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| Photo: Samuel Isaac Chua / EdgeProp Singapore |
Real estate in Singapore isn’t cheap. In fact, Singapore’s property prices were ranked the second most expensive in the world in 2019. This is according to the annual Global Living report by real estate firm CBRE.
Hong Kong topped the list of 35 global cities listed in the report.
Singapore’s high property prices can be attributed to the lack of space on the island. And where there is less supply, prices naturally tend to increase.
In 2019, the average price for new non-landed property located in Singapore’s Core Central Region (or CCR) stood at $2,950 per square foot (or psf).
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Due to the high barriers to entry compared to investing in, say, stocks and unit trusts, direct investment in property or real estate is considered lucrative.
Investing in property is popular for Singaporeans looking to grow their income. Having a regular monthly rental income is also seen as one of the ways for Singaporeans to enjoy a comfortable retirement.
If you already own a property, before investing in a second property, you would need to know what would make it popular with investors and tenants alike.
First, know what makes a property unit popular with investors and tenants
According to Stuart Chng, senior associate executive director at real estate firm OrangeTee & Tie, there are several factors both investors and tenants look at. (Chng is also co-founder of Navis Living Group, which is the fastest-growing division in OrangeTee & Tie, and comprises over 1,100 technologically savvy real estate agents). The factors include “location [of the property], tenure, modes of public transport and proximity to MRT stations, condition of the unit and its facilities, the schools that are nearby, proximity to shopping malls, and tenant catchment areas such as business parks and offices”.
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For investors, however, there are other factors to consider, such as looking for larger developments with more units, as opposed to “boutique projects where there is lower awareness, transaction volume, a smaller land footprint, and [fewer] facilities”, he says. Developments with 999 years or freehold tenure are preferred, but that matters more to the investor than tenant, as tenant agreements last for a limited period of time.
Chng also identifies another factor that investors should take note of; one that isn’t immediately quantifiable, but is just as important - that is, how easily a property can be rented out or sold.
“Some properties out there seem like a steal and are asking for lower valuation, but may not be easy to rent out or sell when it becomes vacant. And that is a huge risk to an investor’s yield and cash flow,” he says.
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To determine how easily a property can be rented out, Chng suggests investors “check the development’s monthly rental volume to ensure the take-up rate is healthy and consistent, and that the available listings for rent are not oversaturated”. Naturally, the higher it is, the better. “There is no particular benchmark, but comparing to neighbouring projects is a good way to gauge the response,” he says.
And when it comes to the types of properties that are popular among investors and tenants alike, Chng says condominiums (condos for short) are generally preferred over landed property.
Why? For investors, “condos generally have higher yields and lower maintenance costs. There is usually less vacancy time between tenants too”, he says.
However, “landed properties can be popular with a niche group of higher-income Western expatriates as they usually bring their families with them, and enjoy larger outdoor spaces”, according to Chng.
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Looking to sell in the future? Identify factors that drive up the price of a property
Beyond the factors mentioned above, “demand is what drives up the price of a property”, says Chng.
Not every development or property unit available is located in a convenient location that enjoys proximity to good educational institutions, the Central Business District in which most offices are located, malls, transportation hubs, and so on, he adds.
Prices are also affected when properties come with a 99-year leasehold, as opposed to the more lucrative and popular freehold or 999-year developments. “[Prices for] properties that are too old – usually those that are over 15 years old – tend not to appreciate [as] much anymore. This is especially if the property in question isn’t freehold or has a 999-year lease, as depreciation starts to be a concern for the incoming buyer,” he observes.
Chng also advises investors to keep abreast of the Singapore government’s growth plans. He cites examples of areas such as Punggol, Jurong, Paya Lebar, Tengah, and the Greater Southern Waterfront as “major [government] capital is invested into the infrastructure growth in these locations, which then drives up capital values”.
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How much money should you be putting into your property?
The way Chng sees it, investors should ideally put in “as little as you can, as the cost of funds are so low”, he says, referring to the current low-interest-rate environment.
A cut in interest rates by the US Federal Reserve encourages spending and borrowing for cars, homes, and so on. This means home buyers “enjoy lower cost of funds and ideally should maximise leverage and retain more cash for seizing other opportunities”, he adds. “Putting your funds into higher-yielding investments such as REITs or blue-chip stocks will help you achieve positive carry and improve your net yields too.”
Positive carry refers to an investing strategy that yields positive cash flow, which means there is more money coming in than out.
That said, Chng advises older individuals who may be reaching retirement, have lower risk appetites, and “may not want to take risks on their mortgage”, to put a bigger downpayment on the property.
Investors should keep in mind that “a rule of thumb for rental yields for properties in CCR is at least 3%”, Chng says.
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“For the Rest of Central Region (or RCR), yields should at least be at 3.5%, and for districts Outside Central Region (or OCR), yields should at least hover around 4%,” he says. He feels that if “they are any less, you could be overpaying for it”.
Beyond budgeting for a new apartment or landed property, investors will also need to consider a “Total Debt Servicing Ratio assessment of your affordability”, says Chng.
The Total Debt Servicing Ratio, which helps banks and borrowers manage their loans responsibly, refers to a percentage of how much the borrower is taking from his monthly income to repay his debts. The ratio assesses a borrower’s ability to pay his or her debt by taking the borrower’s monthly debt, dividing by the borrower’s income, and then multiplying by 100 to calculate the percentage. The limit is up to 60%.
Depending on the number of properties you already own, you also need to calculate your Loan-To-Value limit (or LTV). The limit determines the maximum amount you are allowed to borrow for home loans, and the LTV calculates the percentage derived from the loan amount, and the actual value of your property.
“If it's your second residential loan, you will be restricted to a 45% Loan-To-Value limit (or LTV). If it's your third, you will be restricted to 35% LTV. If you're taking a loan that's more than 30 years in tenure or [for a property that] exceeds 65 years of age, that will further reduce your loan quantum by 20% in each case,” says Chng.
In the budget, Chng reminds buyers to factor in property taxes such as Buyer’s Stamp Duty (BSD), and Additional Buyer’s Stamp Duty (ABSD) fees, if they “already own a residential property to their name”.
In a bid to cool the residential property market, ABSD rates were raised in July 2018.
Taxes for rental properties are also higher than owner-occupied ones. “Rental properties are also subjected to higher property taxes than owner-occupied ones, in addition to 10% to 20% of your annual value assigned by the IRAS,” he says.
When determining the rental fees, Chng says landlords are responsible for monthly maintenance fees, and that they should remember to “factor that in when deciding upon the monthly net rental returns, as it can be substantial for properties located in the CCR”.
How to have your property leased out quickly
One of the ways to garner interest among tenants quickly is to “spruce your property with a fresh coat of paint”, says Chng. “It works like a charm, and enhances the appeal of your home, especially if it isn’t in great condition.”
Another way to interest tenants is to give them a preview of what their future home may look like in the apartment. “Soft furnishings such as curtains and lights must be done well, even if you do not want to invest in furniture for the unit,” he says. “This makes the property more homely than a spartan apartment.”
In essence, “a well-renovated property that is furnished tastefully will certainly draw more oohs and ahhs”, says Chng. “However, it may deter potential tenants who may come with their own furnishings, and want an empty apartment.”
Should the potential landlords find themselves in a competitive market, Chng advises that they arrange for “home staging” sessions. Engaging “social media savvy” property agents will also help promote the property to tenants better, especially those who are already living in the vicinity, and may be renewing their lease soon.
To sum up, Chng advises that if the estate has a lot of competition for rental units, the landlords should “invest in good furniture, or hire home staging rental services to get more viewers and offers quickly”. Otherwise, soft furnishings are “more than enough, if there isn’t much competition”.
See also:
By Felicia Tan / EdgeProp Singapore | April 7, 2020 3:41 PM SGT
Source: PropEdge
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