Improved 2024 supply to ease COE prices, but potential demand will fan volatility

THIS year, Certificate of entitlement (COE) prices for passenger cars and commercial vehicles are expected to retreat from the record-shattering levels of 2023, as their supply increases, industry players have told The Business Times.

COE prices for passenger cars broke records in the second half of 2023, driven by low quotas and consistent demand from private-hire vehicle (PHV) fleets.

Generally, COE prices rise and fall in a 10-year cycle, which is the validity period for a COE.

COE quotas are announced every three months. The quota is chiefly determined by de-registrations in the preceding period, as there is a zero-growth policy for all categories except commercial vehicles.

After 10 years, a car’s COE can be renewed for a full 10 years, or for five years at half the prevailing price, but it must be de-registered after the additional five years.

So if more cars are approaching 10 or 15 years of age, more de-registrations are likely. If a large proportion of cars are under six years old – as is now the case – there will be fewer de-registrations and a lower supply of COEs.

Nicholas Wong, chief executive of Honda distributor Kah Motor, said: “2013 had the lowest number of cars registered; and now, 10 years later, we are seeing the same number coming back into the market. We have already hit rock bottom and the only way is up.”

Between 2012 and 2022, 2013 had the fewest new passenger car registrations at 22,472. The highest figure was 91,922 in 2017.

Accordingly, COE quotas were expected to be at their lowest in 2023 and highest in 2027.

In Parliament last November, Acting Minister for Transport Chee Hong Tat said: “Looking ahead, industry players have correctly observed that the COE supply for these categories will increase significantly from (the) second half of 2024, and reach the peak supply years from 2026 to 2027.”

The government will “also ensure that the COE supply in the upcoming quarters will continue to increase in 2024” until those peak supply years, he added.

“Cut-and-fill” welcome, but more transparency needed

This will be achieved through the Land Transport Authority’s (LTA) continued “cut-and-fill” policy: bringing forward guaranteed future de-registrations from peak years, to add to the current supply of COEs.

The first such injection was around 6,000 COEs in May 2023. In Parliament, Chee said the policy would be extended: “We will therefore do further cut-and-fill to bring forward more quota from the peak years to fill the current troughs, while maintaining our zero-vehicle growth policy.”

The policy contributed to the recent easing of COE prices, down from record highs in September and October 2023.

Lars Nielsen, managing director of BMW Group Asia, said the move is “very much welcome” and a positive for both consumers and industry players.

But other players wanted more transparency in the process.

Cut-and-fill numbers are disclosed only at the point of each quota announcement. LTA has not revealed the total quota amount that will be brought forward, nor the time periods from which they will be brought forward.

“Cut-and-fill has certainly helped bring COE prices down, but more transparency would have been welcome,” said Sabrina Sng, managing director for Lotus, Polestar and insurance for dealership group Wearnes Automotive.

“We don’t know what the total size of the car market will be, and that makes it hard to plan as we typically order four to six months in advance,” she said.

This lack of knowledge, plus supply disruptions due to tensions in the Red Sea, could make the supply of European cars trickier in 2024, Sng noted.

Car dealers whom BT approached had estimates of 35,000 to 38,000 cars for the size of the new passenger car market in 2024 – but with the important caveat that cut-and-fill could change those figures considerably.

“It’s very, very hard to predict, but I think it will definitely be more than 30,000 total,” said Markus Schuster, managing director of Audi Singapore.

Uncertainty means volatility

Singapore University of Social Sciences associate professor of economics Walter Theseira expects the COE supply to improve in late 2024 and beyond, but with “significant volatility and see-sawing” of prices in the near term.

That is because both buyers and sellers can only guess at COE prices, he said. “It’s very volatile due to this guessing game being played by dealers who don’t know how much to reprice, and buyers who are wondering when is the right time to sign.”

Relatively low quota levels mean that prices are still vulnerable to fluctuation. There may be significant unseen pent-up demand, which may surface when prices fall, he added.

“We only ever see demand from buyers who are happy to pay today’s prices or higher. But the demand from those who are willing to pay lower prices is massive.”

Uncertainty over such pent-up demand has led to Kah Motor stopping the sale of cars with a guaranteed COE package, in which the customer pays extra for the dealer to absorb COE price spikes.

Private hire, higher?

Observers said private-hire fleets, used for ride-hailing and car-sharing services, were a key contributor to high COE prices in 2023. However, Acting Minister Chee said in November that private-hire demand has fallen, making it unlikely to be “the main factor” for increased COE prices.

PHVs use the same COEs as passenger cars. As at November 2023, the PHV population had grown by 10 per cent or 7,289 to 79,921 – a record high – from 72,632 at the end of 2022.

A spokesperson for ride-hailing app Gojek said: “The ride-hailing industry recovered strongly from the pandemic this year, resulting in increased demand for ride-hailing services.”

Grab did not respond to BT queries.

Chiam Soon Chian, chief operating officer for private-hire rental company Lumens Auto, said he believes the private-hire car population has plateaued. At the “current, high COE prices”, his company will not add more cars to its fleet.

Car-sharing vehicles – also categorised as private-hire cars by LTA – have increased. The total size of these fleets rose to 26,155 in 2022, from 21,351 in 2020.

Car-sharing company GetGo declined to comment on its fleet plans for 2024. In 2023, its fleet grew to 2,700 vehicles as at September, up from 2,100 in February. It has publicly said that its goal is to have 10,000 vehicles by 2030.

Prof Theseira said private-hire entities are aware of the COE supply increase and “may hold back if they can” to ensure premiums fall over time, but added that this is difficult to predict as the industry is due for a regulatory review.

An LTA review of the point-to-point transport sector, which includes taxis and PHVs, is due to be completed in the second quarter of 2024.