Asia Times Online Ltd

SINGAPORE - While global investors fret about a possible housing bust in the United States, the mounting capital outflow from the US to Asia is pumping up select Asian property markets.

Nowhere is that more apparent than in Singapore, where recent statistics show that foreign money has run up rents for private residential units by 31.2% from the middle of 2006 and 2007, while rental rates for prime office space occupied largely by foreign companies jumped 13.9% in the second quarter alone this year, reaching an average of S$10.33 (US$6.84) per square foot (psf; $1 psf = $10.76 per square meter).

Local property agents ERA and Propnex say that in the first quarter of 2007 apartment prices for the island state's three most popular suburbs rose by more than 10%. In certain other popular areas, a three-bedroom apartment of about 1,400 square feet (130 square meters) would now cost between S$350,000 and S$500,000, about S$250-S$350 psf.

Rocketing private condominium prices, meanwhile, have dominated the national headlines. High-quality apartments in central areas now cost anywhere between S$2,500 and S$5,000 psf. Foreign money in particular has pumped up this market segment, with non-citizen buyers occupying more than half the units of high-end developments.

While soaring prices have pleased landlords, concerns are simultaneously growing that spiraling rental costs are hurting the island state's price competitiveness and ability to attract new foreign companies. In response, the government is scrambling to moderate the market without being seen as overly interventionist.

Like other land-constrained urban property markets, including Hong Kong and Manhattan island, Singapore's price dynamics are complex. Singapore's residential market is generally divided into three categories. Of those, the so-called "landed property" has the highest status, but because it is rarely open to foreign buyers, the top segment is less prone to cyclical froth.

The largest property category is the Housing and Development Board (HDB) segment, comprising apartments built by the government and sold to Singaporean citizens and permanent foreign residents. Currently some 80% of Singaporeans live in these apartments. This category, too, has seen rapid price increases, and many potential first-time buyers are grumbling as prices soar out of reach.

Viewed from one perspective, the property boom is symptomatic of Singapore's success in luring foreign businesses to locate their regional headquarters here, bringing in high spending expatriate staff in tow. Singapore's robust finance industry has also won recognition as a regional safe-haven for private capital. Meanwhile, this year gross domestic product is expected to grow between 7% and 8%, a sizzling pace for a mature economy.

On the other side, the same businesses and expatriate staff now suddenly face sharp and unexpected rent increases. According to property firm Knight Frank, vacancies for all office space are now near 8%, while prime space is at a mere 5%, occupancy rates not seen in nearly a decade.

There has been a simultaneous boom in the house-moving industry, as a growing number of expatriates are unable to afford the higher rents demanded by landlords and are moving out of the private condominiums, where they enjoyed facilities such as swimming pools and gyms, to common apartments.

Historically, Singapore's property market has experienced similar boom-and-bust cycles. After the 1997-98 Asian financial crisis, property went into a prolonged slump and only fully recovered after 2004. But only over the past 12 months have property prices surged so dramatically.

Fastest in the world
In July, property firm Jones Lang Lasalle (JLL) released data showing Singapore's office buildings have risen in value more over the past year than anywhere else in the world. According to JLL's head of Asia capital markets, Stuart Crow, Singapore's property capital values have also shot up the most in nominal terms over the same period.

In the prime Raffles Place area, office values rose by $804 psf in the past 12 months, boosted by a supply crunch and soaring rentals, which is more than double the increase in Hong Kong's central district, where offices rose about $280 psf in value on average, Crow recently said in the local press.

In percentage terms, Singapore's office values jumped a staggering 105% over the past year, while Hong Kong's climbed only 16.7%. In nominal terms, however, Singapore's S$1,568.50 psf (US$1,039) is still far below Hong Kong's US$1,958.60 psf.

Surging demand and cost pressures on creating new supply, including Indonesia's ban on exports of sand and granite to Singapore this year, have driven the uptrend. The ban drove sand prices up to S$60 per tonne, from S$25 previously. However, with new sources since tapped, prices have stabilized at around S$40-S$50 per tonne. All told, it has translated to a doubling of concrete costs from S$70 per cubic meter before the sand ban, to about S$140 currently.

Another important factor particular to condominium prices and rents is the growing trend of apartment owners and property developers tearing down existing properties to rebuild taller, higher-grade apartment complexes on the same plot. Property owners have recently made huge profits when selling condominiums en bloc to property developers.

With an unprecedented number of en bloc sales over the past 12 months, resulting in scores of apartment buildings being demolished, there has been a sharp tightening of supply, which will conceivably extend over the next few years before the new replacement buildings come on to the market.

Add to that foreign buyers and expatriate tenants pouring in, and the city has faced a significant supply constraint. Price increases in the private-condominium segment have naturally filtered down to the HDB segment, which has started to impact adversely on those lower- and middle-income households that rent or are in the market to purchase an apartment.

That, in turn, is raising concerns inside the People's Action Party-led government, which during last year's election campaign was criticized for the island state's growing wealth gap between rich and poor. It recently flagged its intention to release more plots of land on to the market to boost supply.

To dampen en bloc sales, the government recently increased from 50% to 70% the development charge, a tax the government imposes on the increased value of a redeveloped piece of land. Policymakers hope that higher taxes will discourage property developers from buying out old condominiums for redevelopment.

Government authorities are also starting to release more data to the public about property transactions lodged in government registries, aimed at improving market transparency and convincing buyers, sellers, landlords and tenants to make more sober and informed financial decisions.

How long, if ever, it will take for these government measures to cool the market is altogether unclear. Meanwhile, a new speculative front is opening in the hotel sector. Tourist arrivals to Singapore in the first half of 2007 set a record, with visitor days jumping 13.1% over the same period last year and occupancy rates rising above 86%. In June, the average room rate broke the S$200 a night threshold for the first time, reaching S$210.

Jocelyn Su, a manager with travel agent CTC Holidays, told the local press that a client with a budget of between S$150 and S$180 a night who used to be able to get a room at the downtown four-star Carlton Hotel would, under present conditions, only get a Hotel 81 room in Geylang now. For the uninitiated, Geylang is Singapore's red-light district, and Hotel 81 is more commonly known as a chain of pay-by-the-hour hotels.

These of course are the market-inspired hallmarks of economic success, and many neighboring countries envy Singapore for having to contend with soaring rather than collapsing asset prices and the region's more widespread problems of unemployment, poverty and rebellion. But for an island country obsessed with order, the up-and-up property market is pressing another type of economic challenge.