5 facts you must know before your next property investment (Feb 2018)

5 facts you must know before your next property investment (Guest post)

Over the past 3 months, the media has been reporting mostly good news about the Singapore Property Market and Local Property Brokers have been upbeat about the property market. Against a backdrop of what looks like a very promising – The Great Singapore Upgrade for the Property Market, this article attempts to provide deep insights that investors should consider as well as questions investors should be asking.

Below are three facts which most investors already know in the Singapore Residential Property Market :

1. Transaction volumes are increasing

2. Property price index (PPI) is increasing

3. Developers unsold units are decreasing

These three facts have led investors to feel upbeat on the market and may have also created a group of investors who have fear of missing out (FOMO) the next property uptrend.

Before making your next property purchase, there are questions and facts to examine to identify whether the property market will go into a sustainable uptrend, or will there just be a knee jerk reaction due to the influx of en-bloc buyers coming into the market. The facts which are discussed in this article will be crucial in making that decision.

 

1. Interest Rates

Firstly, many people know that interest rates are going up, but to what extent can interest rates can go up to?

Fig 1. Source: moneysmart.sg

Fig1 - Interest Rate Chart - Page 2

Figure 1 shows that the Singapore 3 Month Interbank (3M SIBOR) is on an uptrend after an extended period of low rates. Although there are many different rate packages one can take, including fixed rates, these rates will eventually increase, as mortgage interest rates are not fixed for the whole loan period. We can see that before the last 2008 financial crisis, 3M SIBOR rates were as high as 3.5% and that would lead to a mortgage rate of about 4%. There is also a possibility that we will see rates higher than 4% over the next 2 years.

Investors who are taking a mortgage should therefore ensure that even if interest rates go to 4% or 5%, they are still able to afford their monthly installments. In addition, if

the property purchased is an investment and rental is required to cover monthly mortgage payments, the next factor discussed is a critical point of consideration.

 

2. Vacancy Rate

Fig 2- Vacancy Rate-Page 3

Fig 2. Source: URA (OCR-Outside Central Region, RCR-Rest of Central Region, CCR-Core Central Region)

Based on URA data, vacancy rate of private residential units have been increasing from 2014. The latest Q3 2017 overall vacancy rate was 8.4%, up from 8.1% in Q2.

Investors who rely on rental income to pay for mortgage payments need to consider the following:

  1. If unit is vacant for 6 months, do you have the funds to pay for the mortgage payment?
  2. If rental drops by 30%, ie. From $3000 to $2100, are you able to top up the difference for the mortgage payment?
  3. Will there be potential supply and demand mismatch in the future, for example will there be enough demand to take up the number of units in that area in future.

When buying an investment property for capital gains or rental income, it is important to find out which areas have growth potential to reach that objective. For example, if an investor is seeking rental income, it is important to find out areas where there will likely be increase in future tenant demand or huge existing tenant demand. If you would like to find out where such areas are, look out for our next article about the geographical localities in Singapore.

 

3. Supply and Demand Balance

To better understand the current market position, we look at the supply and demand balance. Currently, URA data reports and shows only planned and approved supply of units that will be completed from 2018 to 2021 and beyond. These are represented in Figure 4 below as the red bars. Due to the recent enbloc frenzy and aggressive release of Government Land Sales (GLS) sites, it is important to project the number of future supply coming into the market. The recent enbloc sites and GLS from 2017 will likely be completed from 2021 onwards.

In order to project the future supply of both, enbloc sites and GLS, the following future supply (fig 3.) and assumptions (fig 3.) of sites being completed are used.

 

2017 2018
GLS 1H 7400 8045
GLS 2H 8125 est. 8000
Enbloc 19198 est. 18000
Assumptions and Notes
2017 1H GLS Complete in 2021
2017 2H GLS Complete in 2022
2017 Enbloc Complete in 2021
2022
2018 1H GLS Complete in 2022
2018 2H GLS Complete in 2023
2018 Enbloc Complete in 2022
2023

Fig 3. Source: URA, REC Research

The projection of the pipeline of supply coming into the market (fig 5.) from 2021 to 2023 and beyond shows that pipeline supply reverting back to oversupply levels, which was seen between 2014 and 2017.

There are currently about 3000 enbloc households, which creates the estimated future supply of 20,000 units. Assuming that these households buy 1 unit each, in 2018 there will be 3000 transactions added into the market. This is a 12% y-o-y increase in private residential transactions in 2018. Likewise, if each household buys 2 units, 6000 transactions will be added and a 24% y-o-y increase in private residential transactions. Either scenario may increase transaction volumes temporarily, but does not soak up all the pipeline supply created in 2017.

Overall, there is a net increase of future supply and will likely lead our residential market into an oversupply situation come 2021.

 

Fig 4-Pipeline supply estimation for singapore

Fig 4. Source: URA, Exclusively collated by REC Research

 

4. Population Growth & Demographics

Understanding Singapore’s Population Demographics is important in understanding the population’s buying preference for the types of properties they may purchase. Although there are many permutations to what buying behaviors could be, we will attempt to look at it in a practical and logical manner.

We look at the Singapore’s population growth (fig 5.) and note that we have averaged just over a 1% increase yearly. The population growth rate is likely to maintain its current path, as commented by Managing Director of Monetary Authority of Singapore (MAS), Ravi Menon that “the current demographics slowdown is so severe that it is neither feasible or desirable to try to offset it completely through immigration of foreign workers” when he was commenting on Singapore’s aging population (fig 6.).

An aging population means more citizens will be planning for their retirement which would mean potentially right sizing to a smaller home to cash out some funds for their retirement. Some may feel that the house is too big and prefer a smaller house. It is reported that some owners whose houses are enbloc intend to buy HDB flats instead of purchase another private condo as their home. This change in buying preference is not positive for the current enbloc cycle as there may be less demand for the future supply of private residential properties.

 

  2010 2011 2012 2013 2014 2015 2016 2017 (1H)
Total Population Growth Rate (%) 1.8 2.1 2.5 1.6 1.3 1.2 1.3 0.1
Non Resident Growth Rate (%) 4.1 6.9 7.2 4 2.9 2.1 2.5 -1.6

Fig 5. Source: Singapore Population Trends 2017

 

5. Inflow of foreign buyers or talents

A recent report by Bank of Singapore noted that in 2017, foreign buyers bought about 1600 units (5.6% of total transactions in 2017), down from the peak of close to 6000 properties in 2011 (15% of total transactions in 2011). A possible reason for the decrease is due to the 15% Additional Buyer Stamp Duty (ABSD) imposed for foreign buyers. However, even if the government reduces or remove ABSD, foreign buyers from China and Indonesia which formed the majority of buyers in 2011 may not rush back to buy properties here due to Capital Controls and Tax Amnesty imposed in the respective countries.

Foreign talents have also seen a reduction in growth rate over the last 3 years as seen from Non-resident growth rate (fig 5.), which contributes to the increase in vacancy rates for private residential properties. Even if the government starts to attract new foreign talents again for our new industries like FinTech, Cyber Security and Artificial Intelligence Industries, there will be lag time before vacancy rate improves.

 

 

Our Views

Our view is that property investment will continue to be very lucrative over the long term. However, against a backdrop of mixed data and noise in the property market, location selection is more important than ever. Property investors 20 years ago could just buy almost any property in Singapore and would make a profit if they held till today. Over the last 5 years, there are groups of buyers who made profits, while also a large group who did not profit. Property selection hence is the key to invest profitably and data based analysis can aid in the process of buying a bargain in a growth area.

If you would like to find out more, look out for our next article on the areas to consider for resilient property investment.

 

About the Author

Ray’s Estate Clinic (REC), founded by the affable Raymond Chng, is a platform for Investors’ and homeowners to have a Property Portfolio Health Check by utilizing data analytics, ensuring that their portfolio remains healthy providing optimized returns.

“Health is Wealth” is what Raymond believes in, and it is not related only to your own body’s health, but it also refers to one’s financial health. Having a Property Portfolio that is not performing does not help improve an investor’s wealth. Hence, converting non-performing assets into optimized performing assets is essential to portfolio’s health improvement.

Raymond graduated with a Bachelors Degree in Business Management (Finance) from the Singapore Management University, and has been in the real estate industry for almost a decade. He believes that marrying financial analysis with real estate data is the future of real estate investment. Having successfully invested in equities, real estate and other asset classes, he works with various domain experts to provide a holistic solution for anyone keen to improve their Property Portfolio Health.

Raymond can be reached at raysestateclinic@gmail.com

 

Disclaimer

This article, publication or newsletter is purely for educational and entertainment purposes only. Material in this article comes from many sources and may be inaccurate or incomplete. The author does not warrant the completeness, accuracy or timing of any information herein. This is not an offer to buy or sell real estate properties. Information or opinions on this blog are presented solely for educational and entertainment purposes, and is not intended nor should they be construed as investment advice. Under no circumstances shall the authors and its agents, or any third party providers, ever be liable for any direct, indirect, incidental, punitive, special or consequential damages, or any attorney fees, from any person or entity that has viewed this blog. View this article or publication at your own risk. It is advisable that readers seek their own professional advice.

Also, please refer to the disclaimer HERE

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