Why Property Is Still The Preferred Choice of Investment Despite Cooling Measures

Written by: Leo ,

February 14, 2019

“Buy assets not liabilities.” – Leo

Take a look at rich investors financial portfolio and you will see one overlapping similarity on the channel of their investments. Real Estate. Wealth accumulation through properties is still widely adopted and practiced by many rich investors.

Properties are assets that tend to appreciate over time. Despite the new cooling measures introduced by the government, property prices of non-landed homes continue to rise in Singapore.

The average price of new luxury non landed homes (Private Condo/Apartment) reached a new high of S$2,819 psf in Q3 2018

“There are still opportunities to buy and sell as long as you have the holding power.”

Property cooling measures were implemented by the Monetary Authority of Singapore to moderate the increase in housing prices. Additional Buyer and Seller Stamp Duties (ABSD & SSD) and tighter loan-to-value limits for loans on second and subsequent properties and loan tenures were put in place. In addition, the Total Debt Servicing Ration (TDSR) limits the total debt amount a person can have. Such measures also seek to contain speculative buying.

So what does this mean if you want to use property as your investment vehicle? What should you do in the light of these measures?

Fret not. There are still opportunities to buy and sell (flipping) as long as you have the holding power to hang on to your properties for a longer period of time (5 years and beyond). Your holding power is measured in terms of how long you can afford to pay the monthly mortgage installment VS your monthly cash flow situation. You may also consider investing in other types of properties: commercial and industrial properties.

There are several advantages of investing in commercial properties as compared to residential units. I will highlight a few of them:

  • The Lower Quantum needed to purchase a commercial property as compared to a residential property. You can buy a commercial unit at around $500,000. Loans from bank can be granted at 70-80% of purchase price. You can expect to pay double the amount for a residential unit.
  • Commercial Properties are less affected by property cooling measures.
  • Strong demand for commercial properties as there is a limited supply of strata offices and retail units for sale.

“Sentiment in the private residential market remained resilient despite new property measures”

In the Q3 2018, 62 super luxury condominiums were sold at ≥ S$5 million (Chart 5). Seven super luxury homes were sold at ≥ S$10 million, six of which were transacted after the latest cooling measures.

The private condominium sector is the most popular segment among residential properties in Singapore. Rental yield for condominiums are relatively constant. This can be attributed to the influx of expatriates who relocate to Singapore for work, indefinitely. These expats tenants tend to choose to live in condominiums for their security and convenient facilities such as an on-site guard, swimming pools, gyms, tennis courts, etc. The constant and high volume of transactions for condominiums offer more opportunities for investors to buy and sell.

“The difference between property and other wealth-creation tools lies in the power of leverage”

Leveraging is about using the other person’s money instead of your own. When you take a property mortgage, you benefit from leveraging. You get to buy, own and control something whose total asset value is bigger than the sum of money you initially put in.

You put your hard earned money in the bank and in return it pays you an interest based on your principal. There is neither leverage nor multiplier effect. Basically, you put an orange in, and you expect to get back more than one orange. With the current bank interest rates, you can expect to get back 1.05 oranges. However, if you compare various investment tools, you will find that there is potential to earn far more from property.

How do you put in an orange to get 5 more oranges? Simple, by leveraging. When you invest in a property, you use an initial sum (downpayment) to secure a loan that is many times more. Gaining access to a larger sum of money is leverage. Let’s say after 5 years, you sell the property at its then-current total asset value (on average property prices in Singapore increase by 50% after 5 years). Which means after five years, you get 1.5 oranges back. Compare the 1.5 oranges to the 1.05 oranges you get from putting your money in the bank.

In the long term, property is likely to retain its lustre as a preferred choice for wealth accumulation for investors, due to the city-state’s regional hub status, solid growth prospects and Asians’ deep-seated desire to own property.

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