(LATEST UPDATE ON 18/7/2018)
Conventional wisdom, especially among Asians, dictates that you should invest in property. CSI PROP takes a closer look at investing in the Singapore property market and compares it to property in other markets overseas.
Property in Singapore is prohibitively priced
Being a tiny island surrounded by water on all sides with not much space available for construction, the only way to build is up — creating the familiar high-rise skyline of Singapore.
With the severe lack of land, it is no surprise that property prices in Singapore are one of the highest in the region — the second highest in Asia after Hong Kong, according to S&P Global Ratings.
The prohibitively high prices of property raises the bar for investors, only allowing for the more affluent section of the population, with ample capital, to invest in the market.
The Prime Minister of Malaysia, Mahathir Mohamad had announced recently that the Kuala Lumpur to Singapore High Speed Rail development will be postponed until further notice.
Following this announcement, envisioned property price growth for the Jurong area in Singapore and the Iskandar region in Johor is unlikely to materialize, much to the dismay of investors.
Government intervention has, so far, kept housing price growth in Singapore in check. A report by S&P Global Ratings found that cooling measures and an accommodative monetary policy have helped to control house price inflation.
Until recently, that is. Despite warnings from the government, house prices in Singapore surged by 9.1% over the past year, after nearly four years of price declines.
This led the government to pull the brakes on the property market yet again. Its most recent cooling measures — possibly the 12th, to date — have been the strongest seen in the island nation in five years.
The government has now slapped an additional 5% stamp duty on property purchases for individual home buyers and tightened limits for housing loans.
First-time buyers who are Singaporeans or permanent residents are exempt from the increase.
Foreigners/foreign investors now pay 20% on stamp duty compared to 15% previously, whilst entities will have to pay 20%, an addition of 10% to previous rates. An extra 5% acquisition tax has also been imposed on developers buying land to build residential properties, which can only translate to an increase in property prices for the buyer in the end.
The government also tightened loan-to-value (LTV) limits by 5% for all housing loans, ostensibly in a move to make property-flipping more prohibitive
Following the government’s drastic measures, new private home sales are expected to reduce by 15% to 20% year-on-year for the whole of 2018, reported Singapore Business Review.
As it stands, developers have already sold 41.7% less private residential units (654) than the previous month, according to the Urban Redevelopment Authority.
Developers volumes were 20.2% below the year before.
The recent action by the Government to control inflation may be good news to home buyers, but from an investment perspective, capital gains from investing in Singapore property may be lacking compared to investments elsewhere.
Poor rental yields
Singapore’s rental market remains in the doldrums, despite signs of a property market recovery from last year.
Property prices do not always have a direct relationship with rentals. Singapore’s rental market is very much driven by foreign demand, given that over 80% of Singaporeans own a HDB flat.
Overall gross rental yields for non-landed private homes from January 2017 to January 2018 hovered just around 3.2% — the lowest in a decade.
The weak rental market deflates returns on investment in Singapore property, lessening its attraction for investors. Stamp duties, property tax, legal fees and agent commissions further cut into profits.
In Singapore, residential property that you own, but are not physically living in (whether rented out or vacant) is taxed from 10% to 20% depending on the house value. Commercial properties have a flat tax rate of 10%.
In June, rentals for private condos and apartments in Singapore fell 0.2% per cent, while HDB rents fell 0.8% per cent in June from the previous month, with volumes continuing to decline as well, according to real estate portal SRX Property.
The rental income that you are able to earn from local property will be impacted by the high property tax, putting a damper on returns.
The United Kingdom
With less-than-stellar returns in Singapore property, it is no wonder that many investors are looking beyond its shores to overseas markets like the United Kingdom and Australia, which can be far more lucrative.
The UK currently faces a severe shortage of homes — in England itself, there is a backlog of 3.91 million homes, according to research by Heriot-Watt University.
The high demand and low supply for housing in the United Kingdom has driven capital growth. Local economies in the regional cities are booming due to initiatives like the Northern Powerhouse, which bring regeneration and infrastructure improvements to England’s North.
Cities in the Northern Powerhouse like Manchester have recorded price growth of an amazing 12.7% last year, with Liverpool following closely behind at 10.8%. This is an indication of the potential that these cities have to offer for the savvy investor.
Singapore currently holds the title of being one of the largest institutional investors in student property in UK and beyond, in recent years. Mapletree and GIC had spent a combined S$2.15 billion on student housing in the UK in 2016, in cities like Leicester, Birmingham, Nottingham, Oxford, Edinburgh, Manchester and Lincoln.
Just this month, Centurion Corp bought a student housing property in the British city of Manchester for S$33.66 million.
Australia faces a similar dilemma to the UK, with the last decade of construction failing to keep up with the country’s record population growth.
Melbourne, in particular, is one of the fastest growing cities Down Under. This city is slated to overtake Sydney as Australia’s most populous city according to the Australian Bureau of Statistics (ABS).
The Urban Development Institute of Australia warned last year that Melbourne could have a shortfall of 50,000 houses by 2020.
Commsec Senior Economist Ryan Felsman commented, “if you look at Melbourne there’s 120,000 people moving to it per annum, but only 75,000 houses being built.”
Whilst the 5 Australian capitals collectively experienced a 0.7% drop in capital growth for the 12 months leading up to May 2018, property in Melbourne performed beyond expectations, growing by 3.3%.
Singaporeans are putting money into Australia. Last year, Cushman & Wakefield reported that Singapore overtook China as the largest source of foreign capital for Australian commercial real estate, as the Chinese government tightened restrictions on overseas investments for its citizens.
Investments into Australia from Singapore quadrupled from about $1bn in 2010 to an excess of $4bn in 2017.
Alice Tan, Knight Frank Singapore director of consultancy and research commented, “Australia has been a popular overseas property destination for Singaporeans, especially for the recent two generations,”
“It continues to maintain its appeal as evident from recent survey findings from Knight Frank’s 2018 Wealth Report, where Australia ranked second on the list of top five destinations where Singapore Ultra High Net Worth Individuals (UHNWIs) plan to buy prime property in 2018,”
“Australia’s economic resilience, adaptability and 26-year record of steady growth provide a safe, low-risk environment in which to invest and do business,” she added.
Cushman & Wakefield regional director for capital markets in the Asia-Pacific region, Priyaranjan Kumar added: “Outside of Singapore, Australia and UK boast two of the most transparent and stable property markets globally for Singapore investors who are largely very institutional in their approach to investments.”
Savvy investors can jump on the foreign property investment bandwagon and take advantage of the supply-demand imbalance in countries like Australia and the UK for more rewarding returns on their investments.
What are your thoughts about investing in the Singapore property market? Drop us a comment below. If you’re interested to tap into the attractive potential that overseas markets have to offer, don’t hesitate to give us a call at 3163 8343 (Singapore), 03-2162 2260 (Malaysia), or email us at email@example.com!
Article by Ian Choong
- Featured image: Archinect