SINGAPORE (Aug  27): On July 5, when the government unveiled its latest round of property cooling measures, I pretty much abandoned any hope of buying another physical property in Singapore. Property ownership is one of the best ways to ride Singapore’s continued growth. But with transaction costs for buying and selling a home here now much higher than in many other cities in the world, it looks like I will have to find another way to gain exposure to this vaunted asset class.

Property developer stocks seem the obvious alternative, especially since they all took a beating after the most recent round of cooling measures. However, private property development can create negative externalities for society, such as the potential for home prices to rise faster than incomes, and for homeowners to be saddled with crushing mortgage debt. That makes the whole industry a target for onerous government regulation.

In fact, the government now seems bent on ensuring that homes remain affordable in Singapore, even if that means throttling the developers. Besides the additional cooling measures introduced last month, the government announced plans this past week to upgrade more HDB flats that reach the 30-year-old mark, and do another round of upgrading for flats that are more than 60 years old. 

The government also announced plans to buy back HDB flats for redevelopment when they reach the 70-year-old mark, under the so-called Voluntary Early Redevelopment Scheme, or VERS. The details of this programme have not been fully decided, and it is only expected to be implemented 20 years from now. But the programme sounds a lot like a government-operated collective sale.

Taken together, these initiatives could revive sagging sentiment in the HDB resale market, and draw demand away from the private property market. Such a shift would obviously be bad news for developers who have recently acquired land in anticipation of continued rises in private property prices. In the past year, HDB resale prices have been sliding while private property prices have risen strongly.

Even in the longer term, it is conceivable that traditional HDB upgraders might shun private property in favour of a resale HDB flat in a thriving neighbourhood. After all, the government has essentially committed to enhancing the value of the existing stock of HDB flats, and providing owners of these properties with a mechanism to eventually monetise their value. 

Are private property developers going to be pushed into a smaller space now? What does that mean for their stocks? Is all the government intervention in the property market really warranted? 

Excessive regulatory interference?

Amid a paucity of Government Land Sales, developers have obtained much of their landbank over the past year through collective sales of private condominiums. On the face of it, this tried-and-tested, market-oriented system seems an efficient means of expanding and rejuvenating the stock of private residential property. Owners of old condos are paid more than they would obtain in the resale market, and a new condo is built on the site with a larger gross floor area. In the process, leasehold sites are topped up back to 99 years. And, the proceeds from the collective sales are channelled back into the property market as the original owners purchase new homes.

Logically, the pace of collective sales and redevelopment of old condos would accelerate as property prices rise, resulting in the stronger demand being met by increased supply. Conversely, if property prices were softening, the pace of collective sales and the supply of private residential property would slow.

Of course, things can go awry. Optimism sometimes turns into euphoria, resulting in property prices rising faster than incomes and rents, potentially leading to an oversupply of homes and excessive mortgage debt. Left to their own devices, private developers might also seek to boost their profitability by hoarding land, targeting foreign investors who don’t live here, or building tiny shoebox apartments to mask soaring land costs. Over the past decade, the government has introduced regulations and taxes that put limits on such tendencies. 

The last round of property cooling measures has some property sector watchers wondering if the government is interfering too much with the market. According to a report last month by property consultancy JLL, the cooling measures came after a not insignificant 9.1% rise in private property prices over a one-year period. But property prices had declined over the preceding four years while incomes were growing. From June 2013 to June 2018, incomes grew a cumulative 15% while home prices fell 3%, according to JLL.

On the other hand, the surge in collective sales was strong enough for the Monetary Authority of Singapore to sound the alarm about “excessive exuberance” in the property market as far back as November last year.  According to the JLL report, more than $18 billion of sites were sold through collective sales since May 2017. This will result in some 7,000 old units being demolished, and 28,000 new units being launched for sale in the year ahead, with completions coming by 2022 to 2023. This implies 3.3% annual growth in private housing stock, which is well ahead of the annual household formation rate of 2.3%, JLL says. 

While some market watchers say the recent surge in collective sales was bound to slow, the government is evidently not in the mood to take any chances. And, even as homebuyers and developers now grapple with the latest cooling measures, more fundamental change could be emerging on the horizon.

Out of step with policymakers?

Homeownership has been strongly emphasised for decades, and generous grants and subsidies are offered to buyers of HDB flats. This put a generation of Singaporeans on the property ladder early in their lives, and enabled many of them to upgrade to private properties over time. However, with slower income growth, an ageing population and a growing realisation that the 99-year leases on HDB flats will eventually expire, there could well be fewer such upgraders in the future. 

The government has also begun sketching out plans to renew and redevelop HDB townships, and buy out owners of older HDB flats through VERS. As with collective sales of private properties, it seems unlikely that the owners of a block of HDB flats would vote to sell through VERS unless they are offered more than they could get in the resale market. In other words, VERS would not just be a means to monetise an ageing HDB flat but also a way to obtain an exit grant of sorts, sharing some of the upside from the redevelopment of the whole precinct. 

Would this further dilute demand for private property from HDB upgraders in the long term? And, combined with increasingly punitive taxes on foreigners and local buyers of multiple properties, where does this leave the local property developers? 

The rumblings of discontent from developers following last month’s cooling measures, and the steep downward trajectory of their share prices, suggest that neither the developers nor the market are in tune with the current thinking of policymakers. And, I would not be surprised if we are also underestimating the impact of the impending HDB redevelopment programme.

None of the major developers face any real financial risk, of course. Most have robust balance sheets and diversified business profiles, with significant holdings of investment properties and overseas exposure. Moreover, with the notable exception of Oxley Holdings, their shares are mostly trading well below their book values. 

That does not necessarily make them bargains, though. Several years ago, I bought shares in SC Global Developments, at a steep discount to the company’s book value. I figured I was indirectly gaining exposure to its unsold stock of luxury properties, and that I would reap a nice gain, as the properties were sold for cash. But SC Global took its time selling its properties, and its stock languished. In the end, I was saved when the company’s major shareholder offered to take the company private in late 2012, though I wasn’t entirely happy with the offer price. 

Without any clarity on how the developers will adapt to changes unfolding around them — or even if they recognise that things are changing — I’m not expecting the discounts at which their shares are trading to narrow anytime soon. Perhaps it’s time for some of them to think about going private, like SC Global did over five years ago.