Still a niche for exec condos

Published 3 March 2011
The Business Times
By Ong Kah Seng

AFTER a hiatus of half a decade, executive condominiums (ECs) made a return last year when three such projects were launched in the final quarter of 2010.

Still a niche for exec condosExecutive condos were introduced in 1995 to meet the aspirations of the sandwiched group who might not qualify for public housing but find private property beyond their reach.

This group would likely comprise homebuyers with monthly household incomes above $8,000 – the ceiling for new HDB flats – but under $10,000.

However, with the Jan 13 cooling measures expected to rein in bullish sentiment in the private residential market, are ECs still relevant?

ECs generally become necessary whenever private suburban condominium prices are soaring and the gap between public and private housing grows wider. This makes it more difficult for the sandwiched class to buy private condominiums.

With the recent cooling measures, suburban private condominium prices are expected to correct, or at least stabilise, which raises the issue of their relevance, going forward. However, ECs are expected to be continually favoured for a number of reasons.

Holding up

Firstly, while the government cooling measures are severe, they may not totally douse sentiment as the local economy is fundamentally strong and poised for a sustained recovery. Also, many see ample liquidity in the system helping to hold up the residential market.

This suggests that any marginal price correction in suburban private condominiums can potentially be reversed in the medium term. A possible 5 per cent dip in suburban condo prices in the first half of this year may reverse in 2H 2011. This would bring prices at end-2011 back to what they were early this year, meaning that prices of suburban condominiums would be near record highs.

If some home buyers find private housing consistently pricey, the sandwiched class who are at the lowest rung of the private property ladder will feel it even more, and thus will appreciate ECs as an alternative.

Another factor working in favour of ECs is the way the cooling measures have been structured. Primarily, the seller’s stamp duty was hiked and extended over four years, such that a typical private homebuyer is unlikely to re-sell his property within four years unless capital gains are in excess of the seller’s stamp duty.

With the loss of flexibility in reselling private condos, ECs become more attractive since they are priced about 20 per cent less than new private suburban condo projects in the vicinity. And the effective purchase price would be even lower if the EC buyer is a first-timer eligible for a government housing grant.

After occupying the EC for five years, the EC owner can sell the property on the open market like a private condominium with one restriction – it can only be sold to a Singaporean or permanent resident. After the 10th year, all restrictions are lifted and ECs will be on par with private property.

With the latest property curbs, the EC ruling of a five-year minimum occupation period becomes much less of a downside since private property too would effectively have a four-year restriction on reselling.

From the developer’s point of view, ECs could also be an attractive proposition.

Although homebuying sentiment has moderated in both the public and private housing sectors, there are still opportunities for sites and projects with strong attributes. Seven EC projects are expected to be launched this year, comprising four from sites awarded in 2010 and three from sites to be awarded under the Confirmed List in H1 2011.

With most of these sites enjoying some proximity to major transport nodes, that is, an MRT or LRT station, the response for the EC projects is expected to be encouraging. With developers becoming increasingly cautious in bidding for land, interest for the remaining three EC sites will depend on how promising the sites are in terms of location and whether they are in emerging new towns with significant growth potential.

Some competition

While ECs have a role to play in the residential market, they do face increased competition, particularly as seven projects are likely to be released for sale this year, in addition to three projects that were launched for sale in 2010. The three projects – Esparina Residences, The Canopy and Prive – were released for sale in the last quarter of 2010.

Although this comes after a long dearth of EC projects and there seem to be ready buyers, overall home buying interest may be affected by post-cooling measures.

Also, the sandwiched group has another option in the Design, Build and Sell Scheme (DBSS) flats offered by the HDB. Monthly income ceilings for this type of flats were raised from $8,000 to $10,000 in the second half of 2010.

DBSS flats, which are priced 20-25 per cent lower than ECs, can be an attractive alternative. An expected economic slowdown may prompt some homebuyers to be cautious and opt for DBSS flats rather than ECs.

However, the sandwiched class buyer is likely to carefully evaluate both options, particularly as ECs promise the benefit of semi-privatisation after five years and full privatisation after a decade of occupation. Their resale market is thus bigger than for DBSS flats. DBSS flats will always remain in the domain of public housing and also do not offer condominium facilities.

Matching supply and demand

It is difficult to anticipate homebuyers’ interest, particularly when demand is seemingly latent as it is now. Homebuyers are taking a breather after the latest government curbs but interest remains strong.

ECs are an even more challenging housing issue as they are a hybrid product. Policymakers will have to closely monitor the private residential market and take a proactive approach in ensuring a timely supply of ECs, especially when suburban private condominiums may be increasingly beyond the means of the sandwiched group.

The number of ECs launched and in the pipeline appear appropriate to the situation of peaking private home prices and as such their role in catering to the sandwiched group seems to have been fulfilled.

Going forward, ECs will continue to be relevant as private home prices are unlikely to suffer a drastic fall despite the latest government measures. But care must be taken not to have excessive supply since a significant portion of eligible EC homebuyers would have their needs met by the new EC projects being rolled out.

Matching the supply of ECs to demand can be improved with realistic forward availability. This would mean having new EC sites made available for sale under the Reserve List in government land tenders rather than on the Confirmed List. This leaves it to developers to gauge demand in a particular location and trigger release of the site for sale.

Ong Kah Seng is senior manager, research (Asia Pacific) at Cushman & Wakefield

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