Wednesday 23rd Aug, 2009

The Sunday Times - 23 Aug 2009

MONEY MATTERS
Reading the tea leaves from URA

An abridged version of this article was published in the Sunday Times of 23rd August 2009 titled “Vacancy rate a key statistic”.

By JOSEPH CHONG

1. Many thanks to Lorna Tan for the invitation to contribute this article and her suggestion to write about residential property, a subject of perpetual interest to Singaporeans and currently a hot topic. I thought it would be of interest to do a piece with an educational slant using an extract from the book that I have been writing. Hence, this piece on investment analysis of URA data releases.

2. Kudos must go to the URA for releasing so much information on the property market every quarter. In the 2Q2009 release, there are 16 annexes filled with a large array of charts, ratios and other statistics. Multiply this by the historical releases and mental indigestion soon follows. So, what should one focus on in this buffet?

3. If one is a residential property buyer, the key statistic should be the vacancy rate. This ratio is the one I always look for whenever URA releases detailed numbers every quarter. Unfortunately, in the last quarter and in almost every quarter previously, the media does not even mention this key ratio. Readers can find this in Annex E-1 of the URA quarterly release.

4. The vacancy rate is the number of vacant units divided by the total number of available units in Singapore. The vacancy rate is also expressed in the inverse way – as the occupancy rate. This is the number of occupied units divided by the total number of available units.

5. Why is the vacancy rate important? There is a correlation between the occupancy rate and prices. The accompanying charts which plots data from the URA shows this correlation visually. From intuition, this makes sense – a fuller Hotel Singapore would result in higher rents and thus capital values. The occupancy rate was 94.1% in the second quarter.

6. Unfortunately, prices tend to lead changes in the occupancy rate, by 2 to 3 quarters. That is, the market seems to know where the vacancy rate would be going. The key therefore is to figure out how the vacancy is likely to change. So, how does the vacancy rate look going forward in the next 2 years? The clues are in the URA data, HDB policy and the mechanics of supply and demand.

7. According to URA data, an additional 8100 private homes on average has been occupied every year since 1995, notwithstanding 3 severe economic downturns since then. With the recovering global economy, we should at least see this number in 2010. The start of the integrated resorts in 2010 may push this number even higher.

8. Here again the published vacancy rate delivers another nugget as URA’s Annex E-1 shows how it is derived. Despite numerous completions in the first half of the year, the vacancy rate was steady as the number of homes occupied increased by 4774 in the first 6 months (2616 in the 2nd quarter and 2158 in the 1st quarter) – this is strong real, not speculative demand for dwellings. This happened despite Singapore’s worst recession since independence!

9. We pointed this out in response to certain media queries when URA released its statistics but it was not reported. Instead the focus was on fear-mongering projections by a foreign investment bank that 100,000s of foreigners are expected to leave Singapore. I guess as a PLS (poor local house), we are less likely to be believed even when we talk facts from URA.

10. This strong underlying demand is probably driven by immigrants. From data published by the Singapore Department of Statistics, growth in the resident population (citizens and PRs) has been driven by the growth in PRs. From 2000 to 2008, the number of citizens grew by 0.6% annually whilst PRs grew by 5.8%. PRs have been growing at an average of almost 22,000 per annum and they do not live in tents. The rest of the world appears to see Singapore as good place to live, despite our perpetual self gripes.

 11. On the supply side for private residences, there will be only 5,233 completions in 2010 according to Annex E-2 of the URA quarterly release. Here, I have used expected completions of units under construction and ignored those that are still being planned. It is unlikely that developments which have not broken ground can be completed in 15 months.

12. This shortfall will push the rental vacancy rate down. I estimate that this will fall from the current 5.9 per cent to below 4.9 per cent. The last time this happened, in early 2007, rents and capital values moved quite a fair bit. Moreover, unlike in 2006, the cushion of unsold HDB flats is probably no longer available.

13. Supply relief will come in only in 2011 with 9339 units expected to be completed. As for 2012, it is too early to call given the possibility of early completions by developers of recently launched projects. Hence, the next 12 months appear to be good times for the residential property market and perhaps this is what investors and “speculators” have concluded too.

14. There is speculation in all markets and I personally know of so-called speculators being burned to the tune of millions. Speculative interest will wax and wane depending on market conditions. Speculation with a view to cornering the market would be unlawful but speculative interest is important because it provides liquidity. It makes it easier for buyers and sellers to transact. This liquidity is also important as it promotes price discovery and pricing efficient – the fair value of an asset is reached more quickly. Therefore, curb 'speculation' with care as it may result in unintended consequences and send the wrong message to investors that we are fickle rule changers.

15. Nevertheless, if one feels uneasy about the re-bound in prices and is hesitant about investing in a property, there will be other opportunities. In the investment world, another bus will always come along. In the near term, the US property market is an early opportunity. We may be adding this bombed-out sector to our global ETF portfolio soon. Meanwhile, in the medium term, China has made it to our potential to-short list, with the trigger being inevitable monetary tightening.

 16. Longer out (distressed) Singapore office properties should offer compelling value by 2011 when the oversupply drives vacancy rates up to 16% plus. That reminds me. Time to get back to work on that distressed properties fund that we need to launch.

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The writer is CEO of financial adviser New Independent. He welcomes feedback at : josephchong@ni.com.sg

This article is for information only. Readers should seek independent advice before making any investment decisions