Watch Singapore's Stock of Unsold Properties for Signs of Revival

 | Mar 15, 2017 | 10:00 AM EDT
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These are not happy times for Singapore, particularly if you own your home. The city state has seen its property prices slide steadily for more than three years. And as millions who suffered through the financial crisis in the West can attest, there's nothing quite like losing a large part of the value of your home to make you feel poor. 

Should this, though, be the time for investors to take a look at Singapore's property developers and banks? The stocks are beaten down, it looks like a bottom for the real estate market, and the government has eased up on some of its tough taxes. 

Singaporeans have certainly grown poorly on the residential side, which has slid steadily since mid-2013. Average home prices have posted roughly a 20% decline in that period. There are now signs that the market is turning. But it's still a long way back. Rents haven't performed much better than those in the office space, down 8.0% in 2016. 

Hong Kong and then Singapore are the two freest economies in the world, according to the Heritage Foundation. The two "city states" (OK, Hong Kong is technically part of China, not a state) have few, if any restrictions on the flow of funds in and out of their financial systems. That means they're favorite spots to park "hot money," some of which inevitably finds its way into bricks and mortar.

As money sought a post-crisis safe haven, both cities therefore imposed stringent taxes on overseas buyers of real estate, seen in both places as mainly aimed at mainland Chinese buyers. In Hong Kong, that requires a non-resident property investor to pay an extra 30% on top of the purchase price to the government.

Hefty. Singapore has a 15% tax on foreigners, as well as a "seller's stamp duty" for owners who sell soon after buying. It last week lowered the quick-sale restrictions, with the highest duty falling from 16% to 12%, as well as reducing debt-servicing ratio requirements.

Time to jump into a market about to turn?

Not so fast, the minds at the investment bank Jefferies say. They've just released the findings of their discussions with Hong Kong investors who are also looking at the Singapore property sector.

The relaxation of the seller's stamp duty still leaves the restrictions on buyers in place. The new rules should encourage transactions at the end-user level, but the government this time also toughened the tax on the transfer of corporate entities, deterring investors, so Jefferies thinks the overall effect on the market will be a wash.

Developer stocks have rallied 20% since the start of the year. That being said, Singapore developers are still trading at a 30% discount to their traditional price/book ratio. 

Jefferies prefers Wing Tai Holdings SG:W05, while it has a Hold on City Developments (CDEVY) . Other major listed developers worth a look include the Sim Lian Group SG:S05, Tuan Sing Holdings SG:T24, the Metallurgy Corporation of China (MLLUY) subsidiary MCC, and GuocoLand SG:F17.

Despite the budget valuations, the recent share price run-up appears to have given the Hong Kong investors cause for pause. With 25,000 unsold apartments and another 19,000 under construction, there's a fairly large pipeline of supply that causes an overhang in the market.

Developers had been getting around the purchase restrictions by structuring deals in imaginative ways, but the rule changes have cut off that option. They're left with the choice of either slashing prices to stimulate sales, or hanging on to their inventory.

As a result, earnings growth doesn't look all that promising to Jefferies equity analyst Krishna Guha. It would take a change in the deterrents for investors or a shift in Singapore's stringent immigration laws to change that.

Singapore's banks, also suffering amid a mortgage slump, do have the prospect of potentially higher margins once U.S. interest rates rise. The government manages the Singapore dollar against a basket of currencies that has a heavy weighting to the greenback, meaning at least part of the U.S. rate rises anticipated this year would feed through.

The catch is that private consumption is weak, job growth anemic and below trend, and leverage remains high. The Hong Kong investors said they believe Singapore would need to import growth from other parts of the world (it's a highly export-driven economy) for rates to start to rise. Amid ample liquidity, they'll more than likely be kept in check.

Office rents have plunged 9.9% last year, according to JLL, and are likely to do so again in 2017. Companies will likely hesitate to expand amid global uncertainties, and there's plenty of new stock to drive up vacancy rates, which have been rising since 2015 and are now at 7%.

Contrast that with Hong Kong, site of the world's highest office rents, which are only climbing to altitudes that match the city's skyscrapers. The onslaught of mainland Chinese firms looking to establish a beachhead in Asia's financial capital propelled commercial rents to growth by 9.6% last year. Prices and rents in Central, Hong Kong's Wall Street, will likely rise by close to 5% this year, JLL predicts.

When, then, will Singapore bounce back? The Lion City did not rank among the top cities in terms of real estate investment intensity, according to a study released Wednesday by the commercial brokerage Jones Lang LaSalle. Hong Kong placed 28th. Sydney (No. 8) and Melbourne (No. 16) are the only cities in the Asia Pacific region to place higher, although Chinese cities like Shanghai and Beijing are coming on strong.

Singapore's expected economic growth is at least a little stronger than in Hong Kong, with gross domestic product forecast by Oxford Economics to rise 2.4% this year in Singapore and 1.9% in Hong Kong. That's ahead of Japan's expected 1.2% growth, but a far cry from the emerging markets in this part of the world. India tops that bunch, with an economy winning new-found friends and rising by around 7% per year.

Home buyers will undoubtedly come back into the Singapore market. Hong Kong's home prices have in fact hit all-time highs despite all the governmental meddling -- there's still nowhere near enough supply.

It's likely those figures for unsold inventory that are the ones to keep an eye on. The available stock has drifted down since peaking in 2011. It's a buyer's market now, for sure, but if the stock comes close to the 16,000 level of apartments typically sold each year, watch out.

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