Bear in mind the importance of value investing as you look for your ideal property

DESPITE the numerous government measures introduced to cool the property market, the high-end residential market in Singapore has not been adversely affected. To begin with, the measures so far are targeted at the mass market which has seen property values rising ahead of economic recovery. Based on Jones Lang LaSalle estimates, the average resale capital value for areas outside the prime residential districts in Q3 2010 is 10.1 per cent above its last peak in Q1 2008; by contrast, the high-end properties are still trading at some 8.4 per cent below the last peak, on average.

In addition, the anti-speculative measures – from requiring a bigger purchase outlay to the most recent clampdown on speculative buying in both public and private markets – have not affected high-end buyers. These buyers are usually long-term investors, if not owners, with strong financial standing. Furthermore, they are foreigners who mostly do not have a stake in the local public housing market.

While the high-end segment has not picked up as much as the rest of the market, there remains latent demand. Besides the Indonesians who form our traditional foreign buyers, an increasing number of buyers with new money from China, India, Russia and the Middle East are looking at the Singapore market.

On the other hand, local investors have also been looking at overseas markets as well. The key motivation for many local investors is distinctly practical – they want to provide a roof over their children’s heads while the latter pursue an overseas education, save on rental expense and enjoy potential capital gains when the kids finally finish school. Additionally, there is clearly further upside in these offshore investments which could come from an anticipated recovery in the values of this asset class and the strengthening of the host countries’ currency. Australia, particularly Sydney and Melbourne, as well as the UK are the traditional markets in which Singaporean investors are active.

Overseas investment opportunities

There are buying opportunities in the Asia-Pacific region, excluding Hong Kong and Japan, as home prices are generally more affordable than those in Singapore. However, foreign ownership usually comes with restrictive conditions which investors should spend time understanding before making any moves. For instance, in Australia, where prices are comparable to Singapore’s, foreigners are prohibited from buying a property to be let out or used as a holiday home, although temporary residents may own a home during their stay in the country, subject to approval.

The UK and the Maldives remain the most open to foreign home ownership. Foreigners who own homes in the UK are allowed to lease out their properties and thus have an income yield apart from capital appreciation. The Maldives is also attractive as investors need only pay a transfer fee of US$3,000-US$5,000 when buying residential properties in the country.

Well-heeled investors have been increasingly buying holiday homes instead of conventional residences. A holiday home has an edge as the project is managed by a hotel operator which frees the owner from the hassle of maintenance. The investor also gets to enjoy the holiday home, along with the facilities, typically for six to eight weeks in a year. This is in addition to receiving income from letting the asset out during the rest of the year. The owner typically splits the income 50-50 with the hotel operator, subject to a bed tax.

Investing in a property

There are several basic but important factors that one needs to consider when investing in property.

Do your sums: Besides making sure that you have sufficient funds for the downpayment on a property, you must ensure a healthy cashflow once you exercise the option to purchase. Increasingly, governments are abolishing the practice of ‘no payment till physical completion’, commonly known in Singapore as the deferred payment scheme, to reduce the risk of buyers defaulting.

Know your market: Understanding the market you are putting your money in is essential as property values may be influenced by many factors, from economics to politics. Even the construction site that sits right across the road can affect your investment positively or negatively. This validates the mantra that ‘location, location, location’ is what matters in property investment. Given the uniqueness of each property, market research is all the more important.

Know your risk appetite: What unsettles you? Knowing your risk appetite helps you determine a market that is most suitable for you. You don’t want to sell in a panic during price corrections. An individual’s risk appetite is largely influenced by his holding power. When investing abroad, there are additional risks to consider:

• Distance – means that you will be unable to keep a close watch on your property and will be less aware of market developments that affect property values.
• Exchange rate volatility – may result in lower returns if your home currency weakens against the currency of the host country of your property investment.
• Ill-informed/unreliable agents – may cause you to miss out on opportunities simply by giving poor advice.

Investment strategies

The conventional wisdom in investment is to buy low and sell high. Had you bought a typical prime property in Singapore in the last property cycle, you would have benefited from a good 40 per cent capital gain if you sold your property today. Buying on cycles would ensure a profit regardless of the property you buy. However, this is often difficult in practice.

The residential market is very sentiment-driven. Many investors act on herd instinct; they buy into the market when everyone else is already in. This usually means lower gains. In addition, many buyers tend to be emotional in their purchases, which may colour their judgement and affect their decision-making.

Speaking to seasoned investors and advisers can help you to avoid following the herd and allows you to leverage on their insights into the market.

As you look for your ideal property, bear in mind the importance of value investing. While mass-market projects tend to be cheaper, high-end properties remain timeless given their quality finishes, higher demand for leases, spacious layout and comprehensive facilities. For example, based on an analysis of the caveats lodged, the median price of a unit in Seasons Park located at Yio Chu Kang Road today has grown by about 9 per cent since it was first launched in Q1 1996; by comparison, Regency Park at Nathan Road commands a median price that is 59 per cent above its initial launch price, despite it being a much older project. As such, the property mantra should be modified to: location, location, quality.

By Jacqueline Wong and Tan Yali - Jacqueline Wong is head of residential, and Tan Yali is senior analyst, research and consultancy, at Jones Lang LaSalle Singapore