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Strong fundamentals back high property prices here

Letter from Charles Tan Meah Yang

I WRITE in response to the letters from concerned readers Lim Boon Hee and Steve Ngo, regarding their views on the state of global price levels and, more specifically, those of our local housing market (”A lesson worth remembering”, May 7 and “Just a lot of bull?”, May 8 ).

Let me quote a more prominent investing legend, Mr Warren Buffett, who said in his 1992 annual report to shareholders: “We’ve long felt that the only value of (stock) forecasters is to make fortune-tellers look good.”

This is not to discount the wisdom of legendary investor Jeremy Grantham — there is merit in his conclusion — but one need not take a six-week trip round the globe to tell you that abundant liquidity, fuelled by cheap Yen carries, exchange rate fixing by Asian central banks and gaping trade surpluses in the Middle East, will invariably lead to global inflation.

I do not doubt that there will be a correction in prices, but I do not agree on how steep the correction will be, and how long it will take. Corrections are inevitable; collapses are improbable.

For one, asset and stock prices are being supported by solid demand fundamentals this time around. For example, on April 29, a highway section collapsed in Oakland, California. But when CNBC first broke the news, contractors were reportedly struggling to find steel in sufficient quantities for the reconstruction effort. It has been more than a week since, and work has not yet begun.

Also, oil prices are high for a variety of economic distortions, but China’s building of a massive strategic reserve isn’t helping.

Lastly, the S&P500 is closing in on highs last seen seven years ago, but with trailing Price to Earnings (P/E) at 18 and forward P/E at 16, I wouldn’t call the market cheap — but I would hardly call it overbought.

Furthermore, central bankers in developed economies have had plenty of time to analyse policy failings from past recessions and are better informed than ever to avert global financial meltdown, and instead engineer a gradual cooling of inflation.

One of the most annoying truisms in financial analysis is: “What goes up must come down”. Stock markets, unlike bad stock analysts, are not subject to the physical laws of gravity. Stock markets trend upwards in reflection of a generally positive growth in population, productivity and profit. To insinuate that prices must return to origin based on a Newtonian concept of nature is simply puerile.

An item is only worth as much as another is willing to pay for it. Rising valuations, as Mr Lim put it, are not a problem if deals are still getting closed, and, in fact, are a sign that there is no shortage of demand even at his perceived “bubble prices”.

If you look only at average salaries here, the current property boom is unsustainable. But our property market is not solely determined by the average Singaporean. Foreign investors with hefty paycheques contribute to demand, too, and this effect filters into the markets that are closed off to them (ie HDB flats) as richer Singaporeans who have been priced out of condominiums divert their fat wallets toward the Government alternative.

Source : Today - 9 May 2007

CityDev chairman gives a developer’s perspective

Kwek Leng Beng, executive chairman of listed City Developments, reckons the problem of speculation will solve itself after a while as speculators get burned and realise it is not so easy to flip properties for a fast buck.

City Developments’ One Shenton apartments sold like hot cakes in early January, drawing queues of buyers, he said.

‘The next day, in the newspapers, there were so many advertisements. Everybody wants to sell One Shenton units. As a potential buyer, when you see so many ads, you get frightened, and won’t buy. Psychologically, even if you have confidence in the market, you won’t buy straight away because you see so many sellers.’

The 1.25 per cent of purchase price that many speculators end up forfeiting to developers rather than proceeding with a sale when they can’t find another buyer will deter them from speculating rampantly, Mr Kwek said.

‘After a while, they’ll know this game doesn’t work any more. It’s not worth their while to go in. Most importantly, investors must realise that buying property is not for a short-term, immediate gain. Property, by its very nature, is a medium to long-term investment. If you think you can buy today and make a profit tomorrow, then you are not being realistic.

‘And if you try to flip when the market is getting hotter and hotter and everyone advertises to sell at the same time, that effect of a hot market will also not help you to sell. If I am a new buyer, I’ll say, ‘Why should I pay you? I’ll wait for next launch’.’

Mr Kwek is not overly concerned about the returned units at One Shenton because ‘I believe there is potential to hold and sell them at higher prices when the development is completed’.

The avid tennis player, who owns a Maybach and a host of luxury sport cars including Ferraris and Aston Martins, has about 40 years of real estate experience, some of it gleaned from his father the late Kwek Hong Png, who was legendary for his property acumen.

Source : Business Times  - 8 May 2007

He points to 7-year cycle, so current phase could run till 2012 or beyond

The property bull may keep on running until 2012 or even beyond, says Hong Leong Group executive chairman Kwek Leng Beng. Foreigners will keep pumping money into high-end housing. And businesses looking to get in on Singapore’s fast-developing hub status will send office rents ‘through the roof’.

‘I believe that at least for the next few years, barring unforeseen circumstances, the boom is sustainable,’ Mr Kwek told BT in a recent interview.

‘If you believe in the seven-year property cycle, we will have a boom until 2012. Our economy, having been restructured, is strong and poised for growth even beyond that,’ he said. ‘I won’t be surprised that we may be witnessing the biggest real estate boom in the history of Singapore.’

He added: ‘If you follow the seven-year property cycle, there’s still a lot of steam left, because we are only in the second year (of the high-end residential recovery). Mid-tier private home prices will move in sympathy, but the percentage rise is unlikely to be as high as in the luxury tier.

‘If you are a strong believer of seven years, then I think it can go on from 2005 to 2012. But I personally believe it will extend longer. The US (property recovery) has gone on for 14, 15 years. Australia, also 14 to 15 years, 16 years, UK has gone on more than 10 years.’

The residential sector will be underpinned by a continuing influx of high net worth investors, says Mr Kwek, who is also executive chairman of listed City Developments.

And the office sector will be fuelled by limited supply in the short term and by strong demand as the various government efforts to promote Singapore as a hub for financial services and wealth management, healthcare, education and hi-tech research, bear fruit.

‘A lot of analysts think we’ll have enough supply of offices by 2010, but I don’t think so,’ he said. ‘Just look at the rate at which we are going and able to attract businesses, especially in the financial industry and wealth management. They want a piece of the action in this part of the world. How can you have enough offices? It takes four to five years from planning to completion of a high-rise office building. I see that this is a place where office rents will go through the roof.’

Office rents did not go up for the most part between late-1996 and mid-2004. ‘This must not be overlooked when we talk about rising rentals now,’ he said.

But Mr Kwek does point out some caveats in his bullish predictions - an unexpected Sars-type disaster, a terrorist attack, the reintroduction of trade barriers and government intervention in the real estate market.

‘In general, governments may introduce measures that are designed for a soft landing but which actually can turn out to be a hard landing,’ he said. ‘In Singapore I think the authorities will only intervene to prevent excessive speculation, and in so doing they will bear in mind that Singapore has become a global city.’

Mr Kwek believes the current property cycle is unlike any Singapore has seen previously because the economy has been restructured and has emerged leaner and stronger.

Also, a vast amount of money is being invested, such as at Marina Bay with its huge integrated resort, botanic gardens and other infrastructure. ‘I can visualise the potential of this place,’ he said. ‘Singapore will be a bustling global city, a place to live, work, play.’

According to Mr Kwek, Singapore is starting to attract ‘cosmocrats’ - an emerging group of globe-trotting super-rich people who are flush with cash and are buying the best properties from London and Paris to New York and Hong Kong. ‘We are just beginning to see them in Singapore,’ he pointed out. ‘To them, if you talk about yield, they’ll laugh at you. Yield is of no concern to them.’

Mr Kwek reckons luxury home prices here are not over the top, pointing to historical data as well as international comparisons. The average highest-done residential price in Singapore recently is about $3,300 per sq ft, which is still about 40-50 per cent below the equivalent figures in London, New York and Hong Kong, he said.

This means there is room for growth in Singapore luxury home prices, and by 2012 the gap could narrow to about 10-12 per cent. During the previous bull run, the highest price achieved was about $2,200 psf, Mr Kwek noted. ‘At 6 per cent interest rate (and this includes inflation, which is not big in Singapore), after 10 years, you know what should be your selling price? $3,400 psf. At 7 per cent, we should be selling $3,900 psf today.’

Source : Business Times  - 8 May 2007

The Ardmore has joined the list of collective sale sites with asking prices of $2,000 psf per plot ratio (psf ppr) and above.

The Ardmore

Knight Frank, which is marketing the 42,565 square foot freehold site at 6 Ardmore Park through an expression-of-interest exercise, says the asking price is $221.8 million, which works out to $2,000 psf ppr including an estimated $16.6 million development charge.

The site is zoned for residential use with a 2.8 plot ratio - the ratio of maximum potential gross floor area to land area - and a 36-storey height limit.

The successful developer can build a project with 42 units averaging 3,000 square feet each, according to Knight Frank.

The closest benchmark in the area is the $1,650 psf ppr achieved for Anderson 18 in March, when City Developments and Wing Tai placed a $477.7 million joint bid for the 112,097 sq ft freehold site.

The highest unit land price achieved so far for residential land is still for The Parisian at Angullia Park, which was clinched by Overseas Union Enterprise for $1,735 psf ppr late last year.

However, that has not stopped en bloc sale owners asking for $2,000 psf ppr or even more.

Last month, Elizabeth Heights, a freehold development in the Cairnhill area, was launched for collective sale with a price tag as high as $2,100 psf ppr.

And the owners of the 99-year leasehold Grangeford Apartments have set a ‘guide price’ of $2,016 psf ppr, which includes an estimated $97.8 million payable by the site’s new owner to the state to restore the site’s remaining 66-year lease to 99 years.

Expressions of interest for The Ardmore close on June 12.

Source : Business Times  - 8 May 2007

FIRST Real Estate Investment Trust (First Reit) has agreed to acquire a nursing home at 51 Lentor Avenue.

The price was not revealed in its statement released yesterday but is understood to be around $12 million.

The 148-bed nursing home will be leased back to its current owner, Sphere Investment.

The leasehold property, with a gross floor area of about 3,000 square metres, is on about 2,500 sq m of land.

First Reit, which is part of Indonesia’s Lippo Group, acquired three properties here for a total of $38.2 million earlier this year. It was listed on the Singapore Exchange in December 2006.

Ronnie Tan, chief executive of First Reit manager Bowsprit Capital Corporation, said there are no immediate plans to enhance the latest property, though there is some potential to maximise unused plot ratio.

First Reit will continue to look for opportunities in Singapore and Asia, he said. ‘We have to continue to grow.’ Dr Tan expects to announce more acquisitions in the current second quarter of the year.

In January, he said First Reit plans to double the size of its portfolio to $500 million within three years and raise it to $1 billion within five years.

At the time of listing, the Reit comprised three healthcare properties and a hotel in Indonesia worth a total of $257 million.

Source : Business Times  - 8 May 2007