Sharing my views on this interesting article here
Credits to the original author.
Decision making considerations
The author lists several factors which I generally concur with. Most are mentioned in my post regarding resale checklist here
- Understand the reason for the purchase: As with most things in life, begin with the end in mind. Is it for owner occupation or investment? This will affect how the buyer/investor weighs the various considerations. e.g. proximity to schools and parents' homes vs tenants' perspective
- Understand your risk profile: As with most of investing, returns are typically associated with risk. The author cited relevant risks such as incurring Additional Buyer's Stamp Duty (ABSD) due to inability to sell the existing property on time, the inability to find tenants, fall in rents, or increase in borrowing costs.
- There is no "perfect" property: linked to point 1, it would be easier to weigh the priorities and make compromises once we are clear on the objective of the transaction.
- Giving up the good in exchange for the better. e.g. I own Asset A yielding 1%. I can sell Asset A and use the sales proceeds to buy Asset B yielding in excess of 1%. While I have no fundamental disagreement on the logic, this depends on the transaction size relative to the investor's net assets. This is because for properties, the investment yield is typically no guarantee, hence there is no certainty that the exchange will be "for the better"
- Location. Reproducing the author's views as I have nothing to add (other than the emphasis in bold) "The tenet for buying property has not changed - location - but with a new perspective. Where location was previously confined to the prime districts, the concept of location has evolved. Although a prime location remains desirable, lifestyle amenities - for example, proximity to the riverside or F&B amenities have also come to the fore as convenience becomes the new currency. Following the pandemic, the pace of decentralisation of business activities, supported by a wider variety of amenities, will gain momentum as more companies adopt a hub-and-spoke model with headquarters in the CBD and branch offices in decentralised locations."
- Accessibility & connectivity. Reproducing the author's views as I have nothing to add, this is linked to the previous point. "Jobs will also be closer to homes as business activities continue to decentralise. This will make living away from the city centre increasingly attractive. As MRT stations become more prevalent, properties near interchange stations will command a premium as accessibility and connectivity in terms of time (instead of physical distance) become the criteria for decision-making."
- Growth areas. Reproducing the author's views since these are typically cited growth areas, although I would caution that the certainty of each project differs e.g. Jurong might depend on the High Speed Rail Project. "As Singapore continues to decentralise, there will be new employment areas - for example, Jurong Lake District, Jurong Innovation District, Woodlands Regional Centre and Punggol Digital District, with ready accessibility to/from other activity nodes and residential areas, facilitated by the Jurong Regional Line, Thomson-East Coast Line and North East Line extension. Neighbourhoods near learning institutes such as universities often command a premium as they anchor a cluster of knowledge-driven businesses that will in turn catalyse other activities. The presence of an institute of higher learning will also have a positive impact on the profile of the residents and amenities."
- Park connectors, parks and nature reserves. The author argues that Covid-19 has raised the awareness of health and wellness to a new level. As such, the demand for properties located near park connectors, parks and nature reserves will increase. While I do not disagree, I believe this should be evaluated in the context of point 1 above i.e. what is the reason for buying
- Health & wellness. This is a point which I have not previously considered. Reproducing the author's view here and I will take a closer look at this factor in a future blog post. "This pandemic has made us rethink real estate including how space is to be used. Our homes have become our workplace, classroom, entertainment venue, exercise studio and playground. Going forward, we could find more households spending time at home.The global trend towards a gig economy as well as more seniors working part-time is leading to a paradigm shift in the design of homes. For example, attention is now turned towards providing more light, cross ventilation, improving fresh air intake, views and creating dedicated or flexible space incorporating touchless design and technology to promote the well-being of those using the home for different activities. Indeed, the healthy building movement is gaining pace, as its role in public health becomes more apparent with practical designs that help communities lead healthy and active lifestyles both within and outside of our homes."
- New versus old properties. The author asserts that while older developments tend to have larger floor areas, their designs are somewhat obsolete. In contrast space may be compact in new developments, the focus is on delivering Space as a Service and not the traditional brick-and-mortar concept of physical space. As a result, many buyers have gravitated to new sales as they are perceived to deliver value, featuring contemporary living designs supported by technology that appeal to their lifestyle needs. While I do not disagree, I believe this should be evaluated in the context of point 1 above i.e. does the buyer/tenant value Space as a Service vs having space in one's property, especially when we are compelled to work from home
Are the factors driving resilience valid?
The author cites several factors explaining the resilience of the residential market despite the COVID dampener on the real economy.
- Memories of past cycles: residential prices under the Sars public health crisis, and the 2008 global financial crisis rebounded after each event. However, past performance is certainly not indicative of future performance, particularly when we examine the longer-term potential of Singapore as a country from a socio-political perspective. For instance, is it certain that Singapore will be an attractive regional hub and gateway for businesses to be in? While the scarcity of land could be relevant in weighing the equation, it would be prudent to consider the sustainability of expected future cash flows i.e. the rental inflows may not continue at current levels. My post here on the drivers of residential property prices is of relevance
- High liquidity with limited investment options: while this is a valid point, there is no shortage of investment options in today's open economy. Overseas securities can easily be purchased via the online brokers, and alternative investments such as bitcoin and P2P lending (e.g. Funding Societies ) implies that residential properties will need to compete with other investment classes and demonstrate a better return/risk ratio.
- Low cost of borrowing: another valid point but the leverage obtained can be deployed into alternative investment options. Perhaps properties serve as better collateral compared to alternative asset classes, allowing greater leverage.
- Stable asset class. past performance is not indicative of future performance
- Emotional attachment: while emotions could interfere with rational decision making, anecdotally most of the property owners did not live in the properties they own (e.g. due to inheritance) and hence the emotional attachment may be weak or non-existent
- Serious investors with longer term perspective: I am not aware of any data to support the validity of this argument
- Established developers: I am not certain whether the strength of the developers result in a resilient residential market, or whether the resilient market improves the balance sheets of developers.
Overall, I am not convinced that the above factors would support the resilience of the residential property market, however that is based on my personal risk profile and outlook on the future.
Useful Takeaways
I found the final section to be filled with practical insights which I will share here
- For buyers: low interest rate environment might not last forever since mortgage rates do fluctuate. For investors, there are recurring expenses such as maintenance fees and property tax in addition to loan repayment, regardless of whether the property is tenanted or not.
- For sellers: establish realistic price expectations if they wish to transact.
- Engaging a knowledgeable broker who appreciates the strengths and potential of the property makes a huge difference. There is an even greater need to market the property to its fullest potential since buyers have many options.
- As prices for older properties are unlikely to increase in the near term, it may be worthwhile to moderate price expectations to realise the sale earlier.
- However, if the property enjoys unique attributes, it may be worthwhile to hold onto the property until the desired price is achieved.
- For landlords/tenants: Landlords should be realistic in their expectations bearing in mind the realities facing prospective tenants in the job market. Some tenants may move to smaller or less prime located apartments, creating demand for these apartments
What were your thoughts on the original article? Let me know in the comments below!
