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Hammer time: What the auction numbers are saying about the property market

We look at what auction numbers are saying about the property market

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ETC’s Joy Tan says small, strata-titled shop units in commercial or mixed-development sites are the most difficult to sell at auction. Footfall within these developments is very low, given that there is no controlled tenant mix or anchor tenant within these developments, and the units are thus not attractive to investors.

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“The volatile financial markets and the digital transformation in the service sectors are likely to result in a more active capital flow in asset owners as they recalibrate their portfolio to optimise returns,” says Knight Frank Singapore’s Lee Nai Jia.

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Foreclosures by banks in the residential and retail sectors peaked in H1 2019, following the cooling measures introduced in July 2018, says Colliers International's Tricia Song.

"S$9.1 million once, S$9.1 million twice, S$9.1 million sold!" went the beaming auctioneer, as she hit the gavel to seal the mortgagee sale of a freehold apartment in Honolulu Tower in Bukit Timah on July 23. The sprawling apartment was one of nine properties sold under the hammer in the third quarter this year. At S$9.1 million, the prime residential property was the highest-priced transaction among auction sales in that period. Mortgagee listings - properties put up for sale by banks foreclosing on loans - reached a high of 362 (including re-listings) in the first half of this year. That was a record for listings in a six-month period, according to Colliers International which has collected half-yearly data from all major auction houses in Singapore since 2008.

The numbers reflected a record number of properties foreclosed by banks in the residential and retail sectors.

Consultancy company Knight Frank Singapore, which publishes quarterly research bulletins on the auction market, similarly found mortgagee listings at highs in the first quarter of this year - up 112 per cent year-on-year (y-o-y) and 28.2 per cent quarter-on-quarter (q-o-q) to 159.

Mortgagee sale listings eased in Q2 to 146, down 8.2 per cent q-o-q, before rising sharply again, by 19.2 per cent in the next quarter to 174 in Q3. Knight Frank figures do not include properties sold before and after auctions.

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Residential mortgagee sales formed the bulk of the listings in all the three quarters this year. The proportion rose from 52.2 per cent in Q1 to 62.3 per cent in Q2, but dipped to 59.2 per cent, Knight Frank figures showed.

Feeling the heat from cooling measures

A confluence of factors contributed to more residential forced sales by banks.

Tricia Song, head of research for Singapore at Colliers International, tells The Business Times that foreclosures by banks in the residential and retail sectors peaked in H1 2019, following cooling measures introduced in July 2018.

Lee Nai Jia, head of research at Knight Frank Singapore, says: "With the cooling measures in place, distressed owners were unable to divest their properties quickly and more properties were foreclosed. This led to the 69.4 per cent y-o-y increase in residential listings under mortgagee sale (in Q1) ."

Owners of prime properties were hardest hit. Dr Lee notes that units in prime locations (Districts 9, 10, and 11) listed under mortgagee sale increased the most - up 53.8 per cent q-o-q, or 233.3 per cent y-o-y, to 20 listings in Q1.

"Proportionately, we see an increase in the larger non-landed apartments (above 1,000 square feet). The restructuring of the economy was among the reasons for the increase in mortgagee sale listings."

A subdued rental market and rising interest rates did not help residential mortgagors. The three-month Singapore Interbank Offered Rate (Sibor) - the benchmark for pricing most home loans - has risen steadily from 0.457 per cent in January 2015 to 1.886 per cent this August, ramping up interest costs.

In Q2, a slower economy and volatile financial markets put further pressure on real estate markets, feeding into the increase in mortgagee sales, says Knight Frank.

Dr Lee says: "Based on anecdotal evidence, several properties were previously owned by business owners or owners who held senior management positions, before appearing under mortgagee sale. Historically, increases in the mortgagee sale listings were correlated to the level of uncertainty in the market. For instance, the number of mortgagee listings increased from 18 in Q1 2014 to 54 in Q1 2015 due to the sharp fall in oil prices in 2014."

Apart from properties in the "core" prime areas, there were also more non-landed residential listings for District 1 (Raffles Place, Cecil, Marina, People's Park) and District 15 (Katong, Joo Chiat, Amber Road) listed under mortgagee sale in Q2 compared to Q1 2019.

The residential listings located in District 1 came from projects in the prime Central Business District such as Marina Bay Suites, One Shenton, and The Sail @ Marina Bay.

The number of non-landed listings under mortgagee sale in District 15 increased five times from two in Q1 to 10 in Q2. Freehold penthouses from projects such as 38 iSuites, Tivoli Gardens and Siglap V accounted for seven out of 10 total listings in the district.

Foreclosures have hit property holders seemingly across the board, although the bulk are on loans for apartment units outside the core areas - the sector that is most accessible to buyers.

Joy Tan, who helms the auction and sales unit at Edmund Tie & Company (SEA) or ETC in short, says: "This year, we are seeing varied property types under the hammer, from Good Class Bungalows (GCBs), to non-landed properties in both the Core Central Region (CCR) to Outside Core Region (OCR), standalone factories, shophouses, etc. The bulk of auction listings are mostly residential non-landed units in the OCR."

The OCR covers the likes of Districts 16, 17, 18, 19, 26 and 27 - Bedok, Pasir Ris, Simei,Tampines, Hougang, Punggol, Sengkang, Serangoon and Woodlands.

Shoebox retail units not shoo-in

The retail sector was also hit, with newly completed smaller strata-titled units - that were marketed to small investors - bearing the brunt of it.

Retail mortgagee listings stood at 55 in H1 2019, a record high since H1 2008, with small units making up a sizeable portion of the total listings, Colliers data shows.

Knight Frank, which tracks quarterly numbers, says forced sales in the retail sector rose 39.4 per cent to 32 in Q1. The smaller strata-titled units of less than 500 sq ft accounted for 71.9 per cent of mortgagee sale listings in the sector.

These "shoebox" retail units were mostly newly purchased, at prices over S$3,000 per square foot in 2012 to 2014. They are typically in strata-titled malls in locations with low foot traffic.

"Following the completion of the malls three to four years on, we observed that these unit owners had difficulty finding tenants or sustainable rents, and were often unable to support mortgage payments. With the structural decline in retail rents and occupancy, and retail sales in doldrums, some owners were unable to re-sell their units and defaulted on their bank loans," says Collier's Ms Song.

Retail listings from District 14 (Geylang, Eunos) appeared in mortgagee sales in all three quarters this year, and included recently completed mixed-use developments such as Centropod @ Changi (freehold, temporary occupation permit granted in 2015), Euhabitat (leasehold, TOP 2016), and HexaCube (freehold, TOP 2017).

ETC's Ms Tan says shoebox strata-titled shop units within commercial or mixed-development sites are the most difficult to sell at auction.

"Generally, footfall within these developments is very low, given that there is no controlled tenant mix or anchor tenant within these developments, and are thus not attractive to investors or buyers."

Also, their small size is a constraint, making such units unsuitable for many businesses.

Will mortgagee listings ease with declining interest rates?

Lower interest rates could improve affordability in terms of mortgage servicing, says Steven Tan, Colliers' director of capital markets. Given the low financing costs, some investors may feel that parking their funds in real estate could garner better returns in the long run.

However, Knight Frank's Dr Lee holds a different view: he thinks owners and investors might instead sell their properties to extract housing equity and invest the capital in assets that offer higher yields.

The increase in residential listings under mortgagee sale from Q4 2017 to Q2 2019 was highly correlated to the rise of interest rates, says Knight Frank. With residential rents largely unchanged, the higher interest rates exerted more pressure on distressed owners. But Knight Frank thinks it is too early to say if lower rates will give home owners a break, given the lag in impact.

In contrast, ERA thinks the Singapore property auction market is less sensitive to US interest rates. There is a lag in local mortgage rates in tracking the United States Federal Reserve. With local rates already quite low, another 25 to 50 basis point reduction by the Fed would not do much for the local property auction market.

Auction transaction rates low

While more mortgagee listings means more business for the auction players, very few properties listed end up actually being sold at auction.

Knight Frank numbers show that just 0.8 per cent of properties put up for auction were sold in Q2, with the success rate falling from 6.4 per cent in Q1 2018 to 1.4 per cent in Q1 2019.

ETC's Ms Tan says opening prices vary with interest, with some " below current market price or at reserve price to lure more parties to participate in the bidding".

Buyers are mostly on the sidelines under current market conditions, but will bid if they find value, says Knight Frank's Dr Lee.

Also, potential buyers are keen to gauge the level of interest at auctions. "Post-auction, however, is when transactions begin happening, via private treaty."

Private treaty is the most common mode of sale in the industry, where buyers negotiate privately with sellers in a "willing seller, willing buyer" process.

Knight Frank does not track transaction data post-auction. It does, however, expect auction listings to increase over last year by end-2019.

"The volatile financial markets and the digital transformation in the service sectors are likely to result in a more active capital flow in asset owners as they recalibrate their portfolio to optimise returns," says Dr Lee.

By this, he means owners and investors have begun looking to sell their properties to extract housing equity, so as to invest in assets that offer higher yields, leading to more properties being put up for owner sales.

Knight Frank sees mortgagee listings continuing their uptrend till end-2019 and into 2020 amid further weakening in global economic outlook. Increased volatility in equity markets and prolonged weakness in the export-base sectors will increase residential and non-residential listings under mortgagee sale.

Steven Tan, Colliers' director of capital markets, thinks that more properties will be sold either during auction or via private treaty after auction sessions for the rest of the year. "Some of the factors that continue to drive sales include the more favourable interest rate environment and stable political landscape in Singapore."

Changes to public housing policies could potentially boost demand for auction properties. A new housing grant and higher income ceilings for eligible Housing Board flat buyers could see more young families and singles buying build-to-order or resale public housing. In the case of resale transactions, some of the flat sellers could opt to look at private properties in the auction market, says Mr Tan.

ETC's Ms Tan says: "This year we saw an uptick in interest and transaction levels mostly in the second half of the year."

She cites ongoing unrest in Hong Kong that has sparked greater interest from potential buyers from the territory.

Plus, en-bloc sale owners who collected their money in the first half of the year are also now ready to enter the market and make a purchase for a replacement home or further investment, at a price in the auction market that they perceive to offer better value than the primary market.

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