Are you ready for your next move in Singapore’s real estate and construction market?

The recent cooling measures for Singapore’s real estate and construction market not only affects buyers but developers as well. These measures have the potential to impact firm and project value in the long term if developers do not consider the ramifications in totality. In light of these recent changes, developers need to take stock of their current strategies and review their decision-making processes before making their next move. This is key to preserving value in spite of new challenges that continue to arise. Using traditional frameworks in today’s volatile environment will have far-reaching consequences.

Will strong market activity continue to last?

In July 2018, the Singapore government raised the Additional Buyers’ Stamp Duty rates and tightened Loan-to-Value limits on home purchases among other measures. Based on the latest URA data, Q2 2018 saw a marked improvement in market activity for demand and supply compared with Q1 2018. On the supply side, developers launched 160% more private residential units for sale compared with Q1. On the demand side, developers sold 49% more units for the same period. While the latest statistics appear to show an improvement in market activity, analysts suggest that these could be short-lived given the cooling measures in July 2018. The construction industry is also showing signs of recovery, yet statistics indicate that in spite of lower rates of market contraction, the industry as a whole is still in a negative position for the year.

Can demand keep up with supply?

Moving forward, statistics from URA indicate that 26,961 units remain unsold, and 16,640 units will be added to that figure by 2019. The redevelopment of en bloc sites sold since 2016 exacerbates the supply issue, but can buyer demand keep up? The outlook on demand seems bleak in view of the rising interest rates and significant slowing down of en bloc sales. Buyers, especially those displaced by en bloc sales, see resale units as an attractive alternative due to the recent cooling measures (TDSR, LTV). Yet, the positive aspect is that job growth is generally positive and retrenchment rates have been significantly lower. Developers need to watch market demand closely going forward as a mismatch between supply and demand has serious implications for developers in the residential space. Therefore, timing and launch volume must be carefully considered before developers decide on their next move.

Four ways to tackle this challenging business environment

Diversifying into adjacent opportunities

Buyers will need to hold more cash to purchase property and in many cases, this might hamper buying and spending. It will become more costly for developers to buy land and the consequences of not selling out at a launch will become more severe with serious cash flow and financial implications for unsold units. Given the pressure on both sides, developers should consider diversifying their business into other ventures (e.g. mixed developments, industrial properties). Within the industry, it might be worthwhile to pursue smaller developments for the time being or go into a joint venture for larger ones to help spread the risk. However, when considering other alternative asset developments, care needs to be taken to assess other aspects such as credit risk, tenancy mix and even the possibility of back to back ‘built to order’ arrangements, which will reduce the uncertainty quotient of such an investment.

Active risk management

Responding to these new measures decisively will help to ensure that developers are able to preserve project value and dampen its operational impact. Developers need to look at ensuring competitiveness when sourcing for materials and labour, while maintaining quality. Active promotion of health and safety practices helps to ensure claims and contingencies are minimised. Senior management needs to revisit risk governance frameworks and internal control processes to ensure that they are not only preserving, but also maximising value at every step of the value chain. Instead of finding ways to counter regulatory changes, developers need to embrace the revised laws as a new norm. Having a strong risk culture, coupled with a keen awareness of internal controls, is a good tool that developers can use, not only to face, but also to mitigate the effects of these new measures.

Stress testing is a powerful tool

A substantial part of embracing these challenges is to prepare for their eventuality. Traditionally confined to banking and financial institutions, stress testing can be a useful tool for developers to simulate different situations that may arise given the changing environment. Stress testing can be done holistically; financial variables, operational variables and even external service providers can be tested to assess the firm’s capability to respond to potential scenarios such as liquidity issues or disruption of services and support. This not only ensures readiness to deal with the potential impact, but also builds resilience within the business. Analysts expect an approximate 30% drop in property transaction volume, citing the 65% and 75% falls after the last round of property cooling measures. This in itself is a good starting point for firms to engage in comprehensive stress testing.

Developers should use stress testing to simulate different scenarios and see if their current strategies will still be viable given the changes in the operating environment. Some useful starting points include testing cash flow, investment and return on investment assumptions, as well as sales forecasts.

Alternatives to deriving value

In an industry where margins are increasingly eroded on both sides (i.e. buy and build segments), developers should start considering alternative avenues to derive value, as this might be the differentiating factor for buyers. Following the Smart Cities initiative, developers should start incorporating Internet of Things (IoT) sensors into new homes to make them ready for Smart Nation initiatives by the government. It is also worthwhile to incorporate sustainability into construction and development; Green Mark building standards are a good starting point.

When developers shortlist and qualify contractors, they should also consider how construction efficiency is applied to their projects to preserve value. Building information modelling (BIM) can enhance the use of space and increase efficiency in planning through the generation of digital representations of physical and functional characteristics of places. Developers can also explore enforcing the use of modular pre-casting by contractors, which is not only resource-efficient, but also ensures faster construction time, higher profitability and better quality. In a challenging marketplace, it is essential to be forward-looking and rethink sustainability and efficiency to help preserve value.

Business leaders have to survey, plan and act decisively by taking an active approach to diversify, identify and manage risk, carry out stress testing and explore various avenues to differentiate themselves in challenging markets. Given the government’s active intervention in the real estate and construction market, the days of speculative gain and windfall profits are numbered. As the squeeze tightens on the market, players need to widen their perspectives and embrace challenges, while managing risk to preserve business value.


This article was written by Assistant Manager Roselyn Lam and Consultant Brian James of our Risk Advisory division.



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