Wednesday, April 27, 2011

What's Wrong with HDB Prices?

So HDB prices are not overly expensive but everybody blames our Govt for the pitiful state of things. Now new couples cannot afford HDB, not to mention low and middle income families, old folks, the disadvantaged. If they cannot afford HDB, where are they going to live? How are they going to survive? The sentiment on the ground is definitely very different from what we have established in the last post.

We shall look at a few issues that might shed some light into the disconnect:

1. Then and Now
2. Sour Raisins
3. Policy Blunders
4. Broken Dreams

Then and Now. Most people have great memory with regard to two things: their salaries over the years and their home prices. This point illustrates how the Price to Income has changed for HDB over the years. Long long time ago (like the 1970s), as the older generation would tell us, HDB flats were going for $20,000. Back then the pay was like $600 per month, so price to income was a mouth-watering 2.8x! And nobody wanted them! Okay maybe that's too ancient and not so relevant. Let's look at 2007. According to HDB website and Singstat, 4-Rm HDB was going for $241,000 and our median household income was $59,000 or so. That's still a cheap 4.1x compared to 6.4x today.

So while HDB is still cheap today when compared to other Asian cities, it is definitely much more expensive compared to its own past. Our incomes have not risen as fast as home prices. Everybody knows that. Well... except the Govt. Or actually they did know, maybe they just had a different agenda: like building the country's reserves or something.

Sour Raisins. To make things worse, our low income households bore the full brunt of higher prices. In 2000, the monthly salary of the lowest 10% was $1,276. In 2007, it went up to *drumrolls* $1,221. Sorry, it actually went down by $55. Finally in 2010, it went up to *drumrolls and crackers* $1,400. An increase of a whopping $12 per year from 2000 to 2010! How impressive! Meanwhile the top 10% grew from $14,959 to $23,684. Close to $10,000 increase. Answer to the recent poll: 17x difference.

Okay, that's a bit dramatic. But the point here is that the lower to middle income group hadn't had it easy. While the top 20-30% of the population enjoyed higher salaries, get to eat at fancy restaurants, drive new cars, upgrade to better 5-Room or Executive HDBs or even condos (yes this refers to all of you money-grubbers reading this blog!), these low income families are eating from hand-to-mouth. It's not even sour grapes, it's leftover sour raisins. And they have to share with their kids while servicing their 35 yr mortgage.

Frankly speaking, it doesn't really matter to them whether the price to income is 5x or 10x, to them it's always 35x, or until retirement. They definitely don't benefit if prices go up, bcos it's their only home and they cannot sell. The Govt seriously needs to do something here. Albeit they are already lending a helping hand, just that it's not publicized that much.

Policy Blunders. While HDB prices are inexpensive, I guess what really gets on peoples' nerves are various policy blunders that led to lower quality and service, like diminishing floor area, supply demand issues and the stupid 8k rule.

On lower quality, it's no secret that home sizes are forever shrinking. An old 4-Room HDB are now as big as 5-Room. Maybe in another 10 yrs, a 5-Room would look like Mickey Mouse's toilet. Bcos they counted the floor area of your balcony which is now bigger than your living room, the aircon unit, the common corridor and staircase as well! Why is this allowed to happen? Talk about major policy blunders!

Quality of finishing also had some hiccups. Remember the aluminium window frames that fell off? Or wall tiles that keep cracking? Well, admittedly, some of these issues have been resolved.

On lower service, this is actually tied to the supply demand mismatch. Basically new HDB owners have to wait on average 2-3 years or so before they get their flat thanks to HDB's "policy" of building behind curve and always in a roller coaster fashion. Just as an example, they overbuilt in the earlier part of the decade, flooded the market with tens of thousands of flats in Boon Lay and Sengkang. Then decided not to build anything, which led to the current situation of newly weds having to wait 2-3 yrs between ROM and customary ceremony. Meanwhile we want higher birthrates!

And now HDB decided to go all out and build 40,000 flats in the next 2 years, staging the market for the next cycle of boom and bust.

So despite paying up for a more expensive home, Singaporeans have to wait longer to live in a smaller unit with probably more defects and subjected to illogical rulings like an 8k income limit for a $780,000 flat.

I guess that is the ultimate unforgivable deed.

Broken Dreams. So far, all the analyses are being done on HDB. Prices though not as expensive as other Asian cities, are rising too fast too furious and policies are crap. Hence there's a lot of dissent on the ground. The far more important piece of the puzzle, is actually the private condo market. Even without doing any detailed analysis, most rational people would come to the conclusion that the Sg property market is frothy. Just a quick glance of two measures: Price to Income is more than 20x if you use median household income, or 13x if you use the 90th percentile. Rental yield is closing in on 2%. ie Froth-on-your-Tiger-Beer level. Any frothier, it's either going down the throat or the chute.

But the biggest setback posed by the private home market is this: It destroyed the 5C dream. THE Singapore dream. An average condo now costs more than a million bucks. Actually the average price is probably like S$1,875,000 (using $1500 psf times 1250 sqf). This means that 80% of the population with annual income of less than S$100k, cannot afford to upgrade to a condo, no matter how hard they try. Bcos it will take them close to 20 yrs just to earn that face value, assuming they spend nothing. With the new ruling of only 60% LTV, it means you need at least S$750k in cash or CPF to buy an average condo. Well, if you have S$750k, I guess it's better to buy yourself 20 yrs worth of food and staples in preparation for retirement. Bcos those are the next items to skyrocket in prices.

So that's the long and short of it. Singaporeans are probably more unhappy with uneven distribution of fruits of labour, policy blunders that let to poorer quality and service and the broken 5C dream. More so than just rising HDB prices itself.

Next post, we discuss some possible solutions!

Monday, April 25, 2011

Are HDB flats really too expensive?

With the election fever running high, it is probably apt to re-visit the property topic, a boiling hot button issue that is on everybody's mind. While various statistics had been throw around by the media, nobody actually believes them. So here is an independent analysis of whether HDB flats are really too expensive.

We shall look at a few measures:

1. Price to Income
2. Rental Yield
3. Absolute Prices
4. Housing Debt to Income

Price to Income is one of the most widely used affordability measure. Basically it is just median housing price divided median income. (info from HDB and Singstat). For Singapore, I am using the the 4 room HDB median price of $385,000 dividing the median household income of $60,000 which gives 6.4x. If we use 3 room, the ratio becomes 5x. Globally, this ratio ranges from 3-20x. Anything close to high teens is usually considered bubblish while anything below 5x would be consider cheap. In developed Asia, most cities are at a high single digit or low double digits.

Tokyo 9x
Guangzhou 8x
HK 11x
Shanghai 10x
Beijing 12x
Taipei 11x

Hence strictly speaking, HDB prices are not that expensive, but we cannot really say it's cheap though bcos 3-5x price to income is relatively common in other parts of the world, esp in sub-urban areas.

However, if we add in condo prices, Singapore is then close to 20x ie higher than most Asian cities, read: bubblish levels.

Rental yield of HDB is calculated using info on HDB's website. Basically using annual rental divided by the median price.


Median prices

The rental yield comes up to around 5-6% for 4-Rm, 5-Rm and Exec and *pause for effect* an amazing 7% for 3-Rm HDB. Again global rental yield ranges from 1-9% with 1% yield during bubbles and 7-9% during crisis. The average yield being closer to 3-4%. So again, HDB rental yield at 5-6% are not exactly indicating that they are overly expensive.

However we must also understand that the HDB rental market has its own idiosyncratic issues and also the no.s quoted are gross yield. With the Singapore RE market, there are various charges that come in such as agent fees, ridiculous renovation fees, down periods and fickle tenants. Esp with HDB, you can expect more problems and hence fees/downtime to take a bigger chunk out of gross yield bcos the absolute rent is not high to begin with. We are talking about S$1300-2000 per month. Tenants also tend to be very price-sensitive and picky, bcos if they aren't, they would have chosen condos. So a 5% yield might be just 4% in reality.

In terms of absolute prices per psf, well I guess most avid Singapore property followers would be more updated than me. HDB psf prices are roughly S$500-800, as compared to Sg condos which can be S$1000-3000. In comparison with global cities, the average is probably S$1200-1500. So again, HDB prices are not that expensive. However if we compare sub-urban areas, then prices are way below our HDB prices.

As for housing debt to income, HDB minister Marlboro Tan quoted that we are about 30%, which is not different from global standards. Granted, most Asian cities are higher, at 35-40%. But again, in US, 28% is what credit agencies would recommend, so we are just a bit higher than that.

Just to summarize, let's look at how HDB flats fare on these four measures

1. Price to income: fair to slightly expensive
2. Rental yield: Cheap in gross terms, maybe fair in reality
3. Absolute prices: Fair in total, cheap compared to cities
4. Housing debt to income: Fair

So on four counts, HDB is probably expensive on only 1 count: Price to income. This is however the most important measure out of those four as it directly determines how the buyers' incomes relate to home prices. Then again, bcos HDB is actually fair or cheap on various other measures, it makes sense as investors to buy HDB flats.

So we established that HDB flats are not way over-the-top expensive, esp so when compared to other Asian cities. In fact it gives a decent yield if we gauge them as investments.

Why then are Singaporeans so angry with our beloved Govt?

Next post, we shall examine the red-hot button holes and threads in detail!

See also Solutions to the HDB Conumdrum.

Sunday, April 17, 2011

Hyflux Preference Shares

Like most yield hungry Sg investors, I have been googling around on Hyflux's preference shares, but sadly, the information online is still somewhat lacking. One of the best analysis out there is done by la papillion:

The blogger has written a blockbuster trilogy as well, do read through his whole analysis, totally worthwhile! Considering that the deadline for subscription is like 3 days from now, I guess this will be the first and last post for me.

For those really dunno what's going on, Hyflux is the leading water company in water deprived Singapore. The mkt cap of the firm exceeds a billion dollars, which means it is not your small fry SGX listed co, this can be the next Keppel Corp one! Recently, the firm announced this plan to raise S$200mn via pref shares with perpetual yield of 6%, with a step up to 8% some years out.

A pref share is similar to a bond in the sense that it gives you an interest income (well in this case a more or less compulsory dividend). The difference being that the dividend is perpetual (at least theoretically). Also pref shareholders are junior vs debt/bonds but senior vs common equity. This means that if the firm goes bust, pref shareholders stand to get something only if all bondholders have taken their share - ie nothing much left lah. However, pref shareholders usually enjoy a higher dividend. In this case, a good 6%!

As for Hyflux, there are various issues involved and I will simply summarize the pros and cons briefly here:

Here's the good part first.

1. The dividends are cumulative - ie if they fail to pay one time, they must make up next round, ie you will more or less get your 6% over time.

2. The dividend must be paid as long as common shareholders are paid, bcos pref shareholders are ranked higher vs common shareholders. Looking at its common dividend, Hyflux's track record is ok, not super stellar but at least got dividend every year since a couple of years ago, albeit the yield is pathetic, like 2% kind.

3. Hyflux enjoys the support of the SG govt, while it is unlikely that the govt will step in to save the stakeholders (ie debt or shareholders) in the event Hyflux goes belly up, it is also unthinkable that Hyflux would actually go bankrupt in the next 3-5 yrs. The govt has in the past been supportive of Hyflux, awarding landmark mega contracts (like the first de-salination plant etc) to the firm every couple of years.

4. It is a well-runned company. Top management knows their stuff and has earned the respect of both investors and competitors. Just that it is in a bad business. More on this below.

Here are the cons:

1. Why is the firm doing such a detrimental financing? They can always borrow from the banks at a lower rate, but they chose pref shares, and have to pay 6%. It might have something to do with their credit rating, if they raise more debt, the rating will fall. It then also says something about their financing options. Last checked, the firm has S$1bn in debt and S$500mn in equity. It's definitely higher than most SG blue chips although not that bad if you compare it with global co.s. Maybe the uprising in Africa is really taking a toll on their businesses. Or maybe Olivia Lum thinks that she should share her success with all Singaporeans. Well that is my wishful thinking :)

2. Hyflux's business model is not robust. It relies on winning projects, which in turn is economic sensitive. Even worse, its growth relies on winning ever bigger projects, most recent ones were like US$1bn or more one. In bad times, like during Lehman, project pipeline dries up and cashflow goes into red.

Also, they have no say over the price, they bid for the projects and can only win with lower bids vs others. Inflation in the last few years is causing their input costs to go up. Now with Libya, I suspect they are not in a good shape although a recent SG project should help. This validates the point made above: the SG govt lends a hand during bad times.

3. The cashflow track record is not exactly great. Over the last few years, they averaged FCF of S$30mn, which means that this pref share dividend alone will eat up S$12mn or 40%. There is one year the FCF went into -40mn, so if that happens again, the shares WILL plummet, both pref and common, like it or not. In short, not too much of a buffer that can guarantee payment until perpetuity.

4. The shares will trade on SGX come end Apr, which means that there might be downside risk if you need the money. It can be trading at $80, then you lose 20%. Of course I suspect it should trade above $100 in the next few weeks bcos Sg investors are suckers for such high yield. Already it's oversubscribed by 8x or so. But we must remember when the going gets vicious, it is likely this thing can go to $70 or even $60. The OCBC pref shares went to $80 during Lehman (now $104). If that happens, you have to ask if you are willing to add more :)

4. Hyflux is likely to buy back the shares asap, 6% of 200mn to pay every yr is no joke (S$12mn as mentioned, or roughly 40% of its FCF), but that's ok even if we just get a couple of yrs of 6% as the shareholders.

5. Finally if you subscribe, you need to do some guesswork, bcos you are not going to get everything. From the 8x oversubscribed no. probably $100k will get like $15k or something. Then again, you must be prepared you might get everything, but this is quite a low probability event now.

Conclusion: Probably an ok deal though not entirely secure like buying the safe and sound blue blue chips. Buyers would be betting on some implicit government support in really, really dire straits, a competent management that knows what they are doing and of course the 6% yield. 2 days left to go to the ATM to subscribe!