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What Stock Market Investors Need to Know about Falling Property Prices

In the past few years, Singapore has seen growing property prices amidst a low interest rate environment. However, the series of property cooling measures that were put in place by the government, coupled with the threat of possible interest rate hikes, have taken their toll on the sale of private residential properties recently.

Over-supply conditions: Houses aren’t being sold

As of April 2014, the situation looked pretty gloomy for property developers according to a recent report from the research arm of realtor HSR; over 50 private residential development projects saw a take-up rate of less than 50% over the past four months.

In fact, there have even been two separate projects that have not experienced a single sale between Dec 2013 and April 2014; the first project is a joint-venture between Hiap Hoe (SGX: 5JK) and Superbowl (SGX: S48) while the second project is from Regal Development. Some of the other projects with particularly poor sales that are mentioned in HSR’s report are shown in the table below.

Project Developer Cumulative take-up rate as of April 2014
Cosmo Loft SingHaiyi (SGX: 5H0) 8.9%
8 Raja Popular Holdings (SGX: P29) 7.7%
One Balmoral Hong Leong Holdings
(SGX: H22)

Source: HSR report

Furthermore, the problem for developers of private residential properties is exacerbated as the Housing Development Board has started to increase the supply of new public housing units under its Build-to-Order and Sale of Balance Flats schemes. For instance, 6454 flats were just launched last Thursday under those two schemes by the HDB.  This will increase the housing options for many Singaporeans and provide a potential lure away from relatively pricier private apartments.

Developers set to cut prices to move units

Back in April, CapitaLand (SGX: C31) was one of the most high profile developers that had cut prices for its projects in order to move sales. As reported by The Straits Times in a 21 April article titled Sky Habitat relaunch draws crowds with lower prices, CapitaLand reduced prices for its Sky Habitat project – the initial launch two years ago saw selling prices of S$1,435 per square feet (psf) to S$1,893 psf; those have been pulled down by 10% to 15% to range between S$1,276 psf and S$1,590 psf – and managed to move 80 units in just one Saturday.

With one of Singapore’s largest developers cutting prices and seeing a positive reaction, smaller players might just follow suit. This is also a view shared by HSR’s research team, who also noted the positive reactions to CapitaLand’s price adjustment in its report that I had referenced earlier.

Business newswire The Business Times had recently reported on the same phenomena of developers cutting prices in a 16 May article titled Price cuts revive April private home sales; further discounts expected. In it, the journalist spoke to CBRE research head Desmond Sim, who gave a very logical explanation and rationale for developers’ willingness to cut prices. The journalist wrote that Sim had mentioned that “Pushing sales through discounts, even if it eats into profit margins, also helps manage cash flow which is needed to finance ongoing construction costs.”

Foolish Bottomline

So, how do all these developments – poor sales uptake in private residential projects in addition to developers pushing through price cuts – affect investors in the stock market? Investors interested in property-related counters may have to focus on the ability (or lack thereof) of property developers in selling their properties. That’s in addition to paying attention to the current situation regarding a lukewarm reception from property buyers for new private housing projects.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.