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4 Risks to Watch for Property Companies

The private residential property sector in Singapore has been in a funk for the past few years and the performances of the property giants CapitaLand Limited (SGX: C31) and City Developments Limited (SGX: C09) have been emblematic of the situation.

From 2010 to 2014, CapitaLand’s net income has fallen by 5% per year on average and its share price has declined by 17% in total from S$4.20 at the start of 2010 to S$3.48 today. It’s a similar story for City Developments; for the same periods as CapitaLand, City Developments’ net income has dipped by 0.5% annually while its shares have lost 14% in price.

Given what we’ve seen, it might not be unreasonable to suggest that a recovery in Singapore’s private residential property sector can be a key catalyst for real estate developers in Singapore to return to growth. Unfortunately, there are signs that recovery in the sector might still be some ways down the road.

Interest rates

Interest rates in Singapore are currently low. But, there are already signs that interests rate might be heading higher in the future. If that is the case, property buyers  would have to service more expensive debt for their property ventures; this might result in less incentives for them to want to get hold of private real estate.

Given this, a hike in interest rates might be bad for business.

Immigration control

Authorities in Singapore have been steadily tightening control over immigration these past few years. Immigrants are a large group that contribute to the demand for more housing in Singapore. If that source of housing demand is reduced through a lower influx of immigrants, it might be hard for overall demand for private housing to grow.

Housing supply

Economics 101 would tell us that higher supply will likely lead to lower prices – that’s a problem for the housing market at the moment. It’s expected that more than 150,000 residential units (of both the private and public housing variety) will be flooding the market from 2015 to 2017.

Cooling measures

Lastly, there is still no sign that the government will be removing any of the property market cooling measures that are in place now. The cooling measures have been very successful in “cooling” the property sector in Singapore. But, if it is not removed, there will be lesser chance of a recovery in the sector anytime soon.

Foolish Summary

Investors might have to adjust their expectations for the property sector in Singapore. Although it’s likely that a recovery will happen someday, the current signs are hardly anything to be optimistic about.

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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 writer Stanley Lim does not own any companies mentioned above.