Executive condominiums: Options may dwindle in 2017

The executive condominium market has cooled down after a slew of cooling measures were implemented in December 2013, which included the implementation of a 30% Mortgage Service Ratio (MSR), and a resale levy for second-time buyers. Tightened financing conditions have dampened demand, and the resale levy has deterred many upgraders. Even though the income ceiling for EC buyers has been raised from $12,000 to $14,000 with effect from Aug 23, 2015, there was no significant pickup in demand. One possible reason is that a large proportion of EC demand is from households earning $12,000 and below. As such, buyers are still very price- and product-sensitive, with demand skewed towards selected projects. Another reason would be that the adverse effects of the cooling measures still outweigh the benefits derived from the rise in income ceiling.

Chart 1: Performance of EC projects in their month of launch

As at end-April 2016, there were around 4,010 unsold EC units, excluding the 620 unlaunched units from Sol Acres Phase 2 (see Chart 2). The rise in the number of unsold EC units can be attributed to slower take-up rates and a large number of EC projects launched in 2015. In comparison, the number of unsold inventory for the private residential market stands at 23,735 units as at 1Q2016. To be fair, the potential demand pool for the EC market is lower than the private residential market, owing to its restricted rules and regulations.

Chart 2: Unsold EC inventory

On the back of the slowdown in the EC market, the EC supply in the Government Land Sales (GLS) Programme had been tapered off (see Chart 3). Only three new EC sites were released in 2015, which could yield about 1,010 EC units. This is about 72.6% lower than the potential yield of 3,685 units from seven EC sites released in 2014. In 1H2016, only one site was released, which could potentially yield a total of 635 units. However, the impact from the tapering of GLS sites would only be apparent in 2017, due to the time lag between the launch of the site in the GLS programme and the actual project launch in the market.

Currently, the average period between the release of an EC site in the GLS programme and market launch is typically 17 months or more. For example, an EC site released in 1H2015 can be expected to enter the market around 2H2016 or later. The time difference between the launch of a GLS land tender and the tender award is about two months. Additionally, for EC land acquired after January 2013, developers are allowed to launch units for sale only 15 months from the date of award of the EC site, or after physical completion of foundation works, whichever is earlier. Some 3,750 EC units were launched in 2015, and in 2016, about 3,276 units are expected to be launched. However, the number of expected EC launches in 2017 is projected to fall substantially to only around 1,010 units.

Chart 3: Number of units released from GLS and launched in the market

EC- Number of units released from GLS

Will developers cut prices?

Although upcoming projects may be launched at lower prices to entice buyers, it is unlikely that we will see excessive price cuts across the board for existing projects. There are a few reasons for this.

First, the upcoming EC pipeline is limited and, even if new sites are released, there is still a time lag of at least 16 to 17 months before the project can be launched in the market, giving current incumbents a comfortable time buffer for sales.

Second, there is still a long time before additional buyer stamp duty deadlines would be a concern for EC developers (see Chart 4). Under current housing regulations, developers are required to build and sell all units in a new residential project (EC projects included) within five years, otherwise they will be liable to pay ABSD charges on their land costs with interest. Most of the EC projects launched in 2013 or earlier have mostly sold out, and the earliest ABSD deadline for projects launched in 2014 would be 2Q2018. Furthermore, the majority of 2014 EC projects are at least 50% sold.

Chart 4: 2014 EC projects sold out (%) status and ABSD deadlines

Third, demand for ECs is still relatively healthy even though it has slowed considerably since 2013. In 2015, developers collectively launched 3,750 units and sold 2,550 units, translating into an average take-up rate of 68% (see Chart 5). The average take-up rate is calculated by dividing the number of units sold by the number of units launched in the whole market. The average take-up rate in 2013 and 2014 was 107% and 63% respectively. A takeup rate of more than 100% means the number of sold units outnumbered that of launches, indicating sales from prior year launches. Although recent annual take-up rates have fallen compared with 2013, developers are still moving units at a progressive rate.

Chart 5: Number of EC units sold from new and existing launches

Decrease in unsold inventory expected by 2017

ECs are tailored for the “sandwich” class, and this segment of buyers is projected to grow, given income growth and later marriages. Despite the slowdown in the market, demand for ECs remains resilient; it is only a matter of location and pricing. EC prices are unlikely to fluctuate much, as developers remain on solid financial footing and do not face much pressure to sell. Even though unsold inventory is at elevated levels, inventory may dwindle by 2017, given resilient market demand and the expected dearth of new launches in 2017. Prospective buyers may be tempted to wait but what is left at the end of the day may not be the unit of choice.

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Executive condominiums: Options may dwindle in 2017

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