AMP Capital has been a player in global real estate for some time, and with A$187.7 billion ($144 billion) of assets under management (as at the end of 2017), it's got investment muscle. In this commentary, its global head of listed real estate, James Mayhew, puts the case for Singapore. The editors are pleased to share these views but they don’t necessarily endorse guest comments and invite readers to respond. Email tom.burroughes@wealthbriefing.com
 
The concentration of business activity in a handful of global cities and easy liquidity from central banks has led to phenomenal residential price growth over the last eight years. Valuations have soared in global cities from Shanghai to Stockholm as well as the most global of all; New York and London.

Fuelled by cheap money, the almost parabolic rise experienced in these cities has raised fears that certain markets may be close to rolling over. Some of these such as London and Vancouver are already starting to soften as the deathly combination of government intervention and rising interest rates begins to have an impact.

However; there is one gateway market that is an exception to this trend, and moreover its economy is starting to rebound at the same time - Singapore. 

The city state not only missed the same residential price explosion but amazingly saw a decline in house prices over this same period of excess central bank liquidity. 

We believe that Singapore residential values are now in the early phase of a multiyear recovery trend following the easing of the two major headwinds that have held back the market since 2013 and a better balance between supply and demand.

Firstly, the government (through the Monetary Authority of Singapore) has eased some of its macro prudential measures, implemented to curtail both speculation and to support affordability in the housing market.

Secondly and most importantly, the domestic economy is now looking far more robust than it has for many years, with household balance sheets at their strongest position in 20 years. We think this creates a fantastic opportunity for residential developers in Singapore that have been sitting on sizeable land banks and are now pushing inventory into a rising market.

Beginning in 2009, Singapore introduced a series of restrictions on buying, selling and financing residential property. This came as the government became concerned about housing affordability for citizens as cheap money from central banks flooded into Singapore’s open economy to finance real estate investment.
 

Buyers’ stamp duty was set at 15 per cent, a level that has successfully deterred most foreign investors and speculation has been discouraged with a 16 per cent sellers’ stamp duty on sales made within a year of purchase. The policy certainly had the desired effect, since 2013 the residential market has fallen by 12 per cent over 15 consecutive quarters, the longest losing run in the 40 years that Singapore has compiled such data.

However, in 2017 the Singapore government announced that it would unwind some of these measures. Home prices had fallen substantially and the government was concerned about the impact of this on the country’s three main banks. In short, as competing global cities around the world had seen house prices hit the stratosphere and affordability hit the floor, Singapore was moving in the opposite direction.

Sellers’ stamp duty will now only be payable on sales within three years of purchase, rather than four, and the stamp duty rate is being reduced. It was also announced that rules regarding debt servicing ratios for some mortgagees would be relaxed.

The Singapore residential market’s other headwind was the weakness of its domestic economy stretching back to 2012. It has suffered from weak external demand and subdued consumer spending during this time.

However, signs are now emerging that Singapore is finally starting to motor again, with improvements in the services economy potentially providing a further boost. This is being driven by growth in export-orientated high value industries such as health care, information technology, communications and higher education. This led to the Singapore economy growing by 5.4 per cent year-on-year in the third quarter of 2017, the fastest growth in four years.

This in turn is boosting fundamentals in the housing market as net wealth improves – driving greater confidence, increasing transactions and falling levels of unsold inventory, with supply being further reduced by the demolition of older condominium blocks in what are known as en bloc sales. Residential developers are in fact holding inventory releases back, very likely because they see greater value tomorrow than they do today, at a time where we are at a decade low in unsold residential stock.

Sustainable economic growth and a relaxation of government controls are the keys to a recovery in the Singapore housing market. These conditions have been met and we appear to be at an inflexion point at the same moment in time as other residential markets are ending their multiyear bull runs. The relative price attraction of Singapore residential property compared to other world cities is driving investor demand and multiple expansion in those residential developers that are listed companies, as the growth realisation begins to get priced in.

We think that solid housing market fundamentals in a developed Asian economy with protected property rights and an attractive lifestyle represent an attractive opportunity that some investors are now eager to explore.