REC weekly #122: Is achieving both capital gains and rental yield still possible?

rec weekly 122 cover image

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.

In the previous article REC weekly #121, case study 3B, a scenario of buying a right sized home and investing the rest of funds in liquid assets. In this article, I will be discussing about how investors can still get the desired Twin Engine Growth – both capital gains and rental yield.

Case Study 3C- Buy Right Size Home and invest part of funds in carefully selected Oversea Properties

Similar to Case Study 3B, the home buying decision process is the same. The difference here is to put some investment funds into carefully selected overseas properties.

Overseas properties have been in the lime light for numerous reasons. From investors making bad investments due to the developers going bankrupt, to investors being ill-informed about the property locations they buy. As a result, the Council of Estate Agents (CEA) came out with guidelines for property agents to follow, a move that will protect overseas property investors and ensure that property agents do due diligence.

Over the past 3 years, I am happy that many of my friends and clients including myself who bought carefully selected properties in Philippines have enjoyed 5-6% net rental yields. Investors have also enjoyed Return on Investment (ROI) of >30% (about 10% p.a), their Return on Equity (ROI) would be much more. Some have already exited their investments with real profits, and some have kept their properties to enjoy passive income. When proper due diligence and selection is done, investors can enjoy twin engine growth – Capital Gains and Income.

Here is a real example of how buying an overseas property in Philippines works. One of my clients bought 4 studio units (this type of units suited the local demand) which costs S$500k, net rental yield per month works out to be $2,400/-. The returns looks a lot like renting out a HDB flat, however the difference is you are buying a freehold property in a rapidly developing country with 100 million population, which have many middle class to support the market and will have even more over the next decade.

If you like to understand more about specific details about this market, I will be releasing a separate article which will discuss the entry, management and exit strategies. Stay tuned.

There are few ways to maximize your en-bloc proceeds, what I will suggest is to be conservative. An investor who wants to take more risks could purchase more oversea property assets, or keep less liquid cash which can be invested in more financial assets.

By doing this, you would now have

  1. Spacious home $600k
  2. $400k of liquid cash
  3. $500k of financial assets generating about $25k income /year (not including any CPF you may have set aside in your CPF retirement account)
  4. $500k of overseas property assets generating $28k income / year (not including any capital gain)


REC weekly #0121: Investing your en-bloc proceeds for asset growth in Uncertain times

part 3b enbloc mini series cover

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.

In the previous article REC weekly #0120, case study 3A, a scenario of buying multiple Singapore Properties was discussed. In this article, I will be discussing about the more prudent strategy based on where we are in the property cycle.

Case Study 3B – Buy a Right Sized Home and invest the rest in liquid assets

Over the last few days, i met a few clients who are waiting to receive their en-bloc proceeds. All of the them had the same question – how to maximise my en-bloc proceeds for BOTH income and wealth preservation.

In my opinion, this strategy is perhaps the most ideal. As we are somewhere towards the end of the property cycle (as of Nov 2018), coupled with global trade tensions and uncertain economy, it is not the right time to make ANY property investments in Singapore. In such an environment, it makes sense to keep your portfolio liquid.

Buying a home is a personal affair, if one needs a larger space, it may make sense to buy a large HDB unit. If a smaller space is preferred, one can buy a smaller condo or HDB as a replacement home. The savvy choice is keep housing costs low and invest in income generating assets that are liquid.

Assuming an en-bloc owner who does not have any other existing properties, buying a spacious 5RM HDB flat would cost around $600k. This would mean $1.4mil left to invest in other assets. To be savvy, it will be wise to keep 20% OR $400k as cash on hand and invest the remaining $1mil. By investing in good quality equities or managed funds, one can get 4-5% returns per annum with relatively low risks, and this is also higher returns than the average gross rental yield of +/- 3%.

By doing this, you would now have

  1. Spacious home $600k
  2. $400k of liquid cash
  3. $1mil of financial assets generating about $50k income /year (not including any CPF you may have set aside in your CPF retirement account)

The key for this strategy is to engage a good remiser or wealth manager to assist you in this process. You may not need to immediately invest into financial assets (Disclaimer: I am not a licensed financial advisor). The advantage of this strategy is that you are liquid and can deploy your money anytime. The figures above will vary depending on what type of home you buy.

If you like to know how you can plan and execute your investment into financial assets, stay tuned for a guest post by one of my buddy, a Wealth Hacker who has been assisting many of my clients with diversifying their investment portfolio. He has also been profitable during the 2007 global financial crisis.

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.

REC weekly #0119: What every en-bloc owner MUST know about the property market

Delivering the continuation to a previous post “en-bloc owners will make the worst decision of their life…” this is Part II, continuation of the mini-series.

In order to curate the best option for property owners and buyers, we first need to understand the current property market cycle.

The environmental factors of the Singapore Property Market 

The Singapore Government apparent intention is to have rising property prices with income growth (2-3%), if any at all. This needs to be inline with inflation to allow housing to be affordable. This would mean that it is against policy for high property price appreciation. Coupled into an environment of rising interest rates, this is a consequential double whammy for Singapore property investors in a low yield environment.

It is often noted that buyers and investors purchase Singapore properties for capital gains, and lesser intent for rental yield. Now that capital gains are being squeezed, in light of the cooling measures. The current environment is much less conducive for property investment. Furthermore, there are events that could be waiting for us in 2-3 years time, namely, the next global economic downturn or crisis.   

Many industry stakeholders say that we are in a new up-cycle currently and the government had pulled the brakes. In my opinion, we are still in the up-cycle which started in 2009-2010 after the subprime crisis. However, we are also likely heading towards the end of the cycle. The 15-month decline in residential property prices was not a down cycle per se, but was more likely an anomalous correction caused by the implementation of cooling measures. The property market indicators and internals show that we are heading towards the end of the property up-cycle. We may be 6-12 months away from the start of the ACTUAL slowdown or slump.   

What does Singapore need to spur a growing property market?  

A. Rental Market

For the Singapore rental market to improve, a few things must happen:

  1. Expats will need better expat packages. Due to slowdown in economy, many expats have lower housing budgets and this has affected the rental market.
  2. We will need more expats to come in, so that demand for rental units can go up and vacancy rates can go down. My personal opinion is the government will allow talents we need (data science, blockchain, AI, cyber security, etc) but it will take time to attract these talents because Singapore is not the only country and also it will take time for foreigners to flow in.
  3. Increase in rental demand from en-bloc owners who will rent a home temporarily before purchasing their new home or while waiting for their new home to be ready. This is however only a short term increase in rental demand and is unlikely to be sustainable.

B. Property Price

For property prices to improve, these things need to happen:

  1. There must be an increase in overall investor demand. This means cooling measures have to be relaxed for both foreign and local demand.
  2. Foreigners need to start buying more units. In 2010, foreigners bought up many properties here causing prices to spike. Today, Indonesian buyers have slowed down due to the tax amnesty introduced. China buyers find it difficult to bring money out of the country due to capital controls, which is their government’s way of controlling their exchange rates. These challenges, coupled with cooling measures hinder the foreigners from buying Singapore properties. Chinese and Indonesians are the top foreign buyers for Singapore properties, the slow down in their purchases affect property price appreciation especially in the luxury segment. With both the ‘gates’ of Singapore and the foreign countries closed, the days of foreigners flooding in are over, at least for now.
  3. Local demand also needs to increase. With an aging population in Singapore, purchase decisions may change, when most property owners 10-20 years ago were young, property owners then can be more aggressive. The situation now is different as most property investors are at or close to their retirement age. The younger population, may not be as bullish on property investment. There are many other investment vehicles with the rise of robo-advisors, carefully selected overseas properties and cryptocurrencies. Real estate as an asset class, is just one of the many options. Especially when many think that real estate is a hedge against inflation, only to see their properties appreciate slower than inflation after expenses.

Where are we in property cycle? 

image 1 - private residential property index

Source: URA, REC Research

The property price index chart from 2009 to present can be read in two different ways. In 2017 during the strong en-bloc wave, there were talks that we are entering a brand new uptrend cycle and are turning around from a downtrend. This refers to the black arrows of 1->2->3 on the chart (Uptrend 2009 to 2013, Downtrend 2013 to 2016, New Uptrend 2016 to present). My personal view is that we have been in the same cycle which started in 2009, as seen with the red arrow. We are still in the same cooling cycle that started in 2009 and the 2013 to 2016 was a mere correction.

This is important because reading the cycles correctly will lead to different outcomes and projections. The property uptrend started in 2009 after the sub-prime crisis and next year 2019 will be the 10th year. This would be a good time to review where we are in the property cycle and be well positioned for what is ahead.

My view is that we are at or moving towards the end of current property up cycle. Let us look at a few critical facts about the property market (some of which I have mentioned in my previous article that was very well received – “5 facts you must know before your next property investment”)

Currently, we see that there is

  1. Real oversupply issues that will be present from 2021-2023, it is similar to facing a resistance block in a stock uptrend.
  2. There are affordability issues faced by the middle class to buy a private condominium.
  3. What is most critical and can directly affect demand supply balance is government policies, the cooling measures. The cooling measures that were implemented on 5th July 2018 were the strongest. Some analysts said the cooling measures were like using a butcher knife to kill a chicken. It is important to identify what the government wants to achieve from the cooling measures, too much cooling measures and property prices decline which will cause property owners to be unhappy. No cooling measures could mean runaway prices that will likely cause properties to be unaffordable for many Singaporeans.

After the introduction of the latest cooling measures, the government said that they want property prices to rise in line with income growth. The cooling measures were strongly directed at property developers more than property buyers as it is the developers that caused higher prices (from en-bloc sites) and higher GLS bids. Lets take a look at how this works.

image 2- illustration of aftereffect of en-bloc

Source: URA, The Business Times, REC Research

Take the popular Amber Park en-bloc in Oct 2017 for example. In a The Business Times article, an analyst noted that the redeveloped Amber Park would have a selling price of $2600 to $2700psf. Before the en-bloc was successful new launches such as Amber Skye and Marine Blue were selling at $2000psf price point (New Amber Park will sell at 30% premium). Nearby, The Esta and One Amber had units selling for an average of $1400psf before the en-bloc of Amber Park, months after, similar units were transacting at $1800psf (a 30% increase in price). These units at One Amber are still almost $900psf from the future selling price of Amber Park. Assuming we discount this amount, due to cooling measures, Amber Park may have a sale price psf of $2500psf ($700psf higher from One Amber $1800psf). This reflects a 38% price gap between the old and new. For average prices to move closer towards Amber Park’s new prices, assuming property prices follow income growth rates of 2% p.a, it would take almost 20 years (simple compound) for average prices to reach $2500psf.

I strongly believe that the government introduced the recent strong cooling measures in attempt to prevent further price increase that is attributed to developers redeveloping the sites. After all, imagine that developers will be making their usual double-digit profit margin that consumers will be paying for.

The latest cooling measures have also signaled that the current en-bloc cycle is approaching the end. We could see a few more good value sites en-bloc. After which the en-bloc wave should be cooled down. This is also a preventive measure from the government to cool the en-bloc market which will cause a massive supply increase as for every one unit en-bloc, about 3-4 more units are re-created.

What should you consider to do?

At this point, the upside potential of property investment is small compared to the potential downside. Property owners should consider reducing risk, repositioning to liquid financial assets and more importantly, avoiding being over leveraged.

Buying in the wrong part of the cycle could mean that you will need to wait for 8-14 years for your property to breakeven. This would mean a huge opportunity cost. If an investor breaks even in 8-14 years, you lose yearly inflation rate and potential gains. This is a MASSIVE loss. Risks can be reduced if an investor chooses the right property particularly when buying in the latter of the cycle. Of course, there are also homebuyers who do claim that they do not mind sitting on a loss making property, this is the mentality and preference of the minority of homebuyers. It is noteworthy to know that there are opportunistic plays in any part of the cycle, accentuating that property selection is the most important aspect of property investment.

In Part III of this mini-series, we will discuss what you can actually do to actively manage your and maximize financial portfolio that will be boosted by en-bloc proceeds. Stay tuned!

As always, please read my disclaimer here.