Is The Property Market Going To Crash? What Should Investors In Property Companies Do?

I was just reading through some of the news regarding Singapore’s property market this week and something struck me. Some of the headlines are below – see if you can find a common thread:

1. Stalemate in Singapore property, buyers and sellers holding out for better price”

2. “Singapore Condo Builders Brace as $19 Billion Due: Asean Credit”

3. “Is property a major risk for the Singapore’s economy?”

According to the news I’ve read, Singapore’s Private Residential Price Index has fallen 3.8% over the last four consecutive quarters. 3.8% might not sound like a lot, but for someone who has borrowed up to 90% of a property’s value in order to buy said residence, that is a loss of 38% of the buyer’s equity. The statistic is even worse for the prime residential market ( the top five priciest private residential areas in Singapore). This segment of the market has fallen by 7.3% in price in the first half of 2014.

In case you were wondering, what struck me was the common thread among the headlines (and in the content of the articles) that there’s hardly anything to cheer about when it comes to Singapore’s property market. Does that mean that the property market here is heading for a crash? For investors in property-related companies, what would a steep fall in property prices here do to those businesses?

Thing is, I feel these are the wrong questions to ask. Trying to predict what the property market is going to do in the short term gives you similar odds of success as trying to guess the exam questions for your next examination. Even if you get it right once, you are just lucky; and you can’t count on luck to bail you out all the time.

Instead, the right questions should be centred along the long-term prospects of the property companies.

Let’s use City Developments Limited (SGX: C09) as an example. The property developer has already been actively looking to expand its overseas presence over the past few years. If successful, City Developments would be less of a Singapore property company and be more of a global property developer and asset owner. And as long as the other countries City Developments is in continues to prosper and there is a rule of law which protects the rights of individuals and corporations to own properties, the company’s good track record can give investors some confidence about its future.

Frasers Centrepoint Ltd (SGX: TQ5), which has been developing residential properties in Singapore, can be another instructive example. It is not only busy expanding into foreign markets, but it is also beginning to focus more attention on its asset management and asset ownership businesses. This can be seen from the recent IPO of Frasers Hospitality Trust (SGX: ACV) and the purchase of Australand Property Group (ASX: ALZ). Frasers Centrepoint would be managing the assets of the former, and with the acquisition of the latter, the company would become an owner of  a large stable of Australian properties.

Foolish Summary

These examples show that companies are dynamic organisations. Even if, in a bad scenario, we see the property market in Singapore growing very slowly in the future, residential development companies can address such challenges by diversifying their geographic reach (like what City Developments has done) or diversifying their businesses into property ownership and/or management (such as what Frasers Centrepoint has done).

So instead of predicting the next collapse in the property market (or any other industry for the matter), it might lead to better outcomes if we focus on how each company within said market are reacting to the current situation and analysing how each of them manages risk.

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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 Stanley Lim owns Frasers Centrepoint Ltd