Stubborn HDB Property Bubble?

Some of my friends painfully resisted buying a flat for the past few years, hoping that the property bubble will pop when the global recession erupted. But to their disbelief, the prices and cash over value (COV) continue to defy gravity and broke new highs. This prompted me to take a closer look at this bubble, why is it so stubborn!?

Demand

Looking at the past prices (available data from 04 to present):
src: http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatResaleIndex?OpenDocument

it can be seen HDB resale prices hit the bottom and remained there after '97 Asia Financial Crisis to late 2006. Though this period included the dot com bust (2000 to 2002) and SARS crisis (2003), there is still generally good economic and population growth (local + foreign). Thus it is quite unthinkable that demand for flats will remain stagnant for nearly 10 years!


Supply

From HDB FAQ, it can be seen that they massively overbuilt in 1997 and and apparently took them nearly 10 years to clear their stock:

...

With the BTO System, flats are built based on real demand. Before any BTO project proceeds, we need to have a clear indication of demand - where to build, what type of flats to build, how much to build.

In this way, there is better management of supply and demand. Before the BTO System, when we tried to build ahead of demand, we ended up with a huge oversupply situation when the financial crisis hit in 1997. Prices were depressed which did not benefit anyone.
...

src: http://askhdb.hdb.gov.sg/Home/hybrid/Themes/HDB/Answers_internal_check.asp?MesId=4604291&isCFP=&FolderID=0&ProjectId=7875909&reAskpage=answer.asp&SelectedCategory=&RecordQuestion=

So if HDB is not going to build ahead of demand anymore and thus assuming there will not be an over supply of flats in the future, then prices will have already found a floor and the ceiling will be determined by demand. HDB will continue to launch BTO until all the demands (genuine ones) are answered, judging from the number of projects launched in first half 2010 (already more than last year), more coming up in second half 2010 and even more in 2011 if necessary.

(src: http://www.hdb.gov.sg/fi10/fi10296p.nsf/PressReleases/B6B5E10434F42EB64825776900154FF8?OpenDocument)

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/1073777/1/.html)

With the recent drive to sustain economic growth based on productivity growth and not via cheaper foreign labour, the demand for flats should be moderated further. Thus I see that price increase will slow down and subsequently stay flat, but not come all the way down since there will not be a repeat of large number of excess HDB flats.

Conclusion

The era of cheap HDB flats (when HDB overbuilt or even cheaper during my parents time when flats sell at cost) is over. Whether or not the current prices or cash over valuation is justified is not really easy to answer. But should young couples continue to wait for a major price correction? They will need to weigh the opportunity cost of waiting for the price to come down versus the risk of paying much more should their combine income exceed $8,000. It will not be an easy decision.

Portfolio restructuring over the last 4 months

Partially divested First Ship Lease Trust(FSLT) into Pacific Shipping Trust(PST) on 29 June 2010

I can count myself 'unlucky' that FSLT had 2 of its ships returned prematurely and took a big hit to its total outstanding contractual revenue and just blame this on the 'business' risk. But looking further into the business to understand that the risk is actually much higher than I thought actually attributes more blame to myself. The high yield comes at a price that I sadly have to pay. Most of the contracts are made when shipping rates are over inflated and ships overvalued. When all things come crashing down, the odds are basically heavily stacked against FSLT. It is already fortunate that only 2 ships are returned. The only good news in this midst of this gloom is that the worse for shipping seems over. Though the global economy is still not on firm footing for full sustained recovery, at least the chance of another big recession is quite slim.

I have a habit of raising funds from one sector and putting them back there. Though this make no investment sense, but nonetheless, its just my preference. I decided to divest part of my FSLT into PST. PST also have simiar structure like FSLT but with a more sustainable distribution payout policy and loan repayment scheme. Its recent distribution accretive acquisition is the main factor that entice me to cross over. Though I'm aware that they do not yet have the funds to acquire them and most probably will require equity raising in late 2010 or early 2011, I believe the yield will still be higher post capital raising.

To put things in perspective. There are two deep cyclical sectors I'm vested, Shipping and Oil & Gas (O&G) Support. Both are still going through pretty bad storms (poor demand and oversupply of vessels) and no one can tell when the storm will blow over. But I'm pretty sure when the sunlight burst through the clouds, the returns will be good. No better time to invest other than bad times.

Partially divested Singapore Airlines(SIA) into Singapore Airport Terminal Services(SATS) on 6 July 2010

If I'm optimistic about the future of SIA (versus the aviation gloom that just ended), I'm even more optimistic of SATS. As more people fly, both companies will benefit. In addition, for SATS, its newly acquired food business (Singapore Food Industries) is fast becoming a fat cash cow. From its annual report, it can be seen that its benefiting from the opening of the two Integrated Resorts. It is also venturing into Pig farming in Jilin province in China. My view is that SATS will become a strong food supplier as it diversify its income stream away from airport support services, an area that will only become more competitive as more players are brought into Changi Airport.

Took more profit from Cambridge Industrial Trust(CIT) into Starhill Global REIT on 29 July 2010

Though CIT was giving a yield of more than 10% versus that of Starhill Globals's 6%, but in terms of discount to net book value, at 50 cts, CIT is trading at 15% discount while at 58 cts, Starhill Global is trading at more than 35%. Looking through the assets of Starhill Global (Ngee Ann City, Wisma Atria, freehold David Jones Building in Perth, Australia, freehold Roppongi Terzo and PRIMO in Tokyo, Japan) I personally think they don't really deserve to trade at such a 'steep' discount when Capitalmall Trust trades above its net book value! Thus for Starhill Global, I'm looking for at potential for capital appreciation rather than cash flow from dividends like CIT.

Conclusion

While the worst of the global recession seems over, the economic recovery does not seems to be on firm footing yet. Some of the stimulus spending initiated by governments across the globe are not terminated yet. In fact, US actually pledges to further increase their stimulus spending. Thus I presume most of the financial performances reported so far do not reflect their true potential when the global economy fully recovers. Hence I see more investment opportunities ahead, as market overreact to negative news that comes out once in a while.

Shopping vs Investing, behaviour peculiarity

Sale!!!

Whenever there is some genuine sale giving 'huge' discounts, e.g. 50%, 70% off original price. There'll always be enthusiastic crowds grabbing the items as if things are going for free. I recently encountered one for branded handbags near my working area. Most shoppers are predominantly ladies who seems to have a mental database of each item and their prices. They knew their 'true' worth and face no problem telling which are the real bargains. Thus seldom do I see them regret their purchases.

Stock market sale

While Great Singapore, Christmas sale happens regularly once a year and some sales never seem to end (e.g. Courts), sales in the stock market occur much more unpredictable and sporadic. In contrast to sales in Orchard Road that drew crowds, sales in the stock market scare away people. The greater the discount, the thinner the trading volume.

Inflation

When energy prices goes up, people complain of higher transport cost, higher utility bills, higher food prices. No one is happy. But when the stock prices shoot up, the trading volume increases. The crowd are happy. The higher they go, the happier they are to snap one the shares like hot cakes.

Conclusion

On the surface, it seems like people have 2 brains, one for daily use, the other for stock market. The latter is obviously faulty. However, drilling a little deeper, I can think of 2 reasons for the apparent difference. First, perhaps, have got to do with valuation. While it is quite easy to know the 'true worth' of an IPHONE 4 or a LV bag, it is not so easy to put a value on a particular stock. And when the price of that stock one had been painstakingly research drops like a rock, the further it goes down, the more the person doubt his analysis. Second, greed. It might seems easy money to buy and sell something that continue to worth more with each passing second. Doesn't matter if one is buying high to sell higher, so long as there's a ready idiot to buy from them. While the problem of valuation could be mitigated by diversification and margin of safety, the problem of greed can only be solved when one become the last idiot to buy at the highest price.