An elite investment gets its day in the sun

Business Times - 13 Aug 2009

Sales of Good Class Bungalows gather steam, with some predicting healthy price rise

By KALPANA RASHIWALA

(SINGAPORE) The Good Class Bungalow (GCB) market has sprung to life with high-net-worth individuals stepping up their purchases.

July was an especially action-filled month which saw about 20 GCB transactions worth a total of more than $300 million. To put this in perspective, the entire first quarter of this year saw GCB deals worth only $27.5 million.

The action picked up in April, when $56 million worth of GCBs were transacted. It gathered pace in May and June, each month seeing deals amounting to around $188 million. In July, the market went ballistic.

So far this year, around 50 GCB deals have been transacted, according to caveats data compiled by property consultants and information on the latest transactions obtained by BT.

The year-to-date tally of over $800 million is healthy, considering that the whole of last year saw just 51 deals worth $830 million.

GCB agents expect the sales flow to continue in coming months. CB Richard Ellis's director, luxury homes, Douglas Wong said: 'It's likely that a total of 60-65 GCBs will be sold in the whole of 2009 - more than the 51 GCBs sold in 2008. The total quantum is likely to be around $1.1 billion to $1.2 billion, about 35-45 per cent higher than the quantum of $830 million in 2008.'

Savills Singapore director of investment sales & prestige homes Steven Ming says that 'although we do not expect the spike in GCB sales that was seen in May to July to be sustained, we do expect to still see healthy buying activity continue for the rest of the year'. He expects 60-70 transactions for the whole of 2009.

Apart from the general feeling that the worst of the financial crisis is over, he cites the low mortgage and deposit rates as reasons for the GCB market revival.

Agreeing, Newsman Realty managing director KH Tan notes that high-net- worth individuals prefer GCB investments to letting their cash idle in banks. They are also wary of investing in financial products following the Lehman debacle, he said.

'Another group of GCB buyers are foreigners who have become Singapore PRs and PRs who have become citizens,' adds Mr Tan, who recently brokered the $38 million sale of a Cluny Park bungalow.

BT understands the property was sold by former Kim Eng Securities managing director Douglas Ooi to a buyer who also picked up No 3 Cluny Hill earlier this year.

'When the IRs (integrated resorts) are ready, even more rich people from overseas will come to Singapore and become citizens. Some would be interested to invest in the GCB market,' said Mr Tan.

Typically, one has to be a Singapore citizen before one can own a GCB. However, PRs are known to have been given permission by the government on a case-by-case basis to buy small GCBs with land areas of about 15,000 sq ft, depending on their contribution to Singapore, according to Mr Tan.

Major GCB deals in recent months include a site at Dalvey Road said to have been sold by a certain Thomas Chan Ho Lam, for $27.01 million. Interestingly, a person with the same name is also understood to have bought a bungalow at Belmont Road for $30.5 million last month from Ong Kok Thai, managing director of Vanguard Interiors and the Peranakan Place Group.

Meanwhile, GuocoLand chairman Sat Pal Khattar is believed to be the seller of a bungalow at Rochalie Drive, which fetched $18.32 million. BreadTalk founder and chairman George Quek is reported to have sold his 2 Swettenham Road bungalow for $29.2 million to developer Simon Cheong.

The GCB market peaked in 2006 with $1.23 billion of transactions involving 119 deals. The following year saw 87 deals for a total $1.15 billion, according to CBRE figures. In the first seven months of this year, 47 deals totalling $710 million took place, CBRE said.

However, BT has learnt there are about six other transactions not yet captured in caveats, located in places like Belmont and Leedon roads, Maryland Drive and Astrid Hill. If these were to be included, the year-to-date tally would cross $800 million.

GCBs are the creme de la creme of Singapore's housing market, with stringent planning requirements.

There are only about 2,400 such bungalows in Singapore's 39 gazetted GCB Areas.

Mr Tan estimates GCB prices could increase about 20 per cent on average over the next 12 months.

Says Savills' Mr Ming: 'GCBs, being limited in availability, are a highly sought-after investment among the well heeled. As more rich are created, demand for these exclusive bungalows will gradually outstrip available supply for sale.'

A bubble that's a gleam in specuvestors' eyes

Business Times - 31 Jul 2009

Mah Bow Tan's caution aimed at averting pain later, property market watchers say

By EMILYN YAP

(SINGAPORE) Better to suck out the froth now than to burst the bubble later - that was what market watchers saw as the government's intention in warning against rash property purchases.

National Development Minister Mah Bow Tan said on Wednesday that there are signs of speculation in the property market, and the government will act if it overheats. He also urged home seekers to buy only within their means.

On the surface, the message may seem puzzling. By most accounts, speculators from the boom years - those who 'flipped' their freshly bought units in the subsale market for a quick profit - have yet to make a huge comeback. Price increases have surfaced only at some projects, while several others still registered price falls.

At CapitaLand's results briefing yesterday, group president and CEO Liew Mun Leong also observed that home demand is 'healthy', supported partly by home seekers whose estates were sold en bloc.

But dig deeper and the cause for concern becomes more apparent. Some industry watchers acknowledge that a group of 'specuvestors' is emerging. These are buyers who are prepared to keep and lease out their properties over the longer term, but are also open to selling them for capital gains if the opportunity comes along.

Although Singapore's economy is shrinking, several factors are working in specuvestors' favour. Notably, interest rates on bank loans are low, and more small apartments going for less than $1 million have become available. Many of them are also lucky enough to still have jobs, and some could have made a killing from the recent stockmarket rally.

These investors, together with genuine homebuyers, have raised market activity to a level that authorities feel is out-of-sync with weak economic fundamentals. The fear? That some would not be able to repay their loans if they lost their jobs, or if banks raised mortgage rates in the future.

'I have seen sufficient cases in my Meet-the-People sessions, where people have over-committed and now find themselves in difficulty,' Mr Mah recounted on Wednesday.

CIMB economist Song Seng Wun said in a note on Wednesday that Singapore's Q2 09 jobless rate is expected to cross 5 per cent. The unemployment rate for Singaporeans and permanent residents rose to 4.8 per cent in Q1.

Falling rentals would also test buyers' ability to support home loans, said Chesterton Suntec International's research and consultancy director Colin Tan.

So to several industry watchers, the government is sounding a note of caution, just in case. As a developer told BT: 'What if the green shoots turn brown?' The formation of a bubble - particularly on shaky ground - would require overt intervention and the consequences are unlikely to be pretty.

Take a look back at 1996, when the government introduced a surprise anti-speculation package to curb sharp spikes in private home prices. Tighter credit, a tax on gains and higher stamp duty caused sentiment to sink and transaction volumes to plunge. This is history that most would not want to see repeat itself.

The key is whether the government's words will help calm the buying frenzy at this stage. Here, views are mixed.

Some people may cool off, said Wheelock Properties (Singapore) CEO David Lawrence. 'I think (Mr Mah is) more focusing on the greedy people who overgeared, took on too many liabilities, and he's just saying 'be careful' . . . I think that's a reasonable message to the market.'

But some also think the buying will continue as long as money from savings, banks or stockmarket winnings is around. A developer also suggested that a few people might bring forward their purchases in anticipation of anti-speculation measures coming on. 'Singaporeans are a bit 'gan cheong' (panicky),' he joked.

At Optima, where people started queuing days before the showflat was due to open, developer TID has conducted a ballot for the 120 units planned for release. All units have been tentatively accounted for with prices starting from $790 per square foot. TID is a tie-up between Hong Leong Group and Mitsui Fudosan. A Hong Leong spokesman said that the balloting process helps to sieve out genuine buyers and the crowds have thinned. BT understands that there were already plans to conduct a ballot when a queue first formed, before Mr Mah spoke to the press on Wednesday.

Market sources also say that around 80 units have been sold at Centro Residences, out of around 110 released.

Frasers' Aussie home projects on show

Business Times - 23 Jul 2009

'The Sydney Collection' exhibition on at St Regis Singapore this weekend

(SINGAPORE) Frasers Property Australia, an overseas arm of Frasers Centrepoint, is holding an exhibition of its Sydney residential projects here this weekend.

The Sydney Collection - comprising Lumiere Residences, Lorne Killara and Trio - is on show at the St Regis Singapore.

In addition, a panel of Australian property experts have been invited to give their views on the potential of the Australian market. The line-up includes Stanley Quek, Frasers Property Australia's managing director, and Rory McLeod, a property analyst with Colliers International Research, Sydney. The third speaker, Carolyn Chudleigh, is a property lawyer and director of the Property Council of Australia, a body that represents developers.

Frasers Centrepoint chief executive Lim Ee Seng said the group hopes the positive buying sentiment in Singapore will spill over to its overseas projects.

'Sydney, in particular, is currently enjoying a strong pick-up in its sales,' he said. 'Australia has long been a popular market for Singapore buyers, and this is a good opportunity to view some of Sydney's best properties under the Frasers brand.'

Lumiere Residences is situated in Sydney's historic mid-town. The project is 56 storeys high and comprises 456 apartments. Prices start at A$1.16 million (S$1.35 million).

Lorne Killara is in the heart of Sydney's prestigious North Shore. The project is a boutique development of 36 apartments and four pavilion-style penthouses. Prices start at A$795,000.

Trio is in an established residential community in Sydney's Inner West, near major universities and teaching hospitals. Prices at this project, which is yet to be completed, start at A$435,000.

Finding that jewel of a house

Business Times - 23 Jul 2009

LANDED HOMES

While most bungalow plots are in the central and eastern districts, they can be found anywhere in Singapore, reports ARTHUR SIM

IT'S not called house hunting for nothing. But if you find a gem of a home, the effort will be very much worthwhile.

Some of the more rewarding finds are big bungalow plots in areas outside central Singapore which, for one reason or another, have so far escaped redevelopment.

By definition, a bungalow here has to be on a site no smaller than 400 square metres and no less than 10m wide. This may be small compared with a Good Class Bungalow (GCB) - 1,400 sq m minimum - but it's twice as big as a semi-detached plot and five times as big as an intermediate terrace (Type II) plot.

Most people associate bungalow plots with the few GCB areas in prime central districts. But at the turn of the 20th century, many of Singapore's wealthy businessmen chose to build homes on the seafront - and it's here that many of these bungalow plots still exist.

One such area is the East Coast. Propnex CEO Mohamed Ismail says Mountbatten and Siglap are good hunting grounds, where such plots may start around $700 per sq ft. 'They make good investments because of the limited supply,' he adds.

A large bungalow site in Mountbatten that was sold in recent years was Chan's Ville, which belonged to the late Chan Ah Kow, patriarch of one of Singapore's leading sports families.

The 55,000 sq ft site was acquired by SC Global for about $11 million in 2004, which worked out to be just $200 psf. In 2005, it was reported that the developer would add four bungalows to the site and sell them for about $5 million each.

About the time Chan's Ville was sold, another bungalow in Mountbatten was sold for $11.8 million or $305 psf for the 38,662 sq ft site. And this site was redeveloped too.

Indeed, with many waking up to the opportunity for redevelopment, the number of large sites on the East Coast has been dwindling.

Still, there are other areas to hunt in, and Mr Ismail suggests Upper Thomson and Braddell Road.

Donald Han, managing director of Cushman & Wakefield, reckons there are about 20,000 detached houses in Singapore, not counting GCBs. Many are in District 15, but other areas include Sunset Way, Jalan Binchang, Westlake estate, Eng Neo Avenue, Faber Park and Serangoon Gardens.

But as Mr Han points out: 'There is hardly enough supply to cater to demand.'

This demand comes from the desire of many Singaporeans to own a landed home.

As an investment, however, landed properties generally give a lower yield of 2 per cent per annum, compared with 3 per cent or more for condominiums, as bungalows are not as easily leased. 'But landed properties tend to be closer to the hearts of owner occupiers and investors alike,' Mr Han says.

William Wong, managing director of RealStar Premier Property Consultant, believes that while most bungalow plots are in the central and eastern districts, 'there are quite a number of them and they can be found anywhere in Singapore'.

Occasionally, bungalow plots in unusual locations are offered by the government.

In 2007, the Urban Redevelopment Authority (URA) auctioned a 4,477 sq ft bungalow plot in Sembawang. After closely fought bidding, the plot sold for $940,000 or $209 psf.

Of course, Sembawang may not be quite the same as Queen Astrid Park - but not many will want to pay between $700 and $1,000 psf for a bungalow plot in a prime district.

What is important to note is that landed housing areas are strictly protected by urban design guidelines. For instance, if you do buy a GCB, you can be sure a condominium is not going to be built on the plot next to yours.

The same cannot be said about plots outside landed housing areas. Indeed, if you happen to come across a detached house sandwiched between condominiums, chances are the area has been gazetted for high-density living.

So before buying landed property - especially if it is outside a safeguarded landed housing area - make sure you check the zoning. This will reveal what can be built. For instance, Mr Wong says mixed zoning means that either terraced, semi-detached or bungalows can be built.

Another important consideration is height restrictions in particular areas. This can significantly alter the redevelopment potential of a site, especially if you intend to build a three-storey house when only two storeys are allowed.

In some instances, landed properties may be in areas that have been rezoned with higher plot ratios. A plot ratio of 1.4 is enough to see neighbourhoods of landed homes slowly redeveloped into apartment buildings. This means that even if most of the properties on the street are landed homes, any of them can be redeveloped as a high rise if the plot is big enough. Of course, for some this represents a windfall.

Steven Ming, Savills director for prestige homes, says the GCB market is extremely active. 'And we can similarly expect demand for detached houses, even those outside GCB areas, to remain strong as well,' he says. 'Recent strong sales have been fuelled by vast liquidity, availability of cheap finance and a general belief that the worst of the global crisis is over and that the panic-selling phase has passed.'

Mr Ming believes that if current buying momentum continues, detached house prices can be expected to appreciate 10-15 per cent during the rest of the year.

Is there still trust in Reits?

Business Times - 11 Jul 2009

Real estate investment trusts do look attractive in the long term at current prices, but investors must choose carefully and diversify their investments accordingly. By Roger Tan

THE Singapore real estate investment trust (S-Reit) sector has grown remarkably since the first Reit - CapitaMall Trust - was listed in July 2002. Between 2006 and 2008 alone, more than 13 Reits were listed, compared with only seven between 2002 and 2005.

Choices of Reits have also expanded. In 2005, investors could only choose between commercial (retail, office or mixed), industrial and logistics Reits. Today, they can find hospitality, healthcare and residential Reits. There are also Reits that own foreign assets.

S-Reit growth in 2006 was mainly driven by increasing speculative interest in the property sector after commercial rents started to rise strongly. The office rental index was up 30.3 per cent in 2006, compared with 12.7 per cent the year before. This was a stark contrast to a 5.6 per cent increase in the shop rental index in 2006. The median monthly rent for central office space at end-2006 was $6.24 per square foot (psf), compared with $4.24 psf in 2005.

Investors' hunger for Reits grew dramatically. The market capitalisation of the Reit sector at the start of 2005 was $9.4 billion - but it hit $16.9 billion in June 2006. Furthermore, only one new Reit - Allco Reit, now known as Fraser Commercial Trust - was listed in the first half of 2006. The increased demand for Reits pushed their unit prices up and dividend yield down. Average dividend yield in January 2005 was around 6.5 per cent, compared with 5.6 per cent in June 2006. This together, with higher Sibor rates, squeezed dividend yield premiums - the difference between dividend yield and three-month Sibor rates - from 5.2 per cent in January 2005 to a low 1.9 per cent in June 2006.

Although office prices rose 17 per cent on the back of higher rents, the increase was more benign than the 30 per cent rise in rents. This resulted in an increase in median annualised rental yields of office properties from 8.1 per cent in 2005 to 9 per cent in 2006. Rental yields of shop space and industrial properties, on the other hand, remained at 7.9 per cent and 5.2 per cent respectively.

The combination of a lower cost of equities and higher rental yields spawned many new Reits between June 2006 and December 2007. Seven new Reits were listed in second half 2006 and another five in 2007. Reits' assets under management (AUM) grew from $13.4 billion in 2005 to $23.2 billion in 2006. In 2008, AUM were $42.5 billion.

Given the increased competition, Reits started to enhance their yields with debt to attract investor interest. The average debt to total asset ratio of the Reit sector rose from 26.3 per cent in January 2006 to 30.7 per cent in June 2007. A few Reits even pushed this ratio above 50 per cent in June 2007.

Reit investors' high hopes of continued price increases started to shake when the first sign of financial turmoil presented itself in July 2007 and Reit prices started to fall. The situation did not improve into 2008. Between June 2007 and December 2008, the S-Reit index fell more than 66 per cent, as opposed to 50 per cent drop in the Straits Times Index. Although Reit prices have recovered 16.8 per cent for the year, they are still 60.3 per cent lower than in June 2007.

High debt ratios employed by Reits became a concern as Reits started to signal that they would face challenges refinancing their loans - and even paying dividends. Loan-to-value ratios increased in 2008 as Reits revalued their assets downwards - adding more concerns over their survival. To improve the strength of their balance sheets, some Reits issued rights in 2008 and 2009.

There are, however, some positive developments from this debacle. First, dividend yield premiums have increased since July 2007. With lower prices, S-Reits now offer dividend yields of around 12.4 per cent, compared with around 7.3 per cent a year ago and 4 per cent in June 2007. Sibor rates have also fallen, from 2.7 per cent in June 2007, to the current 0.7 per cent. Dividend yield premium has thus improved to 11.9 per cent, from just 1.4 per cent two years ago.

Prices of Reits are also at more affordable levels now. For example, the prices of CapitaMall Trust, A-Reit and Mapletree Logistics Trust were at $1.40, $1.59 and $0.56 respectively as at June 30 this year - around half their prices in June 2007.

Most importantly, the good and bad Reits are now easier to differentiate. The lower 'tide' has exposed Reits that have bad assets and have been poorly managed - making investment decisions easier than two years ago.

Unfortunately, uncertainty still lurks in the sector. Although there are now signs that the economy is bottoming, economic recovery will probably be gradual at best. Furthermore, the Singapore economy is dependent on foreign demand, and therefore recovery will lag the developed nations.

Vacancy rates of offices and shops in March 2009 increased to 10.0 per cent and 6.6 per cent respectively from 7.7 per cent and 6.4 per cent a year earlier. Only industrial properties bucked the trend, with the vacancy rate falling from 7.6 per cent to 7 per cent.

Between March 2008 and 2009, rents for office space and industrial property were down 12.9 per cent and 6.5 per cent respectively, while shop space was up a marginal 0.5 per cent.

Even though developers have been holding back new projects, the chances of significantly higher rental and lower vacancy rates this year is not high. Reits may, therefore, have to reduce their dividends.

Reits do look attractive in the long term at current prices, but investors must choose carefully and diversify their investments accordingly. Here are a few important factors to consider:

A Reit's ability to raise funds, especially in times of turmoil, will determine its ability to thrive and survive. This is an important factor. In good times, most Reits will enhance their yields through higher leverage, but only well-managed Reits will be able reduce this leverage in challenging times. Without this ability, badly managed Reits will find it difficult to refinance or raise sufficient equity to repay their loans, putting them in danger of liquidation.

The quality of assets is another important factor, and Reits that own properties beyond just Singapore would be a plus. Too much emphasis has been put on dividends and too little on assets. Investors must bear in mind that they are buying the underlying assets when investing in Reits - the dividends are the result of the ownership and management of the assets.

However, good assets can produce poor returns if poorly managed. The quality of the managers is therefore another important factor. Good managers will continuously enhance the yield of the assets and use an appropriate debt-equity mix at all times. A sudden fall in rental revenue, rental collection issues and below average rental yields are some signs of poor management. Such Reits should be avoided.

Last but not least, investors must check if a counter is a Reit, such as CapitaMall Trust, or a business trust, such as IndiaBulls Property Investment Trust. Business trusts and Reits are created to allow unit holders to receive dividend payments from operating cash flow instead of accounting profit. However, only Reits are required to pay 90 per cent of distributable income to unit holders. There is no such requirement for business trusts. Investors should therefore look closely at what they are picking, to ensure the counter they choose is in line with their investment intention.

The writer is vice-president, SIAS Research

Making sense of the property gains tax amendment

Business Times - 10 Jul 2009

COMMENTARY

More clarity needed on proposed refinement and about the tax itself

By VIKRAM KHANNA

THE Ministry of Finance (MOF) has sought public feedback on certain proposed amendments to the Income Tax Act. One of these, which has received much publicity over the last few days, relates to a proposed 'refinement' to the policy on taxation of gains and losses from property sales.

Under the current tax regime, gains from property sales 'may' be taxed, either as trading gains or as 'gains or profits of an income nature'.

The proposed amendment seeks to add some clarity to this. Under the current regime, it is not clear who will be taxable or when. But under the amendment, anyone who sells only one property within any four-year period will not be taxable. However, if the person sells another property within four years of the first sale, the gains from the second sale 'may' be taxable. If passed, the amendment will take effect from next year.

News of the proposed amendment has set off jitters among people in the property business and the investment community.

A common (mis)interpretation is that a form of capital gains tax on property transactions is about to be introduced, and rigorously enforced.

Thus, after the news of the proposed amendment was publicised, one broking house put out a report which said: 'We find this news adversely affecting sentiment, especially in the upper-mid to high-end . . . We see developers with large unsold inventory in the high-end as potential losers from this news.'

The MOF subsequently clarified that the proposed amendment 'involves no tightening of the current income tax policy for individuals who sell their properties'. It is only aimed at 'giving certainty of non-taxation to individuals who do not sell properties frequently'.

But the heart of the matter is that even under the amendment, the provision for a property gains tax remains on the books.

The fact that it was already there is news to some people, especially as it has apparently been very sparingly enforced: over the years, hundreds of speculators have flipped properties for a profit, and then done it again within days of the first flip, without being hit by the taxman. Investors everywhere have come to presume that Singapore has no property gains tax.

But it is there, on the books. And now, there is a proposal for it to be 'refined'. What should one make of this?

What's the rationale?

The first question is, what is the rationale for having such a tax? One possible rationale is to curb speculation, which is fair enough.

But the government maintains that the proposed change is not an anti-speculation measure. Another rationale is to prevent people from passing off income gains as property gains. This could well be the reason why the provision to tax property gains exists. But if so, it needs to be clarified that the tax would only be enforced when this happens and at no other time.

But then, why the proposed four-year interval before property transactions are deemed to be free of tax? What happens to those who dress up income as property gains every five years?

The rationale apart, another problem with the tax is its apparent lack of fairness. It might be levied on some people, but not on others who do the same thing, and nobody except the taxman knows why.

A third problem is unpredictability - despite the greater element of certainty that the proposed amendment seeks to introduce. You definitely won't be taxed if you sell two properties more than four years apart. But if you do so within four years, you might be taxed. Or you might not.

At a minimum, we need a lot more clarity, not just about the proposed amendment to the property gains tax, but also about the tax itself.

The fact that some other countries have it too is not an adequate reason for keeping it, or for assuming that it is flawless. And if it isn't, then the government should consider another option: sometimes, the best way to refine a flawed policy is to abolish it.

Tips for investing in property

Business Times - 09 Jul 2009

Evidence has shown that the longer the investment horizon, the greater the likelihood of making a profit, and higher profits at that

By STEVEN MING

REAL estate is among the world's safest investments in that it cannot be lost, stolen or carried away. If managed with reasonable care, its value can be maintained or even enhanced. In Singapore, a property cycle typically lasts four to seven years.

As such, a property investor should have a similar investment horizon to ride out any market vagaries so as to best enjoy rental and capital appreciation over time. Empirical evidence has shown that the longer the investment horizon, the greater the likelihood of making a profit, and higher profits at that.

For example, a unit at Ardmore Park which was bought for $4.4 million in 2005 was sold in May this year for $6.2 million, representing a healthy profit of about 40 per cent. This has yet to take into account rental income that may have been earned over the period.

Rental yields are an attractive enticement for property investors, giving them a steady stream of cashflow in good times and bad. Typically, gross residential rental yields stand at 3-5 per cent, depending on the location, project and tenure of the property.

Investors seeking rental yields should note that while residential yields have improved markedly since property prices declined from their peak in mid-2008, rents are now correcting, and are likely to continue their slide till year's end at least.

There was a recent spike in rental yields, which is due to rents falling at a slower rate than prices. According to Q1 2009 data released by the Urban Redevelopment Authority (URA), property prices islandwide have declined by some 21 per cent from the peak while rents have come off some 14 per cent.

High-end residential yields have risen from a low of 2.8 per cent in Q4 2007 to 3.5 per cent in Q1 2009. However, they are expected to stabilise around the long-term average of 3- 3.4 per cent in the near- to mid-term. This is on the expectation that prices will moderate their decline from here while rents remain weak in the face of strong new housing supply this year.

However, residential prices have shown recent signs of consolidation, supported by opportunistic home purchases at discounted prices, introduction of the interest absorption scheme as well as pent-up demand in certain areas.

Leveraging

Positive carry, which is the difference between the cost of financing the property and rental income, looks set to shrink further on falling rents. This is an important factor for investors who look to pay off their mortgages with rental income. But a positive carry still exists and it can be particularly rewarding for those who can finance their properties with a larger portion of equity or a lower loan-to-value ratio.

This is made possible by the current low interest rates - Singapore's three-month interbank rate has steadied near an all-time low of 0.69 per cent since the beginning of the year. This represents an excellent opportunity for property investors to take advantage of relatively low borrowing costs to maximise their return on equity (ROE).

Take for example a studio apartment that costs $400,000, a borrowing cost of 2 per cent per annum and an 80 per cent loan-to-value ratio. In this case, a yield of 4 per cent would lead to an ROE of 1.76 per cent. By bringing down the loan-to-value ratio to 60 per cent, ROE would improve to 3.1 per cent. This rate of return is higher than the savings and time deposit rates today.

Taking potential capital appreciation into consideration, ROE could be even higher. Extending the above example, an investor's ROE would rise to 25 per cent on the assumption of a loan-to-value ratio of 60 per cent and capital appreciation of 10 per cent. So, with proper use of leveraging, one can maximise returns.

Location, location, location

Location, location, location is the mantra of those looking to invest in property. It seems easy enough to say 'Let's buy in Orchard Road' or 'Let's buy East Coast' just because these are well-established residential locations. But what are the factors that make a good location? Why do people want to own or rent a property in a given location? These are the demand drivers that we need to understand.

What makes living in Orchard Road attractive? Beyond the glitz of the shopping belt, it is the proximity to international schools, the Central Business District, the up-and-coming Marina Bay Sands integrated resort (IR) as well as the excellent road and rail connectivity to other parts of Singapore.

The future development of the area is also important. The impact of the up-and-coming IR on residential property is probably best demonstrated by the prices fetched by The Sail @ Marina Bay. In 2004, six months before the IRs were confirmed, the price for the first residential tower was launched at $900 per sq ft (psf).

About a year later, about six months after the IR was given the green light, the second tower was launched at $1,080 psf. After that, resale prices escalated to more than $2,000 psf at the peak of the market.

More recently, the government has focused on building up Singapore as a leading R&D hub in Asia and earmarked areas like one-north in Buona Vista for development.

One-north is a 200-hectare project designed to house Singapore's growing biomedical, infocomm and digital media industries. As such, condominiums in the vicinity like one-north Residences have been well received, with many investors buying for potentially good rentals.

Affordability

In times of economic uncertainty, it pays to be prudent. One should be careful not to borrow too much. Maintaining a debt service ratio of 25-30 per cent of income is ideal as it allows some buffer for any rise in mortgage rates.

Savills' affordability index showed that the average household's ability to service its monthly mortgage repayment has improved. From a peak of 40 per cent in Q3 2007, the debt service ratio has dropped to 26 per cent as at Q4 2008, following the steep price declines.

Valuation

It is important to be familiar with property prices in the vicinity to ensure that one does not overpay. Generally, when buying a new property from a developer, you have greater certainty that banks would be able to match the valuation. In the secondary market, buyers would do well to get a bank valuation on the property before committing, to avoid overpaying.

Risks-rewards

Going by past transactions, prime properties - though more volatile - offer better potential for capital appreciation as investors in this segment are perceived to be less price sensitive.

The recent bull cycle saw the average price of residential properties in our basket for Districts 1, 4, 9, 10, and 11 rise from $1,250 psf in Q1 2005 to $2,400 psf in Q4 2007. Since then, the average price has slipped about 30 per cent to $1,640 psf as at Q1 2009. Given a reasonable investment horizon, there is potential for peak prices to be regained again.

When is it a good time to buy? That's a question many buyers ask. Everyone wants to land a good deal given that property is a big-ticket investment. In some instances, just waiting a few months can mean saving tens of thousands of dollars.

However, the reverse is also true - one may end up paying more if the market suddenly turns up. It's never easy trying to call the bottom of a market as one often only knows it in hindsight.

The writer is director of investment sales & prestige homes, Savills Singapore

The allure of Sydney and Melbourne

Business Times - 09 Jul 2009

However current asking prices are still above palatable levels; market expected to bottom out in about a year at best

By MARTIN PEPPER

AUSTRALIA'S currently under-supplied housing market will see increasing demand in the coming 12 to 24 months, which is likely to result in residential price increases as owner occupiers enter the market, and investors attempt to realise asset growth and secure strong yields.

Residential price growth in most Australian capital cities has been strong for the best part of six years, with house and apartment prices holding up relatively well, albeit at a slower pace over the past 12 to 18 months. House and land 'packages' continue to dominate as the preferred housing type as has been the tradition in Australia, with large swathes of undeveloped land remaining around the main metropolitan regions set aside for development for future generations.

Higher density living, typically in CBD and inner suburban locations, has gained acceptance over the past 10 years in Australia. However, its uptake has fluctuated considerably as a result of market over-supply and price issues.

The provision of high-density projects in CBD locations has seen CBD populations grow from a virtually non-existent base to several thousand persons in a relatively short time.

House and land packages as investments are more likely to be attractive to those investors who want to hold assets for long periods, achieve consistent returns and potentially occupy the asset in the long term.

By buying 'off the plan' homes, investors can benefit from significant tax deductions and may lead to cash flow positive returns for those wanting to contribute minimally to holding a residential asset.

For example, display homes are often leased back by builders for several years at a fixed rate of return, often up to 2 per cent above lending rates. The combination of the current low cost of borrowing (around 5.5 per cent in Australia), tax depreciation benefits and a high guaranteed return (for residential), makes this an attractive investment for many Australians and foreigners alike. For many foreigners, Singaporeans included, high-density apartments in inner city or CBD locations are the preferred investment type due to the familiarity of their built form.

High-density apartments developed in the CBDs of Melbourne and Sydney have historically had around 70 per cent of their sales to investors. In Perth and Brisbane, large-scale high-density residential apartments have predominately been developed in the past five years.

Irrespective of location, the early stages of this market activity has been dominated by off the plan sales. Relatively low initial prices and tax depreciation incentives make the relative scarcity and above average quality of new apartments appealing to investors. In many cases, early investors attempt to sell properties prior to settlement.

This potentially enables them to benefit from the price growth resulting from increased demand during the 18-month or so development timeframe, while only having to fund the initial deposit.

There are hundreds of completed apartments across Australia's capital cities currently competing with new stock and projects being marketed for sale.

Purchaser demand is stalling. However, in light of continuing strong population growth and historically low interest rates, investors are beginning to find value in this type of property asset again.

Gross yields for CBD apartments are around 3 per cent to 4.5 per cent. However, the yields vary considerably with building age, location and cachet.

A significant additional cost for these types of premises are body corporate fees (building maintenance, security, facilities, insurance) which are typically around 1.5 per cent of the purchase price per annum. These fees are tax deductible. However, they can significantly limit the attractiveness of potential long-term capital growth due to the relatively high holding costs.

The truism that increased risk equates with increased return holds true for CBD apartments. Purchasing at a time of oversupply in the market may limit short-term price growth, whereas investing when prices have bottomed will provide an increased chance of capital growth in the longer term.

The geographic separation of the Australian capital cities is likely to result in demand improving at different times across the country.

For example, Sydney and Melbourne are expected to see demand improve in the coming 12 months as the lack of stock and government grants drives up house values in the middle and outer suburbs.

Demand for CBD properties is also expected to improve with the investment fundamentals proving attractive for many.

In both cities, vacancy rates are at historic lows with few new large- scale apartment projects expected to commence marketing or construction in the coming year. While globally the economic climate is uncertain, there are many investors who are satisfied that both locations are likely to experience improving demand in the medium term.

Pent-up demand is significant for CBD apartments in Melbourne and Sydney. However, the palatable price for the majority of apartments is below current asking prices.

It is expected that demand will rapidly return once sentiment and market evidence suggest that prices have bottomed, which in the current climate will be around 12 months at best.

Brisbane and Perth are historically a year or two behind the larger cities at different points in the property cycle.

The recent resources boom in each state has generated high demand for housing. The improvement in demand in each of these capitals has been considerable from very low bases.

Overzealous developers seeking to make the most of strong conditions has resulted in an oversupply of CBD apartments. Accordingly each market is still absorbing the significant apartment supply marketed and developed in the past two to three years.

This is resulting in current asking prices falling as investors attempt to sell assets in the weaker economic climate, often at below purchase price. Both markets are likely to observe falling asset values in CBD locations for several years, as prices are driven down by the over-construction and falling demand.

To conclude, the long-term investment fundamentals are quite solid for high density projects in Australia's capital cities.

Past the current economic hurdles, pent-up demand is likely to see appropriately priced apartments sold quickly, and high construction costs are likely to limit the number of new projects commenced.

Short-term investment horizons of typically less than five years have the potential to realise limited asset growth.

However, with careful research and an understanding of the risk involved, this can be minimised.

Long-term investors are likely to see strong capital growth in their assets over a 10-year period. The long- term stability of Australia, along with its favourable lifestyle, is likely to see it continue to be on the radar of local and overseas investors for many years to come.

The writer is associate director, research, DTZ Australia

Shophouses: best of both worlds

Business Times - 09 Jul 2009

They have traditionally been good investment properties as they are very lettable and are suitable for both business and residential use

By MARY SAI

IF YOU'RE looking for a property investment that could allow you to own a bit of Singapore's history and offer attractive yields at the same time, you might consider buying a shophouse. These shophouses can be found lining the main streets of Singapore. They are typically two- to four-storey buildings with distinctive facades and form part of the city's architectural heritage since many were built before the war.

Shophouses are built on land zoned for commercial or residential use, with commercial use reserved for the first storey. Most of them are found in conservation areas, namely:

- The historic districts of Boat Quay, Chinatown, Kampong Glam and Little India;

- The residential historic districts of Blair Plain, Cairnhill and Emerald Hill;

- The secondary settlements of Balestier, Beach Road, Geylang, Jalan Besar, Joo Chiat, River Valley, Tanjong Katong and Tiong Bahru.

Outside these conservation areas, there are clusters of shophouses in Killiney Road, Serangoon Gardens, Holland Village, Pasir Panjang and Thomson Road.

Shophouses have traditionally been good investment properties as they are very lettable being generally able to provide both business and residential use. But if they fall within commercial zoning, they are strictly for retail use or offices.

Before the mushrooming of shopping complexes, most retail trades were found on the ground floors of shophouses with ancillary offices and dwellings on the upper floors. This explains the popularity of shophouses among family businesses and small operators as they can house all their trade operations and accommodation under one roof.

Due to limited supply and their unique design, shophouses hold their value well especially if they are located in the Central Business District or near MRT stations. Their values will also command a premium if there is a possibility of change of use to boutique hotels or boarding houses.

Sales activity

A total of 1,148 shophouses changed hands between 2006 and the first half of this year, representing about 40 per cent of all shophouses transacted since 1995. A record 526 shophouses were transacted in 2007, which points to prices becoming so attractive that owners who felt some pride of possession were tempted enough to sell.

In the first half of this year, several shophouses have been sold for decent profits. This is remarkable considering that property prices have suffered a major drop since end-2008.

Rental yield

Generally, yields of shophouses are fairly attractive, as some tenants are willing to pay rental premiums to enjoy their unique features. It is possible to achieve net rental yields of about 6 per cent or more for shophouses in choice locations which have been refurbished and fully restored.

Some shophouses within shopping belts such as Orchard Road can possibly fetch double-digit rents of $20 to $40 per sq ft (psf) a month, which are levels commanded by prime retail space. Elsewhere, such as Holland Village, where shophouses are used as bank branches, spas and food & beverage outlets, rents range from $12 to $20 psf.

Notes to buyers - what to look out for

Financing

As with most property transactions, getting funding is pivotal to the buying decision. Since July 2006, Central Provident Fund savings cannot be used to finance a shophouse purchase. As such, getting a bank loan is critical.

With most banks granting loans of 70-80 per cent of the purchase price or valuation (whichever is lower), prospective buyers must have cash upfront for the remaining 20-30 per cent.

And should the shophouse require addition and alteration, a budget of another few hundred thousand dollars must be set aside.

Zoning

Shophouses sited on land zoned residential are essentially terrace buildings with 'tolerated' commercial uses and the occupants have to pay Temporary Occupation Licence (TOL) fees to the relevant authority for the non- residential usage.

Some of these buildings are found in Blair Road and Onan Road. Buyers cannot assume that the building erected on residential zoned land can continue to run as a shophouse when there is a transfer of ownership.

Temporary Occupation Licence (TOL) fees

Some older shophouses have balconies or parts of the building encroaching on state land. In some cases, TOL fees are payable on a yearly basis for these encroachments and buyers have to be aware of the amount payable.

Road lines

Shophouses that face the main road are often affected by road lines. If the property is adversely affected - say, by a major road line - it will be more difficult to get bank financing as there is the risk of government acquisition for road widening.

However, if the shophouses are conserved or located within a conservation area, they are generally safe buys as these are 'protected' areas.

Building features

a) Shophouses with external side staircases are usually preferred by investors as they can lease the various floors to different tenants because of easy access to the upper floors via the external staircases. b) Shophouses with concrete upper floor slabs also appeal more to buyers because they have higher loading than those with timber floors.

High plot ratio

Some shophouses under commercial zoning have plot ratios of three or four which are not fully utilised. In such cases, the owners can build rear extensions up to the maximum height allowable for the area. This increases the usable floor area and value of the property.

Possible change of use

Change of use to commercial or retail use is permitted in the historic districts subject to the Urban Redevelopment Authority's approval. However, note that the strictest form of conservation is practised in these districts.

Corner Units

Corner shophouses are sought after because they occupy more prominent sites in the row of buildings. In addition, they usually have more window openings at the sides and bigger end walls for advertisement signages.

Carparks

Most shophouses do not have carpark lots within their compound so having a public carpark nearby or access to parking in buildings in the vicinity is a major consideration.

With sentiment improving in both the stock and property markets in the past three months, shophouse activity is stirring again. As commercial space is facing a rental correction now, buyers of investment shophouses have to be aware of the challenging rental prospects in the short term. Notwithstanding that, their limited supply and potential for capital appreciation make shophouses gems in the long run.

The writer is executive director and auctioneer, Knight Frank

Slide in top grade office rent slows

Business Times - 29 June 2009

Top-end bungalows going, going, gone

Business Times - 18 Jun 2009

7 good class bungalows sold in April and May, more deals in the works.

Movie star Jet Li bought this Binjai Rise bungalow in May 09 for $19.8m.

New positive spin on S'pore's real estate sector

Business Times - 09 Feb 2009

Economist calls bottom in 2010, based on an 18-year cycle seen in US
By TEH HOOI LING

(SINGAPORE) With observers seemingly falling over one another to come up with the most bearish forecasts, Phil Anderson - who calls himself a renegade economist - stands out from the crowd and confidently calls a property market bottom next year.

'There will be substantial real estate buying opportunities for people with cash next year, which will set them up comfortably for the next 18 years,' the founder of Economic Indicator Services told The Business Times recently.

Investors, however, will need cash to buy because, by then, banks will have no money and will be very reluctant to lend, he said. So individuals, companies and even countries with no debt, such as Singapore, will be well-placed to take advantage of the next boom.

Mr Anderson bases his prediction on an 18-year cycle which he says has manifested itself in the United States since 1800. 'The cycle is as regular as clockwork. It is quite bizarre,' he said.

The US began selling real estate, officially and under a set legal structure, on May 10, 1800, he said. 'Since then there were speculative peaks every 18 years.'

There were peaks in land sales or real estate speculation in 1818, 1836, 1854, 1888, 1908, 1926 and 1944. The peaks were followed by downturns or depressions, typically lasting four years. World War II disrupted the pattern. But the cycle resumed in 1955.

The real estate market in the US again peaked in 1989 and bottomed in 1991. And 18 years later, in 2006-07, it hit another high. We are now into the third year of downturn, so by next year the market should bottom, which will mark the beginning of the new 18-year cycle, according to Mr Anderson.

The next boom, peaking around 2024, will be huge because hundreds of millions of Chinese will enter the market for the first time, he said. 'Singapore is well-positioned to take advantage of the next boom because of its proximity to China. I am very bullish on Singapore. It is uniquely placed. Although real estate is already expensive in Singapore, it is going to be more expensive.'

Mr Anderson is confident the cycle will repeat itself as long as land is tradeable and in private hands. 'It will continue to happen because people will chase the capitalised rent of land,' he said. 'It will be gone only if the rent is collected by the government.'

China's privatisation of its real estate market guarantees a real estate cycle, according to him.
Also, everything that has been done to tackle the current financial crisis is to preserve the system. 'So the system will start again.'

There are smaller cycles within the big 18-year cycles. The first seven years are characterised by a gradual improvement in activity and confidence following the previous crash. The next seven years see steeper increases in activity and prices, with the sharpest gains taking place in the final two of the seven years.

'That's when most people take on more debt. That's also the easiest time to buy real estate because loans are easy to get as banks have a lot of money. But that's absolutely the wrong time to do so,' said Mr Anderson.

The next four years, of course, are the downturn, during which the banks will clear their problem loans, the market will absorb the excess stock and the governments will get organised.

Mr Anderson has detailed his research in a book The Secret Life of Real Estate - How it moves and why, published last year. Based in London and Melbourne, his firm has 'several hundred' online subscribers who pay £200 (S$442) a year each for his 'big picture analysis and ways to take advantage of turning points in market cycles'.

Time to put an official number to DPS units

Views: Opportunities abound in 2009/2010 to buy fire-sale properties on the cheap from the secondary market.

Business Times - 09 Dec 2008

THE deferred payment scheme (DPS) was introduced more than 10 years ago in the middle of the 1997 Asian financial crisis, which dented interest in Singapore's property market.

Developers welcomed the scheme. The DPS allowed home buyers to put down just 10 per cent or 20 per cent of the purchase price when buying a property, with the rest due only after a project obtained its Temporary Occupation Permission (TOP).

The premise behind the DPS was to allow buyers, especially HDB upgraders, to buy a private home in advance of their HDB flats reaching the five-year minimum occupancy period.

However, during the recent property boom, the DPS gave both investors and speculators a window to bet on a rise in property prices. They did not have to secure any form of financing upfront, which meant that the banks' traditional role in measuring credit risk was effectively bypassed.

Securing loans

But questions are now being asked of many of the properties bought in the recent property boom using the DPS before it was suspended in October 2007. With the bulk of the property launches in 2007 due for TOP in 2009 and 2010, the tighter credit market and more stringent lending terms have made it harder for these buyers to secure loans.

'In cases where the property is still 'in the money' and the buyer can't secure a loan, we think the buyer would turn to the secondary market to exit the property,' said OCBC Investment Research analyst Foo Sze Ming. 'However, for properties that are not 'in the money', buyers may have to sell at lower prices or worse, default on the purchase.'

If many buyers end up defaulting, it will end up hurting the overall property market, depressing prices even further as supply increases. Developers' operating cashflow and earnings will also come under pressure.

Estimating the impact

Given the consequences, estimating how big an impact the DPS will have has become the preoccupation of market watches and analysts in recent weeks.

But they do so with patchy data and many assumptions. To begin with, many of the homes initially sold under the scheme have been re-sold on the subsale market, which means that they are no longer under the DPS. So an assumption has to be made there. In a Dec 3 report, DBS Vickers Research analyst Adrian Chua looked at the subsale status of projects likely to obtain TOP in 2009 and compared the figure to the total number of units sold in the development.

'This gives us an indication on the number of units potentially still under the DPS, given that many developers take the prudent approach of not extending the DPS to secondary buyers (from subsale transactions),' he said.

Using this method, he estimated that some 50 per cent of units in CapitaLand projects expected to obtain TOP in 2009 - including RiverGate and Riveredge - were under the DPS. He used this figure to calculate the impact of both a 10 per cent default and a 20 per cent default on CapitaLand's FY2009 earnings per share, operating cash flow, net gearing and interest cover.

His conclusion was that CapitaLand and five other developers - City Developments, Ho Bee Investment, Keppel Land, UOL Group and Wing Tai - are not likely to be too badly hit even under a 20 per cent default scenario.

But other analysts have made their own assumptions and have come up with more dire predictions. Some have cited the DPS issue hanging over the heads of developers here when issuing 'sell' calls on property stocks. These negative reports have spread fear among investors and could cause jittery banks to withhold financing to developers.

Differing views

The wide spectrum in views highlights the problem - right now, no one knows how many units are still on the now-defunct DPS, and consequently, how badly developers will be hurt if some buyers walk away from their deals. One property consultant put the number of units still on the DPS at about 4,000-5,000. But the figure is still an estimate.

What is needed is for the authorities to sit down with the developers to pin down an exact figure to the number of units still on the DPS in projects obtaining TOP in 2009 and 2010, preferably project by project.

If the problem is not as bad as it's now made out to be by some (which is what the developers are telling analysts and banks behind closed doors), then such a disclosure can only be good for all parties involved - developers, investors, home buyers, banks and the authorities, who have been working to ensure stability in the property market.