Singapore has a new price index, which provides information on the state of the residential property market in the country.
The National University of Singapore’s Institute of Real Estate Studies formulated the Singapore Residential Price Index (SRPI), the first such index by an academic institution in the country.
The trend of residential property prices and sales are provided mainly by the Urban Redevelopment Authority (URA). However, buyers and sellers can now rely on another indicator to trace property prices every month.
The new index considers things like sales volumes and unique locations to indicate the movement of market prices.
The index has been developed for it to be tradable, e.g. Total Return Swaps, Property Index Linked Notes, Futures and Forwards to allow individuals, corporate and any parties with exposure to property to manage their overall property risk; taking positions in the index to insulate themselves from downturns.
“We’re different from the URA index in terms of the features. We use a basket based approach,” said Associate Professor Lum Sau Kim, the project leader from the Institute of Real Estate Studies at NUS.
“This means that we’re covering 364 projects, condominiums and apartments and we have certain attributes about these projects. They’re about three months to roughly 10 years old and they do not include uncompleted properties.”
A basket of residential properties is selected at a base year from 2001 and consequently every 2 years to represent a sample of the market. The basket will be next revised in December 2011. The selection criteria takes into account transactions for existing use only removing the impact on property price influenced by extraordinary events such as enbloc / collective sales.
The adequate spread reduces the possibility of manipulation and outliers are removed for a dampening effect. Attributes and physical space are some of the factors taken into consideration for this asset class which is heterogeneous in nature.
Associate Professor Lum used the analogy of a tent-like sheet where each property is a needle which supports the index, and up/downward movement in each needle impacts adjacent and thus overall values.
According to the government, the new index will aid property buyers with investment decisions.
“By offering a snap shot of the non-landed residential property market using a basket of properties, it can facilitate the analysis of price trends and help investors in making more informed decisions,” said Grace Fu, Senior Minister of State for National Development.
“As the index gains in acceptance, it can potentially be used for risk management through the development of products such as property derivatives. Such derivatives may be one way for real estate developers, asset managers, banks and investors to hedge their property exposure.”
The index can help to expand the set of financial products like total return swap and index-linked notes being offered in Singapore.
The introduction of an additional price index has been welcomed by property analysts. They said it is a different option to offer more useful data for comparison. The monthly-tracking of private property price movements would also provide an in-depth and timelier perspective of the market, the experts added.
“This new announcement will definitely factor well for Singapore in terms of how transparent our property market is,” said Dr. Chua Yang Liang, head of Research for Jones Lang LaSalle in Southeast Asia.
“It gives the property market some clarity. It’s the right time and where the market is heading now, I think having another index to confirm or affirm where market trends are is definitely a move in the very right direction.”
Karamjit Singh, managing director of Credo Real Estate, said: “That would be useful. Any more information to make the market as perfect as possible helps decision-makers.”
NUS wanted the new index to complement the quarterly data provided by the Urban Redevelopment Authority.
Responding to the new index, the URA said that its index is different, as it is intended to give the public an extensive indication of price trends in the private residential market.
According to the URA, its index covers both non-landed and landed private residential properties and is also compiled based on all types of transactions.
The NUS’ Singapore Residential Price Index (SRPI) offers a snap shot of a segment of the private residential market, as represented by the selected basket of completed private residential properties in non-landed estates.
The index could help investors in making more informed decisions and help facilitate the analysis of price trends in this market segment.
As the new index gains acceptance, it could possibly be used for risk management, through product developments like property derivatives. Such derivatives could be a way for asset managers, property developers, banks and investors to hedge their property exposure.