Before you take the plunge into property . . .

Oct 25, 2021

IS home really where the wealth is? Against the backdrop of an already modest price growth in recent decades, Singapore's changing demographics and potentially tighter government policies have injected fresh uncertainty into the property market.

This is not to say a house is now a bad investment. It is, after all, a golden asset that has held steady through generations of homeowners.

Real estate is one way to diversify an investment portfolio as it has lower correlation to other asset classes such as stocks and bonds, says Jacquelyn Tan, UOB head of group personal financial services.

Compared to stocks and bonds, real estate tends to be less volatile and less liquid. As an investment, it also offers a slow and stable rate of return over the long term, she adds.

Property will likely continue to hold its place in some retirement nest eggs. But in today's climate, it would pay to do your sums more carefully and consider overlooked risks before getting your keys.

For a start, take a closer look at your current financial health. How much savings can you afford to part with? Do you need to borrow heavily to invest in real estate?

"The decision to buy a property should not be made in isolation without considering how it will impact the rest of your financial plan," says Lorna Tan, DBS head of financial planning literacy.

Property is a lumpy investment and can take up a significant portion of your savings. This limits the ability to invest elsewhere, which can mean lost opportunities, adds Vasu Menon, OCBC executive director of investment strategy.

It also bears concentration risk as a large part of your wealth may be tied to a single property and the outlook for the local property market.

In Singapore, the total debt servicing ratio was introduced in 2013 to limit your monthly debt repayments, including mortgage, to 60 per cent of your gross monthly income.

But to be conservative, loan repayments should be significantly less than 60 per cent, says Menon. Some financial planners even suggest that this ratio not exceed 40 per cent.

Aspiring homeowners should have a long-term view when choosing a property loan package and understand the different aspects of financing a property, including the costs and terms of the loan. "Investors should take into account the interest rate environment too as changes in interest rates would affect loan repayment amounts," says UOB's Tan.

Buying a second property also entails hefty fees - the bulk of which comes from the additional buyer's stamp duty (ABSD). Singaporeans buying a second or third residential property for investments will incur ABSD of 12 per cent and 15 per cent respectively on top of the usual stamp duty.

There are financial calculators online to ease your home-buying dilemma. DBS's MyHome Planner, for example, helps you work out your affordability with different starting points such as property price, down payment, monthly instalment or maximum home loan.

The bank also has a repayment calculator tool that shows a comprehensive amortisation of the property loan, with options to account for staggered payments for new condo purchases or if a lump-sum payment down the line is expected.

If you do decide to invest in a property - and are especially looking for rental income to meet your mortgage payments - it is important to assess the ease with which you can rent the property, says OCBC's Menon.

The location of the property, for example, affects its rentability. Properties with convenient access to public transport or are near good schools may be more easily rented out and may hold up better even during market downturns.

"Unless you can rent out your property easily, you could either end up owning a property that is vacant for long periods or you may have to slash rentals to secure a tenant, especially when the rental market is weak," says Menon, adding that rents can fluctuate significantly, which affects the certainty of monthly rental income.

If you are investing for yield, do assess how much rental the property can command relative to the total cost of purchasing the property, which includes the purchase price, normal stamp duty, ABSD and renovation costs.

"It's important to look not just at the gross rental but rather at the net rental, which considers costs like the commission you pay an agent for helping you secure a tenant, property tax and the maintenance fee that you pay the property manager for the upkeep of the property's common areas," says Menon.

If the cost of mortgage insurance is included, the rental yield would be even lower. Mortgage insurance fees depend on the size of the home loan, the buyer's age and his health.

Physical property assets are typically less liquid relative to other asset classes - a risk that some investors may downplay or overlook.

"The cash you may need is locked inside the property and you can't get it out easily. For instance, you may be unable to sell the property at the price you wish to sell it at. You may also suffer from a cashflow trap if your cash flows are unable to cover the expenses and you've run out of money," says DBS's Tan.

If you sell your property within a three-year period, there will be a seller's stamp duty of between 4 per cent and 12 per cent incurred depending on the holding period, which will eat into returns, Menon adds.

More time and effort are usually needed to manage tenants as well as operational and maintenance matters, compared to other asset classes that may serve as more passive forms of investing.

"It's a nightmare for homeowners to realise the extensive repairs required for hidden structural problems after signing the dotted line. Such problems can turn a profitable investment into a money pit," says DBS's Tan.

Beyond owning a physical property, there are other ways for retail investors to dabble in real estate.

One can buy into real estate investment trusts (Reits) which give exposure to residential and commercial properties, tapping sub-sectors such as office, retail, hospitality, logistics and healthcare, says UOB's Tan.

Reits generally have lower volatility and are often favoured for their good risk-return, compared with equities. They also have a relatively lower cost of entry and are more liquid in nature.



Investors can also tap opportunities from longer-term trends that benefit the underlying assets. The growing consumer preference for e-commerce and cloud storage services, for example, bodes well for logistics Reits. That said, there will be exposure to more market uncertainties given the highly dynamic global environment, warns UOB's Tan.

She notes that investors can hedge against these uncertainties by buying multi-asset mutual funds that invest into a "basket" of different Reits. Such funds offer a wider selection of real estate-related securities compared to buying specific Reits.

Looking at the returns of different asset classes since Q1 2009, the S&P 500 and Singapore Reits recorded the highest growth in invested capital, followed by property assets, recent data from DBS show. For every S$100 invested, one can expect returns of S$635 from the S&P 500 and S$486 from S-Reits, compared to S$399 and S$339 respectively from a first private property or HDB flat.

All things considered, it is important to include more asset classes to build a truly diversified portfolio.

Beyond real estate, how much you should invest in stocks, bonds, gold and other assets will depend on your personal profile, including your risk appetite, financial circumstances, investment objectives and time horizon, says OCBC's Menon.

Investors should first build a strong core of investments to protect and safeguard their assets before taking on more tactical investments to capture market opportunities, adds UOB's Tan.

"We believe that a diversified portfolio consisting of Reits, ETFs and unit trusts (focusing on bonds and equity) will be able to provide steady capital returns and at the same time, complement one's cashflow needs across different life phases and milestones," says DBS head of property research Derek Tan.