Good Class Bungalows – A Major Value Uplift in The Works?

Since our write-up on the Good Class Bungalows (GCB) in the previous Business Times Property Supplement, the market has heated up with record breaking prices. Although average prices have been rising, they are not going up at a rate that is astounding, and it therefore appears that the headline stories are hinting of some new development trend, or what we believe, something that occurs once every generation. Looking at the overall prices of GCBs over the last ten and a half years, the average price per transaction has been rising almost in tandem with the average price on a S$psf based on land area. (Please see Graph 1)

When we look at the number of transactions, they have not gone back up to 2010 levels and have been languishing at less than half those numbers for the most of the last ten years. It was only in 2020, and possibly this year, that we have seen a positive trendline building, or at least matching last year’s numbers. (Please see Graph 2.) For H1/2021, the total number of transactions captured in Realis was 37, which if simplistically doubled will extrapolate to a full year number of 74, same as what was recorded for 2020. The sudden reawakening of this market (and, also the entire private residential market) in a pandemic and the accompanying economic slowdown points to a nascent trend that is developing.

The trend could be seen in Graph 3 when more colours are revealed once we break down the prices of GCBs transacted between 2016 and H1/2021. In the last five and a half years, although the Compounded Average Growth Rate (CAGR) for GCB land prices has been 7.1% (versus the URA’s PPI of 3.2%), the rate of increase is not uniform across the spectrum of transactions. The minimum price has recorded a CAGR of 4.9% while the maximum price has had a CAGR of 10.5%. The dispersion of prices has also increased over this period. Besides, the distribution of transacted prices does not appear normal nor uniform. The interesting observation is that in H1/2021, the right-tailed ‘outliers’, both in terms of quantum and S$psf, are in an island of their own, far from the general cluster of observed prices. However, we believe that this may not turn out to be just ‘outliers’ and can simply be sieved out. The reason is if one goes directly to the source, ie. the GCB experts, to understand their buying motivations, a picture is emerging that this segment of private residential market is about to see a step-up in values. Empirically, we can also get whiff of this incipient development phase by piecing together the information we see in Graph 2 where we find that the number of transactions only started to reawaken in 2020 after a ten-year slumber; Graph 1 shows that the value per transaction shifted gear in 2019 (due to the record price of S$230 million of a GCB sale by the chairman of Wing Tai); and finally, during the same period, the headline transactions increasingly involved buyers who made their fortunes in the new economy (technology and internet related industries).

The upshot of this is that the ‘outlier’ transactions in the right tail of the price spectrum may not exactly be merely flashes in the pan. With the new economy increasing in size to rival or even supersede traditional industries, an additional layer of economic structure is created and with this new wealth. This new wealth creation is quite unlike old wealth because new economy companies come with astronomical valuations that are multiples of old economy ones. Also, successful new economy entrepreneurs tend to be much younger, and therefore more likely to buy in on the You-Only-Live-Once slogan. All these gets translated to the GCB market where record prices are expected to be set more frequently, be it in absolute quantum terms or on a S$psf land basis.

Future Trends in the GCB Market

GCBs remain the most coveted housing form in the highest echelon of the society. It is exclusive to a Singapore citizen, and every GCB is unique in its own right, in terms of site attributes, location etc. Given this nature, the ‘outlier’ transactions trend may expand in scale as Singapore continues to attract talent and businesses from the new economy. Based on feedback on the ground, there is continued interest from new citizens for the best addresses, with the Singapore Botanical Gardens as the pivotal landmark. Another group of buyers of GCBs are the next generation scions of the economically active ‘old rich’, where it is seen as a natural way of wealth preservation. As GCBs values continue to push new benchmarks, there could be downstream effect on the detached housing market, where the quantum is consequently lesser due to the size of these properties.

Conclusion

In Credit Suisse’s Global Wealth Report 2021, it is estimated that, come 2025, the number of millionaires in Singapore would increase by 61.9% over 2020 levels. Using this as a proxy for the number of Super Ultra Net Worth Individuals, that is, those who can afford GCBs, the demand for this residential real estate type is expected to follow suit. However, with limited supply, the cooling measures, which overlay additional costs when one buys more than one residential property, further limit supply as they discourage those who already own more than one GCB from selling, and thus the creation of more new economy entrepreneurs. GCB prices look set to climb to a higher cruising altitude and, as we stand today, we could just be in the early stages of the engines powering up even more.

Read the full Business Times article here.