Is it 1992 all over again?
Rules may be changing in the niche segment for the mass affluent property market


By ROY VARGHESE

THE title of the Carpenters' hit Yesterday Once More is one way to describe the buzz in the private residential market in Singapore. This week's focus is the property segment sandwiched between the mass market in the outlying areas and the prime areas in the city. How is the sudden asset inflation affecting the mass affluent market?



The Water Place: Tenants may find better value in Districts 15 and 16
First off, let's identify the groups who should be most concerned about making the right choice around property. If you are buying your first private home for owner occupation, you are home free: there is no time like the present as long as your new home is affordable. The green light also applies to upgraders - delaying your transaction won't make it cheaper.

That leaves those who need to exercise caution in the face of the surge in home prices: mass affluent expats, some of whom may be permanent residents, and Singaporeans and PRs who are thinking of acquiring an investment property. Here are three scenarios concerning private residential property in the mass affluent market.

Expatriates who are planning to work and live in Singapore for the next five years or more should seriously consider buying instead of renting. Taking an average monthly rent of $4,000 over the next five years, what can $240,000 of capital return? If property prices in the mass affluent market rises by only 8 per cent per annum over the next five years, and if interest rates average 4.5 per cent per annum for the same period, a $1.2 million apartment today may find a buyer at $1.6 million in 2012. That's a sensational 98 per cent return on equity ($200,000 cash down and $240,000 capital repayments - all other expenses and taxes are ignored. See Chart 1).

However, there is the aspect of currency exposure for the expat who will repatriate after five years. The Sing dollar may not strengthen against all major currencies in the medium term. The resulting gain may be less than stellar in the expat's base currency.


If you are looking for Buffett-type value in resale condos as an investment, there are possibilities outside the top-end segment and the mass market in the outlying areas.






Also, in some cases, expats may be better off investing in their own countries while they rent in Singapore. A case in point is Bangalore where home prices have more than tripled in some areas over the last three years. If you had bought a flat in Bangalore before the bull market, it may be more prudent to retain it for your return to India. The more risk-tolerant individual may take profit from his frothing home market and re-start at the basement in Singapore. There are too many variables and assumptions to make it all work to perfection, given a five-year time frame. Nevertheless, it is something to mull over as you update your financial plan.

For those who are contemplating buying a second property as an investment, there are a few hard decisions to make. How can we learn from recent history and avoid the pitfalls of avarice? The scene of buyers lining up in Upper Thomson last week for a low-rise development reminds us of the frenzy of the early 90s. It's hard to know if the prospective buyers were upgraders, investors or speculators. But now the froth is spilling into the mass market.

Four random resale properties were selected from Saturday's CATS classified for a sense of yields and valuations. Some broad-based conclusions can be made from the ads (See Chart 2). A large apartment in the Orchard Road area (Ardmore Park) had the highest rental per square foot (psf) per month of 4.8. The investment objective for investors in this category is to optimise total returns through capital appreciation as the rental yields are around 2.5 per cent per annum compared with mortgage rates of 3.5 per cent per annum. Owners are betting that the psf valuation will rise from $2,300 to $3,000 or more in the next few years.

New releases in the area have already set new benchmarks above $4,000 psf; resale condos in the prime districts will have a few years to close the gap.

The two random samples in the East Coast (Costa del Sol and Water Place) have another story to tell. The rental psf per month ranged from 3.0 to 3.7, which means that tenants may find better value in Districts 15 and 16 compared with prime developments in Districts 9, 10 & 11. From the investor's perspective, the rental yield of 5 per cent per annum is more attractive in terms of cash flow. The sample average valuation in the East Coast is about $850 psf for quality resale developments.

The middle-of-the road candidate is the resale property in River Valley (UE Square) with a rental yield of 3.5 per cent per annum and a rental psf per month of 3.3. The asking prices for this mid-tier category outside Orchard Road suggest a valuation of $1,100 psf. So, there you have it. If you are looking for Buffett-type value in resale condos as an investment, there are possibilities outside the top-end segment and the mass market in the outlying areas.

What should investors who bought at the peak in 1996, do at this stage of the property cycle? Let's make some assumptions about the individual's situation from a historical perspective. It was a brand new 3-bedroom condo near Clarke Quay in 1996 and you paid $1.5 million. The rentals averaged $4,500 in the early years, dropped to $3,000 in the recession years and have now crossed $4,000 a month. The asking price for this 1200 square foot unit (now more than 10 years old) is $1.3 million. Should you hold or sell? The URA index tells us that we are still about 15 per cent off from the 1996 peak. Why would anyone sell now when the prices are just starting to take off? If the holding power is there, then it makes sense to hold on to this property for another year or so.

However, some individuals are prepared to take the smaller loss now and perhaps repay the debt against their primary residence. Alternatively, the equity may be used for a child who is now ready for university abroad. The exit strategy must be clear or one may have to cope with another property bear market in the near future.

Decisions around property cannot be made without updating your financial plan. Assumptions based on input from real estate brokers and bankers should be weaved into your personal cash flow and debt management strategies. The risks and opportunities have to be re-assessed given the fast-paced environment we live in. What can go wrong? Changes in our personal situation (retrenchment, illness), legislation to curb asset inflation, external economic conditions (bear market for equities), etc, will impact the outcome of any investment in residential property.

It was a buyer's market only a year ago. The rules appear to have changed as demand outstrips supply in the niche market segment for the mass affluent. If the property clock is aligned to 1992 today, when will it be 1996? Well, We've Only Just Begun.

The writer is senior vice-president at ipac Singapore. The views expressed are his own.