Why are Sentosa Cove prices falling like crazy?

Feb 14, 2017 12.52PM |
 

by Ryan Ong

SENTOSA Cove is becoming a ghost town, with vacancies estimated at 9.6 per cent in the fourth quarter of 2016. On top of that, more than half of Sentosa Cove’s property sales last year (15 out of 21) were losses. Not the kind of $10,000 loss that a retiree complains about at the coffee shop either; at The Turquoise, one of the more prominent Sentosa Cove projects, a unit that was bought for $7.16 million was resold at $3.8 million.

Now in 2015, when Sentosa Cove properties fell 36 per cent from their last peak (2011), it was thought that prices there were “bottoming out”. But if anything, the downward trend seems to be accelerating. Here’s why Sentosa Cove may be locked in a policy-created tailspin:

 

The important “rich expatriate” connection 

Sentosa Cove is about rich expatriates, and it’s not something that happened by chance. A whole bunch of multi-millionaires didn’t suddenly develop a penchant for cable cars and kidnapped dolphins, and decide to move there. You see, Sentosa Cove’s association with rich expats goes back to 2008, when Singapore had a Financial Investor Scheme (FIS).

The FIS was an attempt to get rich people to put their money in Singapore, and settle down here. There was a way to “fast track” their permanent residency. For some of them, by moving to Singapore, they would be able to stop paying comparatively higher taxes back home.

One of the requirements for the FIS was a Sentosa Cove bungalow. I don’t mean that in a “if you have a Sentosa Cove bungalow you must be rich” sense, I mean it was a stated requirement:

There are two types of financial commitments under the FIS for Singapore Permanent Residence. Option A requires the applicant to place in Singapore at least S$5m of financial assets (‘Minimum Sum’) with a financial institution regulated by the MAS. Option B requires the applicant to hold at least S$3m of assets and a Sentosa Cove bungalow on Sentosa Island. Sentosa Island is an island resort managed by the Sentosa Development Corporation (a statutory board incorporated as a statutory board under the purview of the Ministry of Trade and Industry).” – Singapore Law Gazette

Sentosa Cove, by the way, is the only part of Singapore where foreigners can purchase landed property without restriction (on a 99-year lease).

Now in 2008, Singapore had a few big attractions for rich people. The first, which is still a factor, is that taxes here are low. But in 2008, we had something called the Global Financial Crisis going on; and Singapore looked like a great safe haven. After all, we’d previously also weathered the SARS crisis unscathed, and that was fresh on everyone’s minds. As such, Sentosa Cove was hugely popular with the rich, and there was a big incentive for them to buy.

But bear in mind, the location of Sentosa Cove is not actually great. Not unless your idea of convenience is living next to a bunch of noisy theme parks, and having to drive across that bridge just to get to a decent mall. Sentosa Cove became popular by design. Without government fuelled incentives, any rich person who wants to live in Singapore will more reasonably gravitate towards the Orchard area.

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With that in mind, it’s easier to see some potential reasons why the prices there haven’t stayed at their insane levels:

– The FIS stopped back in 2012

– The Additional Buyers Stamp Duty that started in 2011

– Rising interest rates and vacancies faced by Sentosa Cove landlords

 

1. The FIS stopped back in 2012

In 2012, the FIS was terminated. Rich people could no longer “buy” PR status. A Sentosa Cove bungalow was no longer a must-buy, and demand in Sentosa now had to rest on free market forces.

Prices there were instead fuelled by a buoyant property market in Singapore, on the back of cheap property loans (interest rates were at a record low). In addition, the global financial crisis had soured interest in stock and bond markets, along with interest in hedge funds or actively managed mutual funds. Singapore property looked like the next best alternative. But it generally escaped notice that Sentosa Cove hadn’t started as the most desirable location, and that the key policy which initially made it popular (the FIS) had died.

Now, with the property market in a downturn, Sentosa Cove properties will just have to move along with it. There’s no longer an extra incentive for rich people to buy there.

 

2. The Additional Buyers Stamp Duty that started in 2011

The Additional Buyers Stamp Duty (ABSD) is an added tax, imposed to cool Singapore’s overheated property market. It was first announced in 2011, but revised in 2013. In its present form, the ABSD imposes an added tax of 15 per cent on foreigners buying property. Given that most Sentosa Cove condos are at least $4 million, and the bungalows are upward of $15 million, an added 15 per cent is painful even for the occasional multi-millionaire.

 

3. Raising interest rates and vacancies faced by Sentosa Cove landlords

The low interest rates of 2008 are coming to an end. The reason for cheap property loans, between 2008 to the present, was due to the American Federal Reserve (the Fed) keeping interest rates at zero. This was done in the aftermath of 2008, to stimulate economic recovery.

The Singapore Interbank Offered Rate (SIBOR), to which many home loans are pegged, will usually move in tandem. When the Fed lowers rates, SIBOR will go down, and the reverse is true. In the aftermath of 2008, property loans could be had at 1.4 to 1.8 per cent interest per annum. By contrast, HDB’s Concessionary Loan, which was previously cheaper than bank loans, has remained at 2.6 per cent.

At present however, the Fed is again raising interest rates, with analysts thinking that a triple rate hike is not out of the question for 2017.

Now Sentosa Cove landlords already face low rental yields, given that their property could probably fund a colony on Mars. Higher loan repayments mean some of them will see even lower rental yields, and in some cases their properties will turn into liabilities. This is compounded by the high rate of vacancies they’re seeing.

Singapore is not just taking in fewer foreign workers, we’re seeing fewer expatriates from sectors such as finance and oil and gas (due to macroeconomic factors, such as the recent slump in oil prices). Sentosa Cove landlords don’t just need any tenants, they need tenants who can pay enough to help them cover their insane mortgages. Condos in Sentosa Cove can rent for upwards of $8,000 a month, and this isn’t the kind of money or housing allowance afforded in most industries currently.

This is a plausible reason for the million dollar resale losses, as some landlords would rush to offload these properties before things get worse (although it’s also possible the resale losses may be from owner occupiers, who are eager to reinvest elsewhere). This, in turn, pushes prices down even further.

Barring certain big changes, such as the removal of the ABSD, or a resurgence in the number of wealthy expatriates, Sentosa Cove is likely to struggle; and the next few years may be its worst yet.

 

 

Featured image by Sean Chong.

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