Crisis blurs Singapore’s boomtown vision

Tom Wright
Wall Street Journal

On almost any major street of this affluent Southeast Asian city-state, cranes tower overhead — a reminder of an incredible three-year building boom that now is turning into a bust.

Residential property prices rose 60% between 2005 and the middle of 2008, fueled by a massive influx of U.S., European and Asian expatriates drawn by Singapore’s goal of reinventing itself as a financial and entertainment hub like Dubai or Monte Carlo.

A man puts on his safety helmet at the construction site of hotel towers of the Marina Bay Sands integrated resort in Singapore.

The global financial crisis has shattered that vision. Many of those foreign bankers and lawyers — now without work amid Singapore’s sharpest economic contraction ever — are returning home, weighing on demand just as a slew of new luxury properties are nearing completion. Banks, meanwhile, are reining in loans to developers. Prices of high-end apartments are forecast to fall back to 2005 levels within a year, property analysts say.

“In 35 years of my career, I’ve never seen anything like this,” says Jerry Tan, a Singaporean broker who sold $1.5 billion of property to high-end clients in 2007 but now has time to sip wine and brood at his office.

For Singapore’s trade-dependent economy, officially forecast to contract as much as 5% this year, the house-price collapse is adding to a bleak economic picture of declining exports and shrinking foreign investment.

The property sector’s woes also represent a major setback to Singapore’s efforts to throw off its stodgy image as a wealthy but dull trading entrepôt. A few years ago, the Urban Redevelopment Authority, Singapore’s national land-use planning body, drew up blueprints for world-class casinos, theaters and residential areas. It sold land to developers for the projects and gave them time limits for completion. Some elements of the plan are moving ahead — notably two massive casino-leisure developments set to open in 2009 and 2010 — but many other pieces are in jeopardy.

Those pieces include “Sentosa Cove,” a luxury residential development on Sentosa Island just off Singapore’s mainland. The gated community of $8 million-plus glass-and-steel modernist mansions was envisioned to put Singapore on the map much like “Palm Jumeirah,” Dubai’s artificial residential island.

A Malaysian company is still on track to launch portions of a $4 billion resort in early 2010 on Sentosa Island, including a casino, hotels and a Universal Studios theme park. Another casino and theater complex, under construction on Singapore’s mainland by Las Vegas Sands, is also planning to open at the end of 2009.

But other projects at Sentosa Cove that were to be ready this year are delayed. City Developments Ltd., Singapore’s second-largest developer, has postponed until 2011 a $390 million marina complex of exclusive apartments, shops and a five-star, 320-room Westin Hotel that was due to open this year.

Many parts of the Sentosa Cove development remain an unfinished building site. Developers that paid the government top dollar to buy land there “will find it quite challenging to sell [homes] at a profit in today’s market,” says Nicholas Mak, head of Singapore research at Knight Frank, a property consultant.

Sentosa Leisure Group, a government entity that manages the resort island, is trying to be flexible with developers, says Mike Barclay, the group’s chief executive, and is extending deadlines for construction. “We don’t want there to be half-finished buildings around the community,” he says.

The government received scant interest from private developers when it launched land sales at Sentosa Cove in 2003. Property prices were in the doldrums and the area was seen as too far away from Singapore’s central shopping and financial districts.

But that changed as the economy picked up. Singapore, a major exporter of electronic goods and a global shipping hub, grew by more than 6% annually between 2004 and 2007. Eager to diversify its economy, the government offered generous tax breaks to international private banks and high-tech companies to set up shop.

Half a million foreigners moved to Singapore between 2003 and 2008, many of them wealthy. The Boston Consulting Group found in a recent study that 10% of Singapore’s residents have investible assets of $1 million or more, the densest concentration of millionaires in the world, and more than twice the ratio in the U.S.

Residential-property developers started a flurry of new construction. The government stoked the boom by allowing investors to make down payments of only 20%, paying the remainder upon a project’s completion. In a soaring market, speculators with no intention of completing their purchases were able to sell for a profit without organizing any financing. Amid signs that a speculative bubble was building, the government banned these so-called deferred payments in late 2007. But by then, the market was already overheating.

As the only part of Singapore where foreign individuals can own land without special government clearance, Sentosa Cove became the target of bidding wars. By the market peak in mid-2007, property developers were paying 1,400 Singapore dollars (US$935) per square foot for land, more than four times prices in 2003.

Buyers who already secured property loans, like Bonnie Pun Da Roza, a Hong Kong citizen who lives with her British husband and children in one of two properties they bought in 2006, say they will sit tight and hope for an upturn. “Right now we’re not too worried, but if it goes on for three years, then we will be,” Ms. Da Roza says.

To be sure, the property sector is in better shape than it is in Dubai, where some half-finished construction projects have stopped. The Persian Gulf city developed 50,000 residential units in 2008, much more than the 10,000 private units completed that year in Singapore.

CapitaLand Ltd., Singapore’s largest developer, which is 40%-owned by a Singapore government investment company, and large private companies like City Developments have adequate reserves to complete projects, analysts say. In March, CapitaLand raised S$1.84 billion through a rights issue.

But some smaller, private developers risk bankruptcy, analysts say. As prices crater, speculators are unable to get bank loans to cover what they owe, meaning a jump in distressed sales later is likely. Meanwhile, foreign investors who bought at the peak now face big losses if they have to sell, denting Singapore’s reputation as one of the safest places in the world to park money.

Other parts of the city-state, including the exclusive Orchard Road shopping district, are also feeling the pinch. In mid-2006, City Developments paid a record S$383 million to acquire the existing 90-unit “Lucky Towers” near Orchard Road.

Last year, as prices collapsed, City Developments shelved plans to tear down the building and redevelop it as a luxury 178-unit condominium. As a stopgap measure, a company spokeswoman says it is renting out the old units on short-term leases.

Despite efforts by developers to choke new supply, there are still 35,000 private homes under construction, according to the Urban Redevelopment Authority, a potentially giant overhang. In 2008, there were 13,644 private residential-property deals in Singapore, down 64% from the previous year. About 15% of residential property could be vacant by 2010, worse than a 10% rate after the Asian financial crisis a decade ago, Credit Suisse estimates.

“I’m yet to see the light at the end of the tunnel,” says Mr. Tan, the high-end broker.