time until logic overcomes emotion and premiums for freehold condos drop.

Freehold has long been the preferred property choice in Singapore for almost anyone who can afford it, whether it is a house or a condominium.

The marketing pitch is that the “ownership of freehold property lasts generations”, as SGHousing puts it, and the legal concept is that “an owner will have the full ownership of the land and the property in perpetuity”, as CKS Property Consultants has said.

Ownership forever certainly does command a premium. The difference in price between 99-year leasehold properties and freehold properties is about 20-25 per cent, according to CKS, and it can be as much as 40 per cent or more. And, traditionally, why wouldn’t freehold cost more? If you are looking out for the interests of future generations, then the best way to assure their well-being is to pay more for freehold property.

Leasehold is different because “unlike freehold property, you cannot bequeath it to your descendants when the lease is up” as one writer in an online forum puts it.

As Singapore developed, most freehold property owners have also gained even greater confidence that their property will not be taken away.

In days of yore, the Government readily exercised its rights under the Land Acquisition Act to convert kampungs and plantations into Housing and Development Board (HDB) estates and roads. As the amount of privately owned land diminished, so has the frequency of the Government acquiring freehold property for other development. Bequeathing freehold property to the next generation then seemed more certain.

The reasons for paying more for freehold go deep, and the difference may result more from emotional and cultural ties than anything else. Whether it is the ancestral village, the ancestral home or the old family homestead, families have long been linked their family home by strong emotional cords.

Freehold property for condos or houses may be the Singapore equivalent of the ancestral home, so it has retained an aura of being held in perpetuity - perhaps made even stronger by the contrast with the more prevalent leasehold property in Singapore.

Since the owner has had a right to keep it forever and pass it on to the children, it feels like freehold should indeed command a premium.

It has also become more apparent that the premium attached to freehold is not just based on economics. With banks making loans for properties with shorter leases remaining, and with some leases being extended, even more of the differences used to justify higher prices for freehold property may have disappeared.

And if the issue were just financial, so that parents wanted to pass on profits from an en bloc sale to their children, then it also should not matter whether the property was leasehold or freehold as long as it was sold for a gain.

In reality, though, freehold has changed and it is no longer forever. If 80 per cent or 90 per cent of the owners agree to sell a condominium, even if it is freehold, then the other owners that planned to pass the property on to their heirs will see their dreams vanish.

The changing rules for condo ownership have thus negated much of the difference between freehold and leasehold. A freehold condo that the owner intended to bequeath to the next generation can literally be swept from under their feet, just as would happen with the sale of leasehold property or the end of a 99-year lease.

But if the legal changes on condo sales have erased the reasons for paying a premium, since it is increasingly unlikely that one will own a freehold condo in perpetuity, then why haven’t the mindset and the differential in pricing changed along with market practices?

One reason may be that the shift has been so sudden and so subtle that pricing does not reflect the change. Most owners may not really have reflected upon the idea that freehold is actually more like leasehold and they have not changed their traditional mindset.

The idea that freehold property lasts forever and should cost more has become so embedded in our psyche that the concept of freehold being virtually the same as leasehold has not changed, even though freehold property is being sold when some owners want to hang on.

Another reason could be that since freehold property costs more and is perceived as more prestigious, owners and developers and property agents all have a vested interest in maintaining the myth of the superiority of freehold property to maintain premium pricing.

Who would want to point out the obvious and see the value of their property or their commission drop?

On reflection, though, more owners are likely to begin to realise that freehold has become much more like leasehold.

And since the prevalence of 99-year leases means that most are likely to be extended or renewed anyway so that Singaporeans can continue to live here, long-term ownership of 99-year leasehold HDB flats or condos seems as likely to continue as ownership of freehold.

When, then, will the reality of market forces cause prices for freehold condos to begin dropping to leasehold levels? When the realisation that freehold is not really freehold strikes home, what will the price decline be for such properties?

It remains to be seen when a change will occur, but look out for a drop in freehold prices as buyers finally realise that freehold, 999-year and 99-year condos really are not all that different. All may be equally likely or unlikely to stay in the family for perpetuity.

Richard Hartung - The writer is a consultant who has lived in Singapore since 1992.

Source : Today - 23 Feb 2008

Players feel squeeze from more credit woes and soaring construction costs

THE property market in Singapore is set to face a challenging year ahead as it continues to take hits from the sub-prime crisis in the United States and rising construction costs, industry body Real Estate Developers’ Association of Singapore (Redas) said.

‘Unfortunately, the sub-prime woe continues to hog the headlines,’ saidRedas president Simon Cheong, during Redas’ annual Chinese New Year celebration yesterday. ‘Six months’ ago, we were concerned with the market exuberance. This coming six months, we are wondering when the market will turn around.’

Construction cost is also spiralling upwards at an unprecedented rate, Mr Cheong said.

The property market’s expected slowdown comes on the back of an exceptionally good 2007. Last year, a record-breaking 14,800-plus residential units were sold, the office occupancy rate hit 93 per cent and the hotel sector saw a occupancy rate of 87 per cent.

But this year, with more write-downs for sub-prime exposure expected from major financial institutions - which could affect home prices and demand here - and high construction costs affecting margins, developers are bracing themselves for tougher times ahead.

‘We are concerned that construction costs have gone up so sharply and squeezed (developers’) profit margins so much that a small decline in the the final selling price will affect developers severely,’ said CB Richard Ellis’ chairman for Asia, Willy Shee. ‘A small increase in construction cost and a small decline in selling price will put developers in a very difficult situation.’

Minister of State for National Development Grace Fu, who was guest-of-honour at Redas’ event yesterday, similarly said that the property market’s prospects are dependent on how the sub-prime crisis is going to affect sentiment in the region.

Mr Cheong believes that the market will ‘get some traction back’ in the second half of this year.

Interest rates in Singapore are at a record low, which will encourage home ownership, he said. And the influx of expatriates at all levels coming to Singapore - on the back of an anticipated office supply of 15 million sq ft over the next three to four years - will also provide a boost to the property market, Mr Cheong said.

‘Removal of estate duty also helps,’ said Chia Ngiang Hong, Redas’ first vice-president and group general manager of City Developments. ‘The super-rich will focus on Singapore again.’

Analysts, worried about developers’ prospects for this year, are already starting to recommend that investors put their money into the more diversified property companies and/or switch to real estate investment trusts (Reits).

‘In the current volatile market environment, we recommend stocks of listed property companies with strong balance sheets offering multiple-sector presence and geographical diversification,’ said UOB Kay Hian analyst Vikrant Pandey. Citigroup analyst Wendy Koh said: ‘In the light of the current uncertainties, we retain our preference for Reits over the developers.’

Source : Business Times - 22 Feb 2008

THE real estate roller coaster that developers have ridden in recent years has taken a sharp turn, thanks to United States sub-prime woes, and left the industry wondering what is coming next.

‘Six months ago, we were concerned about the market exuberance,’ said Mr Simon Cheong, the president of the Real Estate Developers’ Association of Singapore (Redas), yesterday. ‘These coming six months, we will be wondering when the market will turn around.’

After an exceptional year of strong prices and sales, the sector has slipped into the doldrums, with buyers and sellers taking cover from the onslaught of a global economic uncertainty, America’s sub-prime mortgage crisis, stock market turmoil and escalating building costs.

Mr Cheong told a Redas Chinese New Year lunch: ‘Though Asia’s economy has a strong buttress - China - the temporary effect of weak sentiment from sub-primes will affect buying for at least the first half of this year.’

Sellers are also lying low, with developers delaying launches and pushing back project completion dates amid the construction squeeze.

Building costs have climbed at an ‘unprecedented rate’, added Mr Cheong, who is also chairman and chief executive of SC Global Developments. ‘What is clear is that developers are bearing the brunt of higher construction costs. Something’s got to give eventually.’

Developers will have to factor in high construction costs when they replenish their land bank, he said.

However, in the longer run, the market outlook is favourable, considering the Singapore economy’s sound fundamentals.

‘Rental yields will eventually dictate and underpin what capital values will be for property,’ said Mr Cheong. The expected slowdown in supply will support the rental market.

Minister of State for National Development Grace Fu told the media during the lunch that the market may be quiet, but prices are firm while demand for commercial property is still resilient.

Those sentiments were echoed by consultancy Savills Singapore, which expects the office sector to stay buoyant.

Deputy managing director Simon Smith told a press conference that average prime rents should match Hong Kong’s by the second quarter and surpass them by year-end.

This is because Hong Kong will see a lot of new supply coming onstream this year while Singapore’s supply will remain tight in the short term, he said.

But higher rents in Singapore may not be enough to push businesses to Hong Kong. ‘Many clients we see switching between the cities tend to do so because of strategic reasons rather than cost reasons,’ said Mr Smith.

Source : Straits Times - 22 Feb 2008

ONE of the latest investments in Singapore by American defence giant Lockheed Martin is a beachfront bungalow at the Singapore Airshow site.

The final bill for the two-storey structure when fully furnished came to ‘about $2 million’, said Mr Jim Gribbon, Lockheed Martin’s Singapore-based vice-president for South-east Asia, yesterday.

The 37 chalets that line the strip of reclaimed land facing Pulau Tekong - literally a stone’s throw from the high-tide mark - are popular watering holes for aerospace executives as they wine and dine potential clients.

Most chalets come with open viewing decks on their roofs. These have proven popular as vantage points to catch the daily aerial displays.

To get past the front door of most chalets, one needs to be invited.

‘We’ve had a non-stop stream of customers and visitors. One of the key times is during the flying display and we’ve had the pleasure of hosting various delegations from the viewing deck.

‘We got a magnificent view as the planes came roaring past,’ said Mr Raymond Francis, Boeing’s Singapore-based communications director for South-east Asia.

Chalet tenants have spared no effort to make their guests feel welcome.

For instance, European aircraft maker Airbus flew in a French chef to whip up gastronomic delights in a chalet that one visitor described as ‘looking like a five-star hotel’.

Unlike the previous airshow where chalets were torn down after the event, four exhibitors who built their chalets will keep the structures until the next event two years down the road.

One company said it had not decided what to do with its chalet in the year-plus lull before the Singapore Airshow 2010, but there is a possibility that the property may be rented out.

Source : Straits Times - 22 Feb 2008

Property players sketch the best and worst-case scenarios for private homes in 2008.

Luxury-home prices could fall by up to 20 per cent in 2008, assuming sub-prime woes don’t end this year. But the mass market may hold its own or ease 5-10 per cent at most. This was the worst-case scenario according to most property players polled by BT.

In a best-case scenario with sub-prime woes clearing by mid-year, high-end prices could rise up to 10 per cent and mass-market homes as much as 15-20 per cent, the majority of respondents said.

The most optimistic is Jones Lang LaSalle Research, which forecasts an 18-22 per cent increase in luxury/prime prices and a 20-25 per cent gain in mass-market prices in a best-case scenario.

Sales activity is generally expected to be quiet in the first half, before picking up in the second half. ‘Interest is still very much there, but investors see no strong push factor to get into the market just yet,’ says DTZ executive director Ong Choon Fah.

Most developers and property consultants are hoping the sub-prime-related gloom will vanish in the second half. Voicing a common view in the industry, City Developments group general manager Chia Ngiang Hong said: ‘We expect the situation to improve after mid-year. Most of the high-profile sub-prime-related write-downs by major international financial institutions are already out. Hopefully, the rest of the write-downs, if any, should be out by March/April. This current period is good for consolidation.’

UOL Group chief operating officer Liam Wee Sin said: ‘If the sub-prime episode is short-lived, it can be seen as a welcome breather for the Singapore property market. Both home and land prices in the high-end segment escalated too quickly, especially in Q2 and Q3 last year.’

But Wing Tai deputy chairman Edmund Cheng feels it may not be realistic to expect sub-prime problems to fade away by mid-year. ‘They are likely to linger beyond this year, as the exposure has extended to many other areas, and it may still take some time for the full extent of exposure to be discovered,’ he said.

But on a more positive note, he believes mid/ upper-mid projects near Orchard Road will be more resilient ‘as they should benefit from demand for replacement properties by those who have sold prime district homes through en bloc sales, as well as demand from expats who find prime district housing too expensive’.

Agreeing, Credo Real Estate managing director Karamjit Singh thinks mid-tier private home prices will appreciate 10-15 per cent this year in a best-case scenario, outpacing his estimate of gains of 10 per cent for the suburban/mass market and 5-10 per cent for upmarket homes.

In the high-end category, many property analysts with stockbroking firms see an oversupply of potential launches as sites sold through en bloc sales are redeveloped.

In a worst-case scenario, a major factor that could hurt high-end prices is if demand dries up and ’specu-vestors’ who bought luxury homes in the past few years offload them below current prices, as they still stand to reap huge gains given their low entry cost, reckons Knight Frank executive director Peter Ow.

In the primary market too, some smaller developers may drop prices to generate sales. But Mr Ow acknowledges that the bulk of the unlaunched high-end housing stock is in the hands of a few major players who have the financial capacity to delay launching projects. Instead, they could focus on selling their mid-tier and mass-market homes this year to generate cash flow.

Giving his take, a major developer said: ‘High-end depends on the appetite of foreign buyers and their perception of liquidity and value in the Singapore market. The strong Sing dollar will help persuade these investors that the property market here will be a good store of value.’

Observers also believe overseas funds are likely to turn increasingly to parking money in Asia, instead of the United States and Europe. Other demand drivers for the Singapore residential sector, especially in the mid and mass segments, include falling mortgage rates, the continued influx of expats from China and India setting up home here, and wage growth arising from the tight labour market.

Most market watchers say the upside for high-end residential prices will be limited even if the sub-prime problem clears around mid-2008.

‘Price increases would not so much apply to luxury-class homes as these have already increased significantly since 2005,’ CB Richard Ellis managing director Pauline Goh argues.

However, mid-tier homes could appreciate 5-10 per cent and mass-market prices 10-15 per cent this year, assuming things become more positive after June, Ms Goh added.

Frasers Centrepoint CEO Lim Ee Seng said: ‘Even in a worst-case scenario, I don’t really see mass-market home prices coming down much because construction costs are still going up and that raises the breakeven cost of such projects.’

Knight Frank’s Mr Ow says the mass-market will benefit from strong demand from HDB upgraders, given the shortage of HDB homes.

Source : Business Times - 21 Feb 2008