By Wong Xian Yang, Head of Research & Consultancy, OrangeTee. 23rd March 2017
On the 10th of March 2017, many were taken by surprise by the government’s move to ease cooling measures by adjusting the holding period and rates for the Seller Stamp Duty (SSD) downwards. Though this change does not directly impact the Executive Condominium (EC) market, there should be a positive spill over effect from the boost in sentiments in the private residential market.
But even before the surprise announcement, the demand for ECs has already risen in the past year with buyers snapping up 3,999 units in 2016, an increase of 56.8% over 2015 sales of 2,550 units. The jump in sales can be partially attributed to improving sentiments in the private residential market, as buyers came back into the market with increasing belief that private residential property prices are stabilising. Notably, the top 2 selling EC projects in 2016 were Wandervale and Treasure Crest which sold a total of 1,001 units in 2016.
Despite the jump in EC volumes on the back of improving sentiments, EC prices have not fallen much. With that in mind, one may ask if ECs still present a compelling value proposition for buyers?
Exhibit 1: Rising sales again
EC launches, sales volumes and prices
Source: URA, OrangeTee
What are Executive Condominiums?
A hybrid between public and private housing, ECs were immensely popular among buyers from 2012 to 2013. Similar to private condominiums, EC are built and designed by private developers and come with condo facilities such as swimming pools and BBQ pits. First-time EC buyers also enjoy government grants of up to $30,000. (check)
However, buying a new EC comes with restrictions. There is a prescribed monthly household income ceiling of $14,000 and buyers of new ECs have to form a family nucleus, which must comprise of two Singapore Citizens (SC) or one SC and one Singapore Permanent Resident (PR). New EC buyers also have to adhere to a Minimum Occupation Period (MOP) of five years before one can sell it in the open market to SC or PRs only. After 10 years, the EC will be considered fully privatised and can be sold to foreigners.
As such, new ECs are sold at a discount to comparable new private condominiums. Currently, the discount can range from 20% to 25%. Notably, when the restrictions on ECs are lifted after the 5 year MOP and at privatisation, the price gap of resale ECs and resale condos narrows to around 9% and 5% respectively.
How fast did past EC launches sell?
Historically, new EC launches sold relatively well with the exception of a few projects which were caught by cyclical market downturns. The early batch of ECs that were launched in 1996 to 1999, were mostly very well received. The median duration for each EC to sell 80% of their stock was only a short 3.7 months. Market sentiments were at a high then after a run up in property prices between 1992 to 1995, and ECs presented an affordable opportunity for many to jump onto the private property bandwagon. However, a few ECs that were launched between 1998 to 1999, were caught in the aftermath of the 1997 Asian Financial Crisis and their pace of sales moderated sharply.
The subsequent batches of EC launches experienced a slower pace of sales, as seen by the increase in median duration. EC came back into vogue from 2010 to 2013, and 24 projects were launched during this period. The suspension of the Design, Build and Sell Scheme (DBSS) and rising private property prices drove demand towards the EC market and the pace of sales fell to 9.3 months. With increased demand, EC prices started to rise and the government intervened to cool the market. A 30% Mortgage Service Ratio (MSR) and Resale Levy was implemented at the end of 2013.
Notably, the EC which took the longest time to sell out 80% of their inventory was the La Casa. Launched in 2005, the La Casa took about 36 months to hit the 80% threshold. Despite the sluggish pace of sales, the developer did not cut prices and La Casa new sale prices actually went on an uptrend from 2004 to 2006, riding on the coattails of rising property prices. At the other end of the spectrum, the fastest selling EC was the Treasure Crest, which sold 80% of its units in less than a month.
Exhibit 2: Most EC projects sell out within 2 years
Time taken for EC projects to sell out 80% of their stock
Source: URA, OrangeTee Research
* Does not include less than 80% sold out existing EC projects, else the total no. of launches would be 16.
Are ECs sure-win investments?
To date, a total of 63 ECs have been launched. Of these, 23 ECs have already completed their 5 year MOP and are available on the resale market. We analysed their launch prices and subsequent resale prices, 5 and 10 years after their respective completions, and matched their caveats to derive the average profits and losses of transactions. The analysis solely focused on $psf prices and does not include grants or other miscellaneous fees.
The results show that not all ECs were profitable after their 5 year MOP. Despite the inherent price gap between ECs and condominiums, buyers who bought ECs near or at the peak of the market, made losses after the 5 year MOP. This applies to the first batch of ECs that were launched from 1996 to 1999. After a series of tumultuous events such as the 1997 Asian Financial Crisis, Tech Bubble Burst and SARs outbreak, private property prices during 2004 - 2005 were still about 35% - 38% below the housing peak of 1996.
The next batch of EC launches fared much better. Launched between 2001 to 2005, during a period of stagnating private property prices, owners benefited from the subsequent upturn in property prices in 2006 and reaped significant profits when they sold their units 5 years after their MOP.
In the long run; 10 years after completion, all of the ECs were profitable. One should bear in mind that EC resale prices closely correlate with the overall private property prices and the EC-condo price gap does not guarantee a sure-win investment for ECs.
Exhibit 3: Higher gains in the long run
Profit and Loss of ECs
Source: URA, OrangeTee Research
Notably, the losses and gains incurred by ECs would be lower/higher compared to condominiums due to their lower purchase price. Though comparable transactions are sparse, one case study would be Yew Mei Green (EC) and Regent Grove (Condo), which were both launched in 1998 and completed in 2000. Many first-hand owners would have completed their 5 year MOP at Yew Mei Green in 2005, and comparing their profit and losses from 2005 to 2010, after which Yew Mei Green becomes privatised, the analysis shows that Yew Mei Green has outperformed Regent Grove every year.
Comparison of profit and loss of first-hand owners
Source: URA, OrangeTee Research
Drivers of EC demand and Outlook
Since the inception of the EC scheme in 1996, ECs have enjoyed good success on a whole. Most ECs tend to sell out within 2 years. There were mounting concerns about the state of the EC market in early 2016, where unsold inventories of ECs soared to a historical peak of 4,007 units. But EC sales started to recover soon after and the current number of unsold inventories have fallen to 2,088 units.
Unlike its condominium counterpart, the supply of ECs is limited, and the only source of new EC sites is from the Government Land Sales Programme (GLS). There were no new EC sites released in the Confirmed List in the last 2 GLS exercise. Bearing in mind the 15-month waiting period from acquiring the site and market launch that developers have to adhere to, ECs will be in short supply in 2017 and 2018. Only 3 new EC projects are expected to be launched in 2017, compared to 5 launches in 2016.
The main driver of EC demand is the significant price gap between ECs and suburban private condos. With a lower purchase price and similar characteristics of ECs and condos, ECs enjoy a higher margin of safety and a bigger potential for capital appreciation. The availability of government subsidies helps to underpin this advantage. Furthermore, the sandwiched class have few alternatives with the suspension of the DBSS scheme.
In sum, ECs still offer an attractive value proposition for eligible own occupiers, given the significant price gap, government grants, and the lack of alternatives for the sandwiched class.