THE first part of this article ("Singapore property may be heading for long-term drop in value", BT, April 20) touched on three of the six "defects" in our property market that might lead to a long-term decline in property values. The first three points are: the issue of demand being exhausted with the last six years of massive supply; the Additional Buyer Stamp Duty; and the Total Debt Service Ratio framework. In this second part, we consider the next three "defects".
One of the methods for capping prices in the residential market involved ensuring that a sufficiently large pipeline of supply is available to investors and buyers. The rationale is that increasing the sales of new HDB flats and private residences will lead to more competition among sellers and keep a lid on price growth. The exuberant pace of sales since Singapore pulled out of the global financial crisis in 2009 has led to a massive boom in construction. Between 2011 and 2015, the total stock of Singapore's residential units, net of demolitions, increased by about 150,000; and over the next four years, between 2016 and 2019, another 155,000 residential units will be completed.
While the Building & Construction Authority has reported better performance and higher scores in construction quality across HDB flats, executive condominiums and private residential projects, there are also more and more high-profile cases of building defects, some of which have resulted in lawsuits. Cases of building defects in new developments reported in the media include million-dollar homes such as The Sea View, RiverParc Residence, The Sail @ Marina Bay and The Coast in Sentosa Cove.
Compared to the total number of housing developments in Singapore - most of which are properly and well built - the number of projects with building defects may seem negligible. However, what might negatively impact future home values is a recent landmark ruling by the High Court. Owners of The Sea View who sued for numerous alleged defects were told by the High Court that the developer, the architect and the main contractor are largely not liable for negligence claims because most of the work has been delegated to other companies, or independent contractors.
One implication for all Singapore property investors might be: investors would need to know the whole plethora of contractors engaged by the developer, the architect or the main contractor for any work on the property. Should investors find any defects in the property and their claims against the developer, the architect and the main contractor not result in any compensation, the investors would have to direct their claims further down the chain, directly at the specific company that had performed the work resulting in the defects.
Such a ruling incentivises developers and main contractors to outsource more of their work. Coupled with the increasing incidences of shoddy workmanship and building defects, the finished quality of real estate might drop, as would its value.
The fifth flaw relates to the increasingly complex set of rules around Singapore property investments. In addition to the various layers of buyer and seller stamp duties, property taxes are tiered and strata area laws are perplexing even to seasoned real estate professionals. An investor purchasing 2,000 sq ft of strata area could have as little as 1,200 sq ft of usable floor area: a drop of about 40 per cent.
PAYING FOR VOID AREAS
The large difference between the area we paid for and the area we can use lies mainly in the void. Yes, the airspace between us and the ceiling - if the ceiling is above certain height limits in a residential or a non-residential space, termed "internal void" - is considered "sellable strata area". Stretching our imagination further, in strata landed houses, investors pay for several levels of "external void" strata area between themselves and the sky.
Strata void areas proliferated in the last decade and have now extended into the office and industrial segments. Investors pay for the void which usually is of little interest to tenants, especially in industrial properties where the size of the production floor area is a key determinant of rental discussions.
As the Singapore economy progresses with technological changes, the rules around various categories of industrial uses are also getting muddled and in most circumstances, require more precise definitions. Overall, hazy rules coupled with complicated duties and taxes will make Singapore properties less and less attractive to serious, long-term investors.
The final point is on Singapore housing policy. It served us superbly well in the country's nation-building years. Looking forward, it is more likely to be a millstone around our necks in a future economy which has shorter boom-bust cycles and which is more nimble.
Singapore's drive for high home ownership rates during its formative years and the first five decades of nation-building has been a remarkable success. But this "achievement" did not come without its sacrifices.
Singapore's home ownership rate, at just over 90 per cent, is very high compared to the levels in developed nations such as 36 per cent for Switzerland, 45 per cent for Germany, 64 per cent for the UK, 64 per cent for the US, 61 per cent for Japan and 67 per cent for Australia. Notably, these are countries which consistently generate more innovative, world-leading products than Singapore.
As Singapore seeks to transform its workforce to be more innovative, entrepreneurial and nimble-footed, it needs to adapt its housing policy to the needs of a future global economy that rewards asset-light, agile and adaptive entrepreneurs. Handcuffing our young households with 30-year-long mortgages when they get married at 28 years of age will not foster any entrepreneurial spirit. In fact it does the opposite, making our society of well-educated workers averse to risk, and happy to just conform to the status quo.
A housing policy that encourages high home ownership may put a drag on future economic growth - and eventually reduce the value of Singapore's real estate.
The six "defects" in Singapore's property market are similar to the cracks in a leaking roof. We could keeping patching the six cracks as they slowly split wider. And we could patch new cracks as they appear, perhaps via game-changing trends like short-term home-sharing. But even if the roof does not buckle and give way, continual patching of cracks will bring down home values.
- The writer is CEO of Century 21 Singapore.
This article was first published on April 21, 2016.
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