ST : Good class bungalows may become pricier

Jan 17, 2010

property special

Good class bungalows may become pricier

They are evergreen investments with no oversupply problem

By Douglas Wong and Han Huan Mei

Good class bungalows (GCBs) enjoy a unique status in the Singapore residential market. These detached houses are highly exclusive as there are only around 2,400 units in the whole of Singapore.

They typically have a minimum plot size of 1,400 sq m, or 15,070 sq ft, and are distributed in 39 designated areas. The GCB market is stable and resilient because GCBs are evergreen investment products that are preferred by ultra-high net worth individuals.

GCBs are limited in supply in urban Singapore where landed housing is scarce. There will never be an oversupply situation. For the buyer, the odds of prices appreciating are better than that of them depreciating.

Most GCB owners have strong holding power, reducing the risk of falling prices during a downturn. Fire sales are thus hard to come by. This has been especially apparent in the recession year of 2009.

Despite the bleak economic outlook, last year was a brilliant year for the GCB market. The total value chalked up was in fact the highest since data was first made available in 1996, with 100 transactions amounting to $1.59 billion, far surpassing market expectations.

The month of July, in particular, saw the highest-ever number of 23 GCB caveats lodged in a single month. As economic fundamentals catch up with sentiment in the residential market this year, the outlook for the GCB market remains healthy.

Given an expected stable GCB market this year, the total transacted value could range from $1.2 billion to $1.4 billion with 80 to 90 transactions. This is lower than last year as the majority of buyers could have already made their purchases in 2009 itself. Buyers who had earlier anticipated that prices of GCBs would dip may have bought these properties last year, before GCB prices increased further along with the improvement in the equity market and market sentiments.

The recent financial crisis caused many investors to recognise GCBs as stable investments that are comparatively less risky than other forms of investments. With such optimism in the market, prices of GCBs could go up further this year.

While it is not possible to pinpoint the price increase on a per sq ft basis due to the unique features and rules governing the sale of GCBs, anecdotally, an overall quantum of $20 million and above per transaction has been occurring more frequently. Last year, there were 20 GCBs sold at a price of $20 million and above, compared to only 12 transactions in 2008, nine in 2007, and a mere four in 2006.

Basically, GCB prices are determined by three factors.

The first of these is location. While there are 39 designated bungalow areas in Singapore, some addresses are more exclusive than others, such as those in districts 10 and 11 compared with those in districts 20, 21 and 23. This explains the popularity and higher volume of transactions in the Nassim, Dalvey and Tanglin areas, which are the prime pickings from the GCB crop.

The second factor is the land on which the bungalow sits. Considerations to take into account here include the shape of the land, its terrain, its frontage and its potential for sub-division.

The final factor is the actual house on site: whether it is single- or double-storey, and how old it is.

Previously, before the escalation of construction costs in 2007, the actual bungalow on a GCB site made up around 20 to 25 per cent of its total price, with the land itself accounting for the rest. But in recent months, this proportion has risen to 25 to 30 per cent.

Most GCB sellers are people who have owned their GCBs for around 10 years, and who bought their homes when prices were lower. They usually own more than one GCB. With the current high profit margins, they are prepared to cash out and invest in other areas.

As for buyers, there are two categories. One group is young professionals in their late 30s who buy for their own stay. While in the past the typical age of a GCB buyer would be in the mid-40s, it is now not unusual to find GCB buyers in their late 30s.

The second group consists of ultra-high net worth individuals who buy for long-term investment, and eventually pass on the GCBs to the next generation.

In recent months, young professionals and entrepreneurs, as well as permanent residents, have been observed to show keen interest in the GCB market, driving up demand in a market that already has a limited supply.

This trend is expected to continue in 2010, as younger affluent home buyers recognise the investment value of GCBs.

The writers are CB Richard Ellis' director of luxury homes and associate director of research.