This morning's Q3 GDP numbers in Singapore were a very interesting read indeed! Not just because they showed the economy grew 8.6% in the first three quarters of 2006, or because domestic demand is making up part of the decline in external demand growth. But because the construction sector - laggard for years - is now really moving ahead. Here's the evidence:

Construction grew 2.3% in Q3 2006, compared to 0.4% growth in Q2. Clearly, this is still small compared to the 11% growth in the manufacturing and wholesale and retail sales sectors, and 8.4% in the financial services sectors. Even hotels and restaurants, transport and communication and business services registered higher growth. But look below the headline: Contracts awarded surged 160%, after the 43% rise in Q2, thanks to large contracts awarded in the private industrial and commercial segments. Certified payments grew 6.6%.

Now, before you get blinded by the numbers, here's the anecdotal evidence. Yes, we've all heard of the S$3,000 per square foot that investors in upmarket condos and serviced apartments are now prepared to pay. But for the rest of us, prices still need to rise another 30%-40% before they are back at the levels at which we bought our properties! And while I describe myself as an optimist, there is still a structural problem (pardon the pun) that needs to be overcome:

On the weekend I spent a few hours chatting with a friend of a friend who supplies pre-cast concrete to construction companies. He pointed out that there are 40,000 empty apartments in Singapore. 40,000! I did a quick search of the URA website and only found mention of a vacancy rate of 6.6%, but no empirical numbers that would support this 40,000 figure. So let's not dwell on the number.

But the biggest concern this friend-of-a-friend expressed was that the units that were empty were unlikely to be sold soon for some rather serious reasons: they are located in Woodlands or Sengkang, far out of town. And while Singapore is a tiny place compared to most cities, in a city where drivers prefer to wait with their engine running in an underground carpark until a parking space opens up next to the lift lobby, rather than park further away and walk twenty metres, distance is an issue!

Now, one solution might be to bring new industries to these areas, to stir fresh demand for space in these "far flung" suburbs. Maybe even build an office tower in Sengkang. There's lots of land, city centre office rentals have gone through the roof, and as IBM demonstrated by moving out to Changi many companies don't need to be in the crowded Central Business District anyway.

But other reasons for the apparent residential vacancy rates are the high density, small size and few ammenities in Sengkang. I haven't verified these reasons independently, but apparently the distance between LRT stations was as much an issue as the fact that residents can see what's on the dinner menu of the neighbors just by looking out through their dining room window.

These issues are not going to go away. Amenities can be brought to Sengkang. LRT stations built. But how do you create more space between apartment blocks? Tear some down? Also, how do you enlarge relatively new units? Upgrade them already?

If we take the parallel of unemployment, there appears to be a mismatch between available labour and available jobs. Similarly, there appears to be a mismatch between available units and the demands of increasingly affluent Singaporeans.

Once again, it appears that demand for these units needs to be stimulated. If Singaporeans don't want them, perhaps they can be opened up to people from overseas. What may not be good enough for Singaporeans may be good enough for them.


Mark Laudi