Sunday, August 23, 2009

Vacancy rate a key statistic

Residential property buyers should zoom in on this in the URA quarterly release

Every quarter, the Urban Redevelopment Authority (URA) releases data on supply and demand in the residential property market.

In this year's second-quarter release, there were 16 annexes filled with many charts, ratios and other statistics. Multiply this by the historical releases, and the amount of data could be mind-boggling.

So, what should one focus on in this buffet of figures? For me, it is the vacancy rate. Residential property buyers should zoom in on this key statistic. It can be found in Annex E-1 of the release.

The vacancy rate is the number of vacant units divided by the total number of available units in Singapore. Previously, the vacancy rate was also expressed by the URA in the inverse way - as the occupancy rate. This is the number of occupied units divided by the total number of available units.

The vacancy rate is important because there is a positive correlation between the occupancy rate and prices. From intuition, this makes sense - a fuller 'Hotel Singapore' would result in higher rents, and thus capital values. The occupancy rate was 94.1 per cent in the second quarter.

Unfortunately, prices tend to lead changes in the occupancy rate by two to three quarters. The key, therefore, is to figure out how the vacancy is likely to change. So, how does the vacancy rate look going forward in the next two years?

The clues are in the URA data, HDB policy and the mechanics of supply and demand.

According to URA data, an additional 8,100 private homes on average have been occupied every year since 1995, notwithstanding three severe economic downturns. With the recovering global economy, we should at least see this number next year.

The opening of the integrated resorts next year, which will attract more foreigners, may push this number even higher.

Here again, the published vacancy rate delivers another nugget, as URA's Annex E-1 shows how it is derived. Despite numerous completions in the first half of the year, the vacancy rate was steady as the number of homes occupied increased by 4,774 in the first half of the year - 2,616 in the second quarter and 2,158 in the first quarter.

This took place despite Singapore's worst recession since independence. It also proved wrong the projections made by a foreign investment bank that hundreds of thousands of foreigners were expected to leave Singapore, thereby affecting occupancy.

This strong underlying demand is probably driven by immigrants. From data published by the Singapore Department of Statistics, growth in the resident population has been driven by the growth in the number of permanent residents (PRs).

From 2000 to last year, the number of citizens grew by 0.6 per cent annually, while that of PRs grew by 5.8 per cent. PRs have been growing at an average rate of almost 22,000 per annum, and they need a roof over their heads.

On the supply side for private residences, there will be only 5,233 completions next year, according to Annex E-2 of the URA quarterly release. Here, I have used expected completions of units under construction and ignored those that are still being planned. It is unlikely that developments which have not broken ground can be completed in 15 months.

This shortfall will push the rental vacancy rate down. I estimate that this will fall from the current 5.9 per cent to below 4.9 per cent.

The last time this happened, in early 2007, rents and capital values moved quite a fair bit. Moreover, unlike in 2006, the cushion of unsold HDB flats is probably no longer available.

Supply relief will come only in 2011, with 9,339 units expected to be completed. As for 2012, it is too early to tell, given the possibility that some developers might complete their recently launched projects early. Hence, the next 12 months appear to signal good times for the residential property market, and perhaps this is what investors and speculators have concluded too.

Speculative interest will wax and wane depending on market conditions. Speculative interest is important because it provides liquidity. It makes it easier for buyers and sellers to perform transactions. And with more transactions, the fair value of an asset is reached more quickly.

Nevertheless, if one feels uneasy about the current rally and is hesitant about investing in a property, there will be other opportunities.

In the investment world, another bus will always come along. In the near term, the United States property market is an opportunity. Investors may want to check out funds that include this bombed-out sector.

In the longer term, Singapore office properties should offer compelling value by 2011, when the oversupply drives vacancy rates up.

Key number
The vacancy rate is important because there is a positive correlation between the occupancy rate and prices.

Source: Sunday Times, 23 Aug 2009

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