By Getty Goh (guest contributor)
Some time back, I was invited to participate in a panel discussion at the SMART Property Exhibition in March 2010. There was a fellow panellist who was very experienced in overseas investments and had quite a number of property investments abroad. Back then, I was of the view that overseas properties were not as attractive asSingaporeproperties. One year on, I now hold the opposite view and believe that certain overseas destinations and developments may present interesting opportunities.
Why the change in sentiment?
There are five key factors that have led to my change in thinking.
Factor 1: High Property Prices in Singapore
Presently, property prices in Singapore are at an all time high. Based on Figure 1, the URA Private Property Price Index (PPPI) for 2011Q2 is at 203. This exceeded the last peak of 181.4 set in 1996Q2. Based on this trend, investors who buy Singapore properties now could be paying a premium and are not getting value for money deals.
Figure 2-1: URA PPPI trend from 1975Q1 to 2011Q2
Factor 2: Low rental yield
As a result of the high property prices, the rental yields for residential properties in Singapore have correspondingly been low. Based on Figure 2, the rental yields for residential properties purchased after 2010 have generally been less than 3.50%. As at 2011Q2, the rental yield for Core Central Region (comprising of District 9, District 10, Marina Bay District and Sentosa region) was as low as 3.15%. Once again, this implies that investors would likely be overpaying for the potential rental income.
Figure 2: Median Prices and Median Rental for various regions in Singapore 2004Q1 to 2011Q2
Factor 3: Restrictive selling conditions – Seller’s Stamp Duty (SSD)
In February 2010, the Government imposed a seller’s stamp duty (SSD) for property owners who buy residential properties on or after 20 Feb 10 and sell them within one year of purchase. The amount of SSD then was computed based on the same rates as the buyer’s stamp duty.
On 30 Aug 10, the Government introduced further measures that increased the holding period from 1 to 3 years. On 13 Jan 11, the Government announced another round of measures by extending the holding period from 3 to 4 years and introduced a new set of SSD rates. The SSD rates that currently affect properties are as follows:
- Holding period of 1 year: 16% of price or market value, whichever is higher.
- Holding period of 2 years: 12% of price or market value, whichever is higher.
- Holding period of 3 years: 8% of price or market value, whichever is higher.
- Holding period of 4 years: 4% of price or market value, whichever is higher.
With such conditions in place, properties in Singapore have stopped being attractive short term investments as buyers have to wait for a longer period of time before they can sell to realise their profits. Hence those who are looking to generate quick returns would likely be better off investing elsewhere.
Factor 4: Diversifying localised risk
You may have heard the saying “do not put all your eggs in one basket”. This saying is also applicable when it comes to property investing. Property markets in various countries behave differently due to the different demand and supply situation. For example, due to Singapore’s open economy, the demand for real estate is more susceptible to global economic conditions as well as the ebb and flow of international liquidity.
On the other hand, countries that have a large domestic sector would likely see less volatility in the real estate market as demand is more affected by internal consumption.
In view of this, it is reasonable to expect that, at any point in time, some property markets will be growing while others will be on a decline. Hence, a feasible diversification strategy would be for investors to purchase properties in different countries so that they are not exposed to the unsystematic risks that each country faces.
Factor 5: High Cost of Living in Singapore
Singapore’s annual average inflation rate since 1980 has been about 2.1%. While it does not seem that high when viewed in isolation, due to the effects of compounding, the change in Consumer Price Index from 1980 to 2010 works out to be about 43.6%.
From Figure 3, it can be seen that CPI has been on an upward trend. This means that the standard of living will likely keep increasing and make Singapore an expensive place to retire. To stretch their retirement funds, retirees could consider settling down in some of the neighbouring countries instead.
Figure 2-3: Singapore Consumer Price Index Trend 1960s to 20101 (2009 = 100)
At this juncture, I must qualify that this article briefly covers a very complex topic – overseas property investments. Although I have listed some reasons why overseas properties make worthwhile investments, I must highlight that there are inherent risks as well.
However, before I conclude, let me leave you with a quote from André Malraux, an award-winning author and French statesman, “Often the difference between a successful person and a failure is not that one has better abilities or ideas, but the courage that one has to bet on one’s ideas, to take a calculated risk – and to act.”
As long as due diligence and thorough research is done, I believe that most risks for overseas property investment can be mitigated, avoided and prevented. If astutely invested, the returns from some of these overseas investments would definitely be worth your while.
By guest contributor Getty Goh, Director of Ascendant Assets, a real estate research and investment consultancy firm. Getty has a MSc (Real Estate) and BSc (Building) from the National University of Singapore.