IT has been a year of contrasting halves for executive condominiums (ECs) in 2015. The first six months of this year saw heightened concerns about an oversupply of ECs, as sales were sluggish for EC projects. However, in H2 2015, developers cut prices for unsold stock and new launches and consequently, sales improved.
Developers trimmed average EC prices from S$800 per square foot (psf) in the first half to S$780 psf or less in H2 2015. This has helped to mitigate oversupply worries in the EC segment.
To recap, it has been nearly five years since EC projects made a comeback in 2010. ECs are a public-private hybrid housing form minted to meet the needs of the sandwiched group. From 2010 to H1 2013 (a two-and-a-half-year period), the EC average launch price appreciated modestly from S$700 psf to S$750 psf. This increase was in sync with improving buyers' sentiment for residential properties on the whole during that period.
However, developers raised prices of new ECs more steeply in H2 2013 as demand climbed following the implementation of the Total Debt Servicing Ratio (TDSR) framework in late-June 2013. This is because a HDB upgrader's existing monthly mortgage payment will not be factored into TDSR calculations when a bank assesses the amount of loan to grant him on an EC unit he buys directly from a developer since he will be required to sell his HDB flat within six months of the EC project's completion.
ECs were thus launched at an average price of about S$800 psf in H2 2013, up from an average of S$750 psf during the first half of that year. With such buyers exposing themselves to bigger loan quantums, the authorities in December 2013 introduced a mortgage servicing ratio (MSR) cap, whereby monthly mortgage payments on loans granted by financial institutions for EC units bought directly from developers are to be no more than 30 per cent of a borrower's gross monthly income. Since then, the demand for new ECs has been sluggish, raising concerns of an oversupply in 2014 and H1 2015.
Recent price cuts highlight no major oversupply
Indeed, one who felt there could be an oversupply of new ECs in 2014 and 2015 may have overlooked an essential premise that underpins demand - pricing. ECs saw prolonged sluggish sales as developers were holding on to the sticky S$800 psf level in H1 2015, which could no longer be supported due to the MSR cap. Prices seem to be lowered in H2 2015 and sales improved.
According to the Urban Redevelopment Authority data, 752 uncompleted ECs were sold by developers in H1 2015. These EC units transacted have an estimated median price of S$810 psf. About 1,250 uncompleted ECs were sold by developers in Q3 2015, at an estimated median price of S$785 psf. As developer sales of ECs in H2 2015 improved on the back of price cuts, it points to no oversupply or loss of buying interest. It is only when prices are cut and there are very few buyers, can we point to some loss in the relevance of this housing type.
Improved sales in H2 2015 shows that ECs still have endearing appeal to many sandwiched-class homebuyers. At Sol Acres, a 1,327-unit project, 707 units were launched in August, of which 259 units were sold in the same month - an encouraging sales result. The 259 units sold fetched a median price of S$787 psf.
An average launch price of S$750-780 psf is expected to be the pricing for new EC projects for the rest of this year, as well as for next year. Such pricing will be able to draw encouraging buying interest.
There is another reason why developers' move to adjust prices of new ECs this half is timely: the award of two EC sites along Anchorvale Crescent and Woodlands Avenue 12 at about S$280 per square foot per plot ratio (psf ppr) in February 2015. In August 2015, the EC site at Choa Chu Kang Avenue 5 was awarded at S$295 psf ppr.
Having paid less than S$300 psf ppr for land, the developers of such projects will be in a position to achieve a decent margin, assuming they price their projects at around S$720 psf on average during launch next year.
With lower prices almost a certainty for ECs to be launched from 2016, it seems developers who have reduced selling prices in H2 2015 are timely in bridging the gap between the sticky S$800 psf and lower prices in the future.
Still much mileage in developing ECs
The lowering in EC prices may reduce a project's profit margin, but developers who cut EC prices in 2015 and 2016 may earn a reputation as being responsive to the market by offering affordably-priced ECs. After all, ECs are a subsidised public-private hybrid housing product, catering to the sandwiched class - with more social objectives compared to private homes.
That said, it is not just about price cutting looking ahead. We can expect developers to further engage in product innovations to compete for buyers. Well-established developers will be able to win buyers' confidence by conceptualising new EC products - including providing high-end touches, designs and themes. Such projects, even if priced at the upper tier of the S$750-780 psf price band, could still appeal to buyers. For other developers, they can still count on competitive pricing to draw buyers.
New income ceiling for EC purchases
The new monthly household income ceiling revision for buying new ECs was announced in August. It was raised from S$12,000 to S$14,000. The higher ceiling can definitely raise demand for new ECs, in part siphoned from new private condo sales. But this may not happen at an excessive pace as a HDB flat owner who buys a private condo unit has the option to lease out the unit when it is completed and stay put in the HDB flat.
However, a HDB dweller who buys an EC unit does not have the option of doing the same, since he is required to sell the HDB flat within six months of the completion of the EC project. Moreover, there is a five-year Minimum Occupation Period (MOP) for new EC units. Those who buy a private condo, however, will have to trade off in unit size, as a private condo costs more in price per square foot terms.
However, the recent suburban condominium leasing headwinds have shown property owners that investing in a private property requires much effort to achieve required rental returns. For buyers earning S$12,000 to S$14,000 monthly and who do not like to stress themselves by continually devising leasing strategies, they may be happier to opt for an EC to live in.
EC owners adopting flexible mindsets
The issues for ECs do not merely revolve around pricing and affordability. New issues and trends are developing. One issue stems from buyers of new ECs who have to sell their HDB flat after the completion of the EC. There may be more cases of a family of four to five members finding a two-bedroom EC too small for the family.
Those who bought smaller-sized ECs are generally couples or families with limited budget. This problem may somewhat escalate around 2016 and 2017, particularly for buyers who bought smaller ECs at high prices of S$800 psf from H2 2013 to H1 2015, where the units are scheduled to be completed from 2016.
These families may devise creative strategies such as having one of the parents (or an adult member) put up more often in his or her elderly parent's (or a relative's) home nearby. Although it might impact family living dynamics, many buyers in this situation still enjoy and find it meaningful to live in their well-designed new EC home.
Continued relevance and more product innovations
We have come to exciting new chapters for ECs, following their comeback in 2010. Issues are not merely confined to pricing and affordability. The drop in winning bids at EC land tenders and developers starting to reduce selling prices of ECs have already addressed concerns about the affordability of ECs and oversupply. This is pertinent to the continued relevance of this housing form.
There are new exciting product forms and interesting occupiers' mindsets arising from ECs completing from 2013. Some have also wondered if new EC units as small as around 500 square feet are able to contribute meaningfully to family development. However, these small units are still limited in numbers and may be indeed relevant for some buyers.
For instance, a new couple who has bought a small EC unit from a developer might sell it after the five-year MOP when they have children; the EC would have provided them an opportunity to accrue wealth upon a profitable resale.
On the public housing front, generic demand from families for four-room and five-room Build-To-Order (BTO) HDB flats has also increasingly been met. The HDB is thus phasing in the needs of special groups such as singles, where two-room BTO flats have been released since 2013 for singles to apply. More HDB flat housing grants have also been offered recently to cater to different needs.
We should not view private condo and EC owners turning creative regarding living strategies as an entirely negative development. While it may impact the family, it illustrates property owners' flexibility in coping with situations and living out their property dream. After all, ECs have been around for about two decades. It is time for some creative product variations within ECs, including small units, which will spur more nuanced appreciation on the part of buyers.
Recent issues of affordability have been addressed by developers who have lowered prices. The new pricing level of around $750 psf seems to better match the affordability of buyers and still allow developers to make a profit. It is likely that the MSR cap on ECs will stay or be relaxed slightly. Addressing affordability issues will also downplay oversupply risks and support the continued relevance of ECs.
This article was first published on October 22, 2015.
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