Published April 16, 2007

Hot property market still has good buys

Biggest gains seem to be in collective sale market but better to base decision on rental yields, say analysts


(SINGAPORE) At the end of last year, most analysts tipped property prices to rise about 10 per cent in 2007. But some now see prices rising as much as 20 per cent, leaving some people to feel that they have missed the boat.

A bit of legwork and research, however, could unearth some relatively affordable good buys.

The biggest gains appear to be in the collective sale market, where it is not uncommon for owners to make a premium of over 50 per cent.

But Savills Singapore director for marketing and business development Ku Swee Yong advises against a pure collective sale play. 'I would not buy a property with only en bloc gains in mind because there can be many hurdles and hiccups,' he says. 'It would be more prudent to base the decision on rental yields.'

Mr Ku reckons that with a budget of about $1.5 million, it is possible to buy a property that could fetch a rental yield of 5 per cent. Assuming the property is 1,200 square feet and the rental rate is $5 psf, monthly rental income could amount to $6,000. Even when interest on a housing loan is factored in, there is still a net positive inflow. Mr Ku also believes that with the rental market buoyant, it is not unrealistic to expect rents to increase by about 20 per cent after a typical two-year lease expires.

Areas that Mr Ku thinks are worth considering are on the fringe of the Orchard Road area. 'Even areas like Mount Sophia and St Thomas Walk are viable because foreign students are creating demand for older apartments there,' he says. Fringe areas further from town - but still with potential upside - include Tiong Bahru and the East Coast.

Capital gains from such investments can also be expected, assuming prices keep rising.

UBS Investment Research is among the most bullish about the market, projecting an overall price rise of 20 per cent this year. In a recent report, UBS said: 'We think there is little risk that residential prices in Singapore will decrease as seen in the US market. This is mainly because we believe Singapore residential prices are still in a catch-up stage, compared to GDP.'

Coming to terms with current prices may be a challenge for investors, but as DTZ Debenham Tie Leung executive director Ong Choon Fah points out: 'Singapore has changed structurally.'

The current Master Plan only caters to a population of 5.5 million, whereas the latest population target is now 6.5 million, she notes.

Citing new segments like the super-luxury tier, Mrs Ong says: 'New products have helped raise prices. And Singapore still offers compelling opportunities for foreign investors.'

She reckons it is not so easy to find relatively cheap property anymore as 'the market is very efficient'. So any possibility of an upside like that arising from a collective sale is immediately factored into the price.

Still, she feels that looking farther from the central districts could unearth some gems. She also advises that you check the Master Plan to see if the plot ratio and height restrictions support a collective sale.

DBS Vickers analyst Wallace Chu reckons that because Singapore has entered a new phase of development, higher property prices are inevitable. 'People need to take a view that historical Singapore is no longer the same as the future Singapore,' he says. 'The economic drivers have changed. So you have to have a new mindset and accept the new price levels.'

Mr Chu points out that there are other ways to invest in the property market, including property stocks. 'It depends on how liquid you want to be, and whether you want to get in and out quickly,' he says. He also notes that property stocks can offer the benefits of geographical and sector diversity.

Wealth management firm dollarDEX CEO Chris Firth believes property should still be part of anyone's investment portfolio. 'Property would definitely be in the equation,' he says. 'Assuming it's not for residence, then it's usually sensible to have up to 20 per cent of a portfolio in physical property or Reits.'

Mr Firth also believes concentrating your investment capital in real estate alone 'would be quite risky - although because of the benign cycle timing, it's probably not too late yet to consider this'.

For more prudent investors, he says property is 'certainly a good long-term investment'. But it is likely to be a good short-term investment too, he says. 'That's because we think we are most likely in the middle of a rising trend, where 2004 represents the bottom. If previous property cycles are a guide, we have a few more years of rising prices before we approach any slowdown.'

Historically, real estate has been the second-best performing asset class worldwide since the 1950s, beating bonds by a large margin but underperforming stocks, Mr Firth notes. 'In the long run, this return has been around 10-12 per cent per annum, although of course, short-term variations are huge, especially when individual properties are considered.'

Elaborating, he explains that a property bought at a market bottom and rented out could easily average a 30 per cent annual return over the medium term, but would not sustain that in the long run.