MRT stations and property prices

30 December 2011
Ku Swee Yong

As more and more MRT stations are built in Singapore, there has been much discussion over whether the presence of an MRT station will boost the prices of residential units nearby.

Let's use the recently completed Circle Line for discussion. According to one school of thought, when the Circle Line and the locations of its stations were first announced in the early 2000s, prices of developments within walking distance to the stations started to pick up. Very quickly, advertisements for developers' new launches and classified ads placed by real estate agents highlighted the benefits of the future MRT stations: Accessibility and travel convenience, resulting in increased demand from both owner-occupiers and tenants, leading to improved rentals and higher transacted prices.

Some investors believe in entering the market early because with the view that when the MRT stations are completed and the line starts running, the market for residential properties nearby would have already "priced in" the premium of the convenience. There is also a view that in the very long term, most Singaporeans will be living within 500m from an MRT station and any "price premium" arising from such proximity will disappear.

It seems that we still lack solid data to substantiate and quantify the effects. But I think it is correct to say that there is an initial euphoria as sellers of properties around the named stations will immediately raise their prices.


CONSTRUCTION INCONVENIENCE

However, what follows after is about five to seven years of construction work for the MRT lines and the stations. During this period, there will be traffic diversions and residents in the vicinity are inconvenienced by the noise, dust and poor traffic conditions.

Based on our observations from serving investors and tenants, expatriates and locals looking for units to rent or buy typically shun condominiums where there is construction nearby. This is especially true for condominiums that suffer limited access due to the construction works for the MRT line and the stations.

For example, residents of LevelZ, Spanish Village and Gallop Gables at Farrer Road were inconvenienced during the construction of the Circle Line's Farrer Road Station, when there was reduced access to their main entrances. Farrer Road itself had many changes and diversions, with new twists and turns appearing every few months or so. Residents had to bear with dust, noise and the occasional movement of heavy construction equipment. The result: Lower occupancy rates and longer periods of vacancies between tenants, which led to weaker rentals and, in many cases, lower-than-market transaction prices.

As completion nears and the streetscape is brought back to normal, with roads straightened and potholes patched up, prospective tenants are more willing to consider renting these properties in the knowledge that the MRT line will begin operating soon. Once the station is open, tenants are willing to pay a bit more and may also make quicker decisions on signing the tenancy agreements. Therefore rentals rise and as yields in Singapore remain within 3 per cent per annum, the prices of the condominiums will grow with the rental growth.

It is difficult, almost impossible, to use a standard yardstick to measure the opportunity costs or the relative underperformance of property values affected by MRT construction. Some cases can be pretty obvious as evidenced by the retail outlets around Chun Tin Road and Beauty World Centre. Due to a reduction in parking lots and traffic congestion, patronage of the food outlets is reduced and, therefore, rentals drop.

In the case of residential properties, things are less obvious. Rental data is not rich for comparison and over the five-to-seven-year period, rentals and sale prices may go up or down depending on the overall external economy, en bloc exercises and new launches, etc.

However, we do have snippets of data that can support our empirical observations. From the chart, we can compare the median rental prices for residential properties around Lorong Chuan and Farrer Road MRT Stations over the last three years.

We see that from May to Sept 2009, when Lorong Chuan MRT Station began operating, median rentals climbed 55 per cent from S$1.97 per sq ft per month to S$3.06 psf per month. Over the same period, median rentals along Farrer Road rose about 30 per cent from a three-month average of S$3.01 psf per month (Note: I have used the average of April to June 2009 because of the spike in May) to S$3.91 psf per month in Sept 2011. In fact, during the period in May to Dec 2009, when rentals around Lorong Chuan station were creeping up steadily, the average rentals along Farrer Road were flattish, due to the fact that Farrer Road was still in a mess as far as the traffic flow and the MRT construction were concerned.


WHAT TO INVEST IN AND WHEN?

I would summarise it as such: Prices of residential properties rise due to exuberant expectations when the locations of the MRT stations are announced, subsequently underperform the rest of the market during the construction period, and then trend up again when the work is completed.

So, buy at the correct time: When the MRT stations are about to be completed, not when the stations are announced and certainly not when the construction is at its peak.

In a previous commentary in Today, I had recommended that investors avoid Upper Bukit Timah, Thomson and Upper Thomson, especially the latter locations as two major infrastructure projects will be built at the same time - the North South Expressway and the Thomson MRT line - choking north-south traffic until 2020.

With Circle Line's Stages 4 and 5 - from Marymount to Harbourfront - running since October and cutting travelling times to Holland Village, Buona Vista, Science Park, NUS, etc, where the working population and student population are high, I am optimistic that the residential markets will begin to show rental and price growth.

Furthermore, I believe that price growth will not be limited to the two new stages. Stage 3 of the Circle Line (Bartley to Marymount) began operations in May 2009, while Stages 1 and 2 (Dhoby Ghaut to Bartley) commenced services last April. Looking at the potential of the residential segments across these stations, I believe there are several locations that are particularly promising:

1) At Bartley MRT Station, where works on the Bartley viaduct and the Paya Lebar underpass had inconvenienced traffic for several years, watch out for a new condominium launching soon between Lorong How Sun and Bartley Road. This residential precinct has been neglected by investors for a while due to the lack of new projects and the traffic situation. Now that traffic has improved and the environment is nice and neat like it used to be over 10 years ago, property values can begin to rise with the convenience of the expressways and the Circle Line.

2) Lorong Chuan MRT Station is surrounded by a cluster of private condominiums. Several international schools and major shopping malls are within a five-to-10 minute drive. In the past, a resident here would take 30 minutes to an hour to commute by public transport to Alexandra, Pasir Panjang or NUS. Today it takes 20 to 40 minutes. The 10-year-old condominiums there are priced at S$800 to S$1,100psf, with rental yields of 3.5 per cent per annum and higher.

3) Pasir Panjang MRT Station, where freehold condominiums are trading around S$1,000psf. I would consider them undervalued relative to mass market locations at the same price level, given that these condominiums are within a five-to-10 minute drive to the financial district and both the integrated resorts.


Ku Swee Yong is the founder of real estate agency International Property Advisor, specialising in property services for high-net-worth clients. He is the author of Real Estate Riches: Understanding Singapore's Property Market in a Volatile Economy.