Relooking The Future Of Singapore Prime Condos
Uncertainty looms as the recent spate of events unfolds one after another. From the third round of anti-speculative measures to the QE2, is there still a future for prime districts condos in Singapore?
Quantitative Easing: Round 2
Early November 2010 saw the US Fed announcing a fresh set of stimulus to aid its sluggish economy. These measures, widely known as the second round of quantitative easing (QE2), will pump approximately US$600 billion worth of funds into the economy suffering from record high unemployment rate near 10%.
With the Fed’s injection of capital into the economy, the value of US currency will be devalued even further and the already low interest rates will continue to be weighed on. In fact, JPMorgan & Chase Co mentioned that the US dollar may fall below 75 yen in 2011; thus making it the world’s weakest currency as a result of the QE2. US dollar denominated assets will hence appear less attractive to investors due to their lower expected returns. Therefore, the injected funds will flow off the US shore in search of better investment opportunities across the world.
And where can investors find these opportunities other than in Asia? Already DBS economists reported US$2 billion worth of investment flowing into Asia every day. It is not surprising that Singapore is set to deal with a substantial amount of hot monies flowing in due to its status as a successful financial hub in the region.
Future of Prime District Condo
With the liquidity and capital entering into Singapore, many would think that the property prices will increase. This is true to a certain extent as some form of inflation is likely to occur as seen in China. However, we do not expect the prime residential properties to exhibit much response to QE2 and their prices will hold moderately for the short term.
Firstly, the government stated that they will monitor the effects from the capital influx closely and will not hesitate to impose additional steps to cool the property market. Let’s not forget that the government recently implemented their third round of anti-speculative measures to curb the over exuberant residential market performance. As of mid-November, an estimated 1,000 prime housing units were still left unsold, signaling weak demand for the prestigious developments.
The current residential market is already saturated with high prices that have surpassed their 2007 peaks hence prospective buyers are reluctant to enter the market yet. Also, due to the persistency of the global economic downturn, many expatriate tenants have not been entering the rental market as overseas business expansion continues to be slow. Together with the high property prices, this translates to low rental yield for investors contemplating on prime residential investments.
Commercial Could Snatch Limelight
Rather than residential properties, we foresee a shift of focus and that the inflow of capital is likely to be targeted at commercial properties especially industrial and office spaces. Over the past few months, the two sectors have been performing well due to their high rental growth. The monetary boost from QE2 will allow banks to generate more loans, thus inducing more business opportunities. This results in higher number of tenants looking for industrial and office spaces for the next few months.
Also, commercial property investments especially Real Estate Investment Trusts (REITs) are more liquid than their residential counterpart because of their existence as small units or shares. As the hot monies will be strongly tied to the capital markets, investing in financial securities will be more appealing for many financial institutions rather than real physical assets. The current low interest rates and strengthening Singdollar will also help leveraging which boosts the investment activities.
Prime Residential Potential
Due to policies’ restrictions and other competitive investment opportunities, we downplayed that the role of investing in prime residential market for the short term. However, we have to be more forward-looking to recognize the potential of prime housing properties as investible assets. Prime residential properties have been able to withstand the test of time as we know from previous economic lull periods. We expect that in 2 to 3 years time, economies of US and Europe would have recovered, together with the rise of Asia, global business confidence will reach unprecedented heights. Given Singapore’s open economic policies to the international stage, overseas business expansions into the city state will lead to more expatriate tenants coming into the housing rental market.
When the time arrives, prime residential properties will be poised to reach another round of record high prices. For the near future, prime homeowners are advised to remain realistic about their rental and selling prices should they intend to divest their property investments.