Bye to big profit from property buys

Some friends recently commented that "invest in property, sure make money". That, unfortunately, is not as true as it once was. It now depends on what you mean when you say "make money".

Potential gains are certainly not on the scale of those achieved for homes bought in the late 1960s and 1970s. At that time, a house could be had for anything from $10,000 to $100,000. Now these terrace homes and bungalows are priced in the millions and even the tens of millions of dollars.

Even as recently as 20 years ago in the early 1990s, condos could be purchased for a few hundred thousand dollars and there were still landed homes available for less than $1 million.

Back then, it didn't take much to have a Midas touch as home owners rode the transformation of Singapore from developing to developed economy and the accompanying jump in home values.

Many people who say that property makes them money are, I believe, referring to this period. These are the older generation of home owners for whom property has, without a doubt, outshone every other investment.

But the case for property being a winning proposition has since become less clear-cut.

For example, there are some property buyers who bought houses close to the previous peak in 1996 and it has taken years before prices returned to those levels.

Oleander Towers in Toa Payoh, for example, was transacting at around $800 psf (per square foot) in 1996, but during the global financial crisis, units could be had for less than $700 psf. This year, there are several units that have changed hands at more than $900 psf.

There are also those who invested in luxury apartments during the latest peak of 2006 and 2007. Many of them could well be sitting on paper losses.

For example, Bukit Sembawang sold 14 units at its Paterson Suites condo earlier this year at around $2,500 psf, about 15 per cent off the peak in 2007.

What has cushioned the impact is that the developers, as well as many of these investors, are cash-rich and have holding power. Developers would have covered their costs from selling sufficient units, even if the project did not sell out. Many investors who have a large property portfolio are able to wait out their paper losses, while renting out their properties in the meantime.

Winners and losers

Equally, just as there are now cases of investors nursing paper losses, there are many who have made a pretty profit.

The most recent upswing came when the global economic crisis hit after 2008, when the property market was in the doldrums. But a flood of cash from the first round of quantitative easing helped prop up the stock market, and before you knew it, property prices were on the rise again.

Investors brave enough to venture into the market then are now the ones laughing all the way to the bank. Take the project at City Square Residences near Little India. In 2009 when the project was still uncompleted, psf prices were around $1,000. Now, nearly three years later, small units are transacting at around $1,600 psf.

But even if there are investors who have made profitable bets, examples of investors making capital gains on such a scale will be thin on the ground from now on.

The reason property investors are no longer going to enjoy a 100 per cent or 200 per cent upside is partly due to the series of cooling measures.

The Government aims to have a stable property market. The days of flipping properties in 2006 or so - where for a downpayment of a few hundred thousand dollars, you could make almost that same sum a few months later by selling your option - are over.

Supply is going to increase substantially on all fronts, from the HDB market, to the executive condominium market, to the condo market. That will keep price rises in check.

The major structural change in the property market - a large jump in the population - which led to a surge in demand for housing has already occurred. Further rises in population numbers will be at a more placid pace.

It may be easy enough for prices to rise by 50 per cent from $1,000 psf to $1,500 psf, but it will take much longer to hit $2,250 psf from the higher base of $1,500 psf.

At the same time, potential buyers who stand ready to pounce once prices plunge should refrain from wishful thinking.

That's because Singapore's fundamentals remain strong. There are people who want to upgrade, to move, and to rent. Singapore is seen as a safe haven and therefore will continue to attract investors - both local and foreign - who think property investments will remain a store of value.

As prices are unlikely to fall much, what should be clear for investors who have missed the boat and are hoping to get into the property market is that handsome gains are probably going to be far and few between.

There is, however, the slow boat, as I would call it - a respectable yearly yield from decent rental rates.

This means that investors aiming to buy property have to focus on what brings them yield. This means buying smaller properties - such as two-bedders because these will be easier to rent out.

Properties should also be close to transport links and amenities to cater to tenants who do not drive.

While property investment may not make big money, if carefully handled, it is not a losing proposition either.

Source: The Straits Times – 13 October 2012