White Paper’s implications for property market

 

⋅ March 15, 2013 ⋅

The recently-published and hotly-debated Population White Paper highlights the key demographic, infrastructural and economic challenges facing Singapore over the next 20 to 30 years.

 

Specifically, it tries to balance the tricky demographic–infrastructure equation. On one hand are Singapore’s persistently low birth rate and consequent need for an immigrant population; on the other are growing concerns over the rising number of foreign residents and the overcrowding of public infrastructure.

 

In a bid to strike a favourable balance, the Government has laid out a vision to expand public transportation and housing infrastructure to cater to a population that is projected to grow to between 5.8 million and 6 million by 2020 and between 6.5 million and 6.9 million by 2030.

 

Among other things, the White Paper sets out plans to double the length of the MRT rail network to around 360km by 2030 and to allocate enough land to build 700,000 new homes by then.

 

While the population projection for 2030 seems like a huge leap from the current figure of 5.3 million, it translates to an annual growth rate of 1.1 to 1.5 per cent, much slower than the 2.5 per cent annual growth rate from 1980 to 2010.

 

Based on this projection, the Government expects the country’s economic growth rate to slow to an average of between 3 and 4 per cent a year from now until 2020, and to between 2 and 3 per cent a year from 2020 to 2030.

 

If the White Paper proposals are carried out as published, its impact on Singapore’s real estate sector is likely to be most keenly felt in the industrial and residential property markets.

 

Industrial property faces inevitable exodus

 

For the industrial property market, the slower population growth projection suggests that the tight immigration and foreign-labour policies currently in place will continue.

 

Thus, labour-cost inflation will likely remain high, potentially dealing a significant blow to labour-intensive manufacturing sectors.

 

Indeed, many of these industries, including food manufacturing, have voiced their concerns to the Government about the White Paper’s implications for the labour market.

 

Given the high industrial property prices and rentals in the current market, the outlook for tight labour conditions and slower economic growth over the long term gives manufacturing companies reasons to continue a trend that has recently developed: Relocating to lower-cost locations such as Iskandar Malaysia.

 

And given the current shortage of land in Singapore, the population projection, regardless of its low growth rate, implies that the Government will increasingly allocate land for higher-value-added commercial or residential purposes, rather than for industrial purposes.

 

This would make the relocation of manufacturing and industrial companies even more inevitable — a prospect that does not bode well for industrial property demand.

 

Residential property faces supply overhang

 

For the residential property market, if we take the mid-point of the longer-term population projection, Singapore will have 6.7 million people by 2030, an increase of 26 per cent from the current figure.

 

Meanwhile, the White Paper’s scenario of adding 700,000 new homes will bring the total housing stock to 1.9 million units by 2030, an increase of 58 per cent from the current number.

 

Even if we factor in the potential demolition of some 200,000 units that will be older than 50 years by 2030, the net increase of 500,000 still translates to a housing stock increase of 42 per cent.

 

Given that the potential increase in the housing supply outpaces the potential growth of the population, the White Paper has created concerns of oversupply in the residential market over the long term.

 

Singapore’s residential property market already faces a near-term increase of more than 30,000 units this year and 40,000 units next year.

 

The addition of 700,000 homes by 2030 would translate to a fresh supply of around 40,000 units a year until 2030.

 

Although this could potentially result in oversupply, the upshot is that it would prevent a repeat of the housing shortage that Singapore had experienced over the past decade.

 

Linking this to the potential expansion of the MRT system, increased housing supply would mean more homes being built around MRT stations in the future. Thus, residential units situated far from MRT stations may find themselves at a pricing disadvantage.

 

By Tan Chin Keong – analyst at UBS CIO Wealth Management Research

 

Source : Today – 15 Mar 2013