Tuesday, July 22, 2008

About this Blog

Investment Property: Low ROI, High Risk, Illiquid & Heartache: Compare with Investments in Blue Chip Stocks, Foreign Currency Deposit..

Today, I shall focus on the property investors. Unlike home buyers, property investors buy properties purely for their investment returns.

Personally, I'm of the opinion that the current property price simply cannot be justified by its ROI (Return on Investment). Typically, a new property bought from the developer at today's price will generate only a 2% rental yield or less, perhaps a little higher for 99 LH property but then buyers will be faced with the risk of high capital deprecation when the property age.

Even at 5-6%, I'd not find investing in Singapore property attractive because there are other investment alternatives like foreign currency fixed deposit which pay 10% interest and blue chips stocks which pay good dividends. These alternatives are not necessarily riskier than property investment. They're generally more liquid so you can cash out easily when needed. Property is not only difficult to liquidate, renting a property also incurs a lot of headache such as tenant management, property maintenance and all the logistics of moving furniture. Having owned a rental property for well-over 10 years, my experience says property investment is not at all as attractive as many Singaporeans believe, especially not when prices are still sky-high like today and rental yields are getting increasingly lower as vacancy rate increases.

The following is a forum exchange between a bull and a bear on the return on investment for Singapore property extracted the Singapore Property Forum.

Bear wrote:
Buyers cannot ignore the low ROI from property investment. PERIOD.

Bull wrote:
Low ROI? Many projects in the market can now simply generate 7% of rental yield. Certainly, that's almost never seen in Singapore ppty history before. How can these projects generate such a high return? Because the rental market is still very strong, while housing prices is relatively stagnant or slow. In other words, the pent-up demand for housing is real and incredibly huge, but due to some uncertainty, ppl still opt for rental, instead of buying. Obviously, this is a game for only genuine risk takers, not kiasu sideline buyers, to transform the risk into a huge profit.

Bear wrote:
Try giving us some concrete examples. I bet you can't do it, using current prices and rentals.

Bull wrote:
why not? HDB easily 6-8%. LH 99 yrs, 5-6%.

Bear wrote:
When you buy a HDB, you've to stay in it. So why are we talking about ROI for HDB?? Anyway, we talking about private property market here. LH 99 yrs, new 3-rm in suburb like Hillview Regency costs about $900k-$1M which can rent for $2-3K/month at a good time like that but only $1.5-$2.5k at worse time, so let's assume average of $2K. 20,000/900,000 ~1%. Ok if we relax it, you're just talking about 2%. Meanwhile, your 99LH will suffer capital depreciation. Ps show one which gives 5-6% at today's price. Anyway is 5-6% attractive given the depreciation, the huge risk and the illiquidity?

Bull wrote:
There is many HDB rented out, commonwealth area $2.5k-3k, Redhill & Tiong Bahru, 3.5k-4k. 99 LH near MRT, 2 rm is renting at $3.5k-4k & so on. These are selling at $700k-850k. Some people don't mind a 3-4% rental yield.

Bear wrote:
3-4% is ok? Mortgage rate is ~ 3.5% and likely to go up. Your nett return is 0%!! Only ppl who can't count will think it's ok. Put your money in Aussie FD and you'll get 8-9%. Leave your money in CPF, you'll get 2.5%, no risk and no maintenance and no mortgage to pay.

May also want to read:
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
When to Buy, When Not to by
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life
HDB Resales: West Sees Highest Price Increase

4 comments:

Phantasia said...

Hi Smart Buyer,

I've seen you mentioned a few times that the value of 99 LH private property will depreciate over time.

Can i find out roughly how many years before we might actually see a drop in the value of the asset due to age? Is there a rough guideline for this?

I guess that will also let us know how long is the shelf life of a 99 LH property, and if we should avoid buying a property if it is reaching the end of its shelf life.

Smart Buyer said...

Dear Phantasia,
You've asked a very good question. I've wanted to do a systematic research on just how a 99 LH property depreciates with time, but haven't found the time. So I must confess that my views are largely based on anecdotal evidence.

1.Most buyers in Singapore would go for 99 LH property which is less than 10 years old. (That's what most potential buyers for the 99 LH condo that I just sold specified as a pre-requisite.)

2.Old 99 LH property prices are significantly lower than new ones. E.g. Compare old condo, Parc Vista's average price of $5xx psf and nearby new condo, The Lakeshore's $8xx - $9xx psf. I was at the Parc Vista's launch years back, if my memory serves me right, it was then priced at $6xx -$7xx psf. So you can see, owners of old 99 LH may have problem even getting the price they paid, much less see any appreciation over time.

3.Old 99 LH properties in suburbs are going at $4xx psf even at today's peak market.

4.For 99 LH with <60 years lease left, buyers will obtain less CPF and bank financing. In another 10 yrs, 99 LH built in the mid 90's peak will have to face that problem when selling their properties.

5.One of my strongest reason for the depreciation of 99 LH property is its inability to command "rare good price" unlike FH, cos supplies will keep coming. Just look at the 99 leaseland parcels around you waiting to be sold. According to URA data, we'll have another 65,406 in the market by 2010. The average take-up in the past in about ~7000 per year for private property (FH & LH), so you can see it may take ~ 10 years to absorb that. With more GLS (government land sales), you can expect that number to grow.

6.My own observation shows that there's higher percentage of "marginal" owners for 99 LH properties which can cause their prices to drop drastically with any economic downturn. In fact, some 99 LH condos dropped below even HDB prices in the last recession.

7.Singapore buyers tend to buy new 99 LH condos from the developers, rather than the resales making it hard to sell a 99 LH condo in the resale market at a good price.

8.Most 99 LH buyers do not plan to hold their properties for long term which again put downward pressure on the price of old 99 LH properties.

9.Because of the short shelf-life of 99 LH properties, owners may find it hard to hold these properties through a long downturn like what we saw from 1998 -2006.

10.In general, I'd say a 99 LH more than 10 yrs old will start to see significant depreciation.

However, there are situations where it makes sense to buy 99 LH property. Well, I'll write more about this in a future post.

Phantasia said...

Hi again,

Thanks for your analysis! It does make me think twice about getting the EC i was considering, which is currently at 7 years lease.

Though one of the pull factors of the EC is that it'll be fully privatised in another 2 years time. Which i'm hoping will see some increase in the valuation.

The main objective of getting the EC currently is as a place to stay, but the thought that the place will depreciate over time is certainly something to consider.

On the other hand, since its going to be my place of residence, should i even be concerned about such things? I think my investment objectives vs my residential objectives does meet with some conflicts and dilemma at times.

Smart Buyer said...

Dear Phantasia,
I mentioned in my last comment that there're situations where it makes sense to buy 99 LH, one of which is it meets your aspiration for a condo-lifestyle while remaining still affordable. However, my own observation says most Singaporeans'd expect their home also to be an investment that'll appreciate and form part of their retirement funds. This must have come from the HDB ownership concept. Anyway because of this concept, I'd think that the value of old 99 LH properties tend not to be well-supported in the long run. But if you're going for the condo-lifestyle rather than the investment value; and you're prepared to hold the property for good, then depreciation or appreciation shouldn't bother you too much.

You should of course make sure that you really like the place as a home for good, because as you'd probably already know, old 99 LH properties are difficult to sell. There are buyers who simply won't even consider viewing such property no matter what the price is.

Well, just to share my last experience: I used to have this condo that looked so beautiful from the outside with all its glassy facet but when I moved in, the huge floor-to-ceiling windows also exposed me the heat of the fearsome sun that made the apartment extremely uncomfortable.

Best wishes.

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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

Smart Buyer :)