REC weekly #0120: Is it the right time to buy investment properties in Singapore?

In continuation for the previous article “what en-bloc owners must know about the property market”, this is the final part of the en-bloc mini-series – “Prudent Strategies for Asset Growth”.

In this final part, I will share 3 common strategies that en-bloc owners will likely be considering and provide my views in a series of 3 articles.

When enbloc owners receive their sales proceeds (or anyone striking a windfall from the stock market or lottery), it will be tempting to spend money quickly. This psychology is common, but is not a good idea. Some en-bloc owners will consider buying 2 properties – one as a replacement home, another for investment.

Case study 3A – Buying multiple Singapore Properties

A few of my clients told me that they want to buy 2-3 properties in Singapore when they get their en-bloc proceeds, what investment properties in Singapore should they buy?

The short answer is – this is not the time to buy investment properties in Singapore (unless it is a very good deal).

The usual me – being data and finance oriented, was tempted to take out my laptop and go through with them financial calculations and the numbers. However, instead of going to such details, I explained about where we are in the property cycle. I hope that this explanation will be informational for everyone. If you still are wondering about the financial numbers after reading this article, feel free to discuss with me further.

Where we are in the property cycle?

After being a real estate and stocks investor for about a decade now, reading countless books by Ray Dalio, Howard Marks, Warren Buffet, etc, and speaking to already seasoned investors, something that they all agree on is that they cannot predict the market, but they sure do need to know where we are in the market cycle. I too cannot predict the market, but understanding where we are in the market will give us an idea what to do.

Here are some facts about the market now:

1. Some property agents and even property buyers are saying – it’s time to buy because as Warren buffet says, be greedy when others are fearful. Perhaps this is being misused. There is less people buying now due to the cooling measures and people also worried that asset prices are overvalued. There is no blood on the streets, those words are best said in 2007/2008. Not now.

2. Investors are afraid that future generation cannot afford housing and fear of missing out (FOMO), they think prices will continue to go up indefinitely. I think that asset prices are inflated and the government won’t cause the prices drop, the global economic crisis will. When people think prices will continue to go up indefinitely, I start to worry.

3. Many property buyers today forgot about the financial crisis that happened. Perhaps they did not experience it first hand, or believe a crisis won’t happen again. I quote our MAS Chief, Ravi Menon’s words, he says that the risk of financial crisis is present, it is like energy, it is just converted from one form to another. In short, the next crisis is likely to happen, it just looks different from the previous one.

The above 3 points lead me to think that the psychology of investors are driven by optimism, trust in the future and less worried about risks. We are probably almost at the end of the property cycle.

Based on the above information and the property market outlook written in the previous article, buying an investment property in Singapore may not be a good idea. If you have not read my previous article, here is the summary.

We are currently in an investment climate of rising interest rates, stagnant rents and oversupply due to huge en-bloc redevelopment units coming onto the market.

With risk free investments (Fix Deposit rates closing on 2%) and gross rental yields at close to 2% and slow capital appreciation coupled with global trade tensions, it is prudent to hold more liquid assets. Some may remember, not too long ago, when the property markets were not overheated, some studio or 2 bedroom units had 5% gross rental yields. Today, the average yield is at 2.5-3%. Prudent investors will look at rental yields and decide how much they should pay for the units. After all, no investor wants to hold on to an asset with low returns. For rental yields to rise, 1 of 2 things must happen. Rents must rise or asset prices must go down.

Rental market outlook

Rents are unlikely to see any sustained rise due to vacancy rate of 7% here. There just isn’t as many expats here today compared to the good times in 2010-2013. In a recent catch up with a client at Club Street, a restaurant manager came to have a chat with us and he mentioned that the crowd at Club Street has shrunk. Many of the frequent Caucasian expats who like to hang out there seem to have gone back. My first reaction was, perhaps these expats could be hanging out somewhere else. However, on second thought, perhaps this is indeed a sign that we have lesser expats here due to the tight immigration policies by the government. Even if the government attracts more talents to work here, the economy will have to remain healthy and we are facing competition with other tech hubs in Asia. Given the above assumptions and information, I believe that rents will remain depressed for the next few years.

Property price outlook

Property prices currently as what Minister Wong (Minister for MND) mentioned in a recent redas meeting, “we are already seeing significant headwinds in the external environment, with trade, with global economy slowing down, with interest rates likely to go up. On TOP of that, within our domestic market, more supply is coming on stream”. His words sums up the question on where are are in the economic and property cycle. It will not be wise to think that property prices will only go up.

If rents are unlikely to go up, then for investments to be attractive, asset prices have to go down. The question now is – how low will asset prices drop in a financial crisis?

REC Views

Buying multiple properties in Singapore for investment with en-bloc proceeds is not recommended. Due to oversupply of residential properties in Singapore, rising interest rates and global economy slowdown.

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