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5 Key Factors To Property Investment In Singapore

Singapore Property Investment – 5 Key Factors

 

There are 5 key factors in Singapore property investment. Learn how they are playing out in the local real estate market and why it remains attractive to investors. For those looking at the HDB market, please refer to “Is Investing In HDB Flats A Good Option?” as the article will address this property segment more specifically.

And for foreigners looking for residential property investment here, please take note of the restrictions in place, which you can find out more in “Singapore Property Rules for Foreigners”.

Now, back to the question why invest in Singapore’s private residential market when it is ranked the second most expensive worldwide, just behind Hong Kong. In addition, Singapore is ranked the most expensive city to live in 2019, tying first place with Hong Kong and Paris, according to the Economic Intelligence Unit.

To find out why they have not deterred local or foreign investors from Singapore property investment, below are 5 important factors:

1. Singapore’s stable political climate provides a safe haven for foreign funds
2. Low interest rate environment
3. Real estate provides attractive upside investment potential and is a hedge against inflation
4. Singapore is land scarce
5. Freehold versus 99-year leasehold properties

For a quick access to the various sections of the post, please click on the links in the Table of Contents below

Singapore’s Stable Political Climate

 

Singapore has only known one government since its independence in 1965, and it is not about to change anytime soon. For foreign investors, this provides a stable political climate to ‘park’ and grow their property investments. Singapore is also very efficient and transparent when it comes to doing business while corruption is highly frowned upon. Due to its safe haven status, it is a magnet for many foreign investment funds and rich individuals, especially when it comes to Singapore property investment.

This include those from China following its rapid economic growth in recent decades. According to a report by Credit Suisse, China has overtaken the United States in rankings of the world’s richest people. Many of these rich Chinese have ventured into foreign property investments, including those in Singapore, as a means to preserve their wealth and avoid the scrutiny of the country’s communist rulers. This has kept Singapore’s property market buoyant despite the government’s cooling measures in July 2017.

In addition, Singapore has also witnessed an influx of funds from Hong Kong due to its ongoing unrest. This has prompted many Hong
Kong companies and expatriates to relocate here.

Singapore’s Low Interest Rate Environment

Singapore’s mortgage rates are closely tied to the prevailing level of interest rates such as SIBOR (Singapore Interbank Offer Rate). Given the country’s low interest rates environment, it is one of the key factors driving Singapore property investment.

Typically, low interest rates will lead to lower mortgage rate offered by banks, which in turn lower the cost of property financing. Given the low interest rate returns from saving and fixed-deposit accounts, this makes Singapore property investment a good alternative for many locals, with the added prospect of capital appreciation (which we will touch on next). Similarly, this has also attracted foreign buyers and investment vehicles while the easy accessibility to funds is an added advantage given Singapore’s position as one of the top financial centres in the world.

Interest rates in Singapore have been very low for more than a decade, and they have remained depressed since the 2008 global
financial crisis triggered by the collapse of major US investment bank Lehman Brothers (refer to SIBOR trend below). As a result, you can get property financing at rates around 2% or less.

Historical SIBOR rates

Singapore Property Investment Provides Long-Term Capital Gains

Looking at historical records, Singapore property investment provides long-term capital gains. Although there have been dips during economic recessions and global financial crises, property prices have always recovered to record new peaks.

This is can be seen by the two charts below, one for resale and the other for new launch properties.

Price trend of different types of properties

Price trend for new launch properties for different market segments

Given the upward trend, a Morgan Stanley report has forecast Singapore’s property prices could double by 2030.

The appeal of residential property investment in Singapore can also be attributed to its flush financial system. This has kept the bank savings and time deposit rates at sub-2% levels for more than a decade, which hardly offset the rising cost of living. Hence, property investment is good hedge against inflation and help to preserve one’s hard-earned savings. It also provides better returns than simply
putting your money in a bank (see chart below).

 

Singapore Property investment yields versus SIBOR

Scarcity of Land In Singapore

As a very small country, there is a scarcity of land in Singapore. It only has a total land area of 724.2 square kilometres (as of 2018), making it the 192nd-largest country in the world out of 195. It has a population size 5.66 million, but according to the Population White Paper (PWP), this is expected to hit 6.9 million by the year 2030.

Given the scarcity of land in Singapore, the Government Land Sale (GLS) programme will stop offering freehold land. All new land plots will be sold with 99-year leases. This was stated by Prime Minister Lee Hsien Loong in his 2018 National Day Rally speech. He said flats with 99-year leases are sufficient to be handed down to one or two more generations before they revert back to the state. He
reckoned that if flats were sold as a freehold property, the government would eventually run out of land to build new flats for future generations.

As a result, the only way for housing developers to acquire freehold land is through collective en-bloc sale of freehold properties. But given the increasingly scarcity of freehold land, some property developers who purchased such land to build new properties are selling them with 99-year leases. This ensures the land will revert back to them once the leases end.

Given this scenario, should those looking for Singapore property investment quickly got out and secure freehold properties before they get scarcer? Perhaps, the more pertinent question is whether freehold properties provide the best return on investment (ROI) versus 99-year leasehold? Continue reading to find out more.

To help you make an informed decision, consult a good real estate salesperson to help you identify properties with good investment
potential. He can also advise you on the following:

  • Potential capital gains of New Launch versus Resale properties based on market data
  • Leveraging on an existing property to acquire two or more properties
  • Financing
  • Rental Yields
  • Exit Strategy

Singapore Property Investment – Freehold Versus 99-Year Leasehold

After having talked about the increasingly scarcity of freehold land in Singapore, are freehold properties a better investment compared to 99-year leasehold properties? Naturally, most of us would want to own our properties forever and pass them down to our descendants. Although there is nothing wrong with such thinking, are there factors that we may have overlooked when it comes to maximizing the ROI of our Singapore property investments?

Let us examine some of the factors below.

Freehold Properties Cost More

Given the small land size of Singapore, almost 80% of our land are leasehold with up to 99-year tenure. Contrary to popular belief, the government is not obliged to extend the leases. Nevertheless, many leasehold residential properties had their leases extended by paying the government a lease top-up when they went under collective en-bloc sales. Due to such sales where homeowners pocketed a tidy profit, people have become less averse to leasehold properties. For residential properties, whether the government grants any lease extension will depend on the following factors:

  • land use intensification
  • mitigation of property decay
  • preservation of community

Given the uncertainty over lease extension, is buying freehold properties the better option when it comes to Singapore property
investment? All things being equal (same location, size, amenities, etc) freehold properties cost minimally 10-20% more than similar properties on 99-year leases. For example, if a leasehold condominium cost 1 million dollars, a similar freehold will cost at least 1.1 million dollars (if we assume a minimal 10% premium). But when you take into account the Buyer’s Stamp Duty (BSD), the total difference between the two works out to be $104,000, not $100,000.

How the BSD is calculated is shown in the table below. 

Buyer’s Stamp Duty (BSD) Rates

Based on the table, the BSD for the 1.1 million dollars freehold property works out to be $28,600. For the 1 million dollars leasehold, it is $24,600. As can be seen, you not only pay an additional $100,00 for a freehold, but also $4,000 more in BSD.

But bear in mind that nowadays, a 1 million dollars property can only get you a shoe-box apartment or condominium. If you want a more decent size home, the difference between a freehold and leasehold property can be quite substantial.

If you are a Singaporean buying your second or even third property, you have to fork out Additional Buyer Stamp Duty (ABSD) of 12% and 15% respectively. For permanent residents and foreigners, the ABSD are even higher (refer to table below).

Additional Buyer’s Stamp Duty (ABSD)

The BSD and ABSD will add to your Singapore property investment cost substantially, which we will address in the ” How To Calculate Singapore Property Stamp Duties BSD, ABSD And SSD?

The bigger your financial outlay, the greater your financial burden. This could mean setting aside a significant portion of your monthly income to service the mortgage. Typically, taking a 20-30 years bank loan is quite common, especially for young Singaporeans venturing into the private residential property market for the first time. To service the mortgage, many of them may need to cut back on things they enjoy, such as going on holidays. Some may even need to delay their retirement plans. Are you prepared for such sacrifices?

Of course, all of you will hope that your careers will take off and lessen the financial burden. But on the other hand, many of you MUST also need to prepare for the unforeseen, such as job retrenchment. Therefore, having an Exit Strategy is critical if you want to maximise your property investment, be it a leasehold or freehold property. Speak to a real estate consultant who can recommend properties that will meet your budget, lifestyle and investment horizon.

We don’t just sell properties. Instead we advise our clients on investment strategies through the sharing of in-depth research and market-driven data. This will help them make informed rather than emotional decisions that may lead to buyer’s remorse.

Let us share with you the following: 

  • What is the current market trend.
  • What is the demand/supply situation in the various residential real estate segments.
  • What is the investment potential of different residential properties.
  • What are your investment options based on your current financial position.

Freehold Status Only In Name?

In law, the Doctrine of Tenure states that all land belongs to the State. Thus, technically speaking, what a person ‘owns’ is not the land itself but an ‘estate’ in land. There are two types of freehold land – Estate in Fee Simple and Estate in Perpetuity (also known as Statutory Land Grant). To the layman, both are the same. However, there are actually some differences which is explained below:

Estate in Fee Simple – A freehold estate where the owner can own it ‘forever’ without any conditions.

Estate in Perpetuity or Statutory Land Grant – A freehold estate where the owner can own the land ‘forever’. It is however subject to the terms under the State Lands Act. The terms include the rights of the State to have free access to land, take mineral oil and duty to maintain boundary marks.

Why are we saying freehold status only in name? This is because under certain circumstances, you can be forced to give up your
freehold property through government land acquisition and collective en-bloc sales.

Government Land Acquisition

Private land may be acquired by the government for public purposes such as economic and infrastructure developments. For example, if the government wants to build a new MRT line, widen a road or to construct a new highway and your land is in the way, it will be acquired under the Land Acquisition Act. It is administered by the Singapore Land Authority (SLA).

Since April 2007, landowners whose land are acquired, are paid market value under the Act. The compensation will not be adjusted if there is any increase or decrease in value between the date of notice of acquisition and date of vacant possession. In other words, the potential value of property is not taken into account. The government will enjoy/bear the difference in price.

Hence, in Singapore property investment, nothing is 100% certain, as highlighted in this case.

Collective En-Bloc Sale

A collective en-bloc sale can happen in several ways:

  • Owners of old properties facing high maintenance cost selling collectively to interested housing developers. This will help
    them fetch a higher price per unit than if they sell individually.
  • Older low-rise properties with large open spaces and common areas that have been under-utilised. This allows more
    intensive use of the land to build more housing units.
  • Revision of plot ratio. This is one of the major factors driving collective en-bloc sales. If the URA raises the plot ratio, Building
    Control Height will be increased. This allows higher buildings to be built on the same plot of land (refer to table below). With
    the increase in Gross Floor Area (GFA), more housing units can be built. The plot ratio of land is indicated in the URA’s
    Master Plan which is revised once every five years.

Gross Plot Ratio and Building Control Height

  • Change in zoning of land use. This is also included the Master Plan and specifies what the land is used for. These zoning
    include Residential, Commercial, Commercial & Residential, Hotel, Business Park, to name a few. For example, if a land that was formerly zoned ‘Residential’ is subsequently revised to ‘Commercial & Residential’, the value of the land will increase. This is because commercial developments usually command higher rental returns than residential properties.

For a collective en-bloc sale of a residential property to take place, owners of 90% of share value must agree if the development is less than 10 years old. For a development that is 10 years old or more, the threshold is lowered to 80%.

If you are one of the 10% or 20% of home owners who are against the collective en-bloc sale, too bad for you! You will be forced to sell no matter whether your property is freehold or leasehold.

Location More Important Than Freehold Status?

This may sound like a cliché. But location is a very important factor when it comes to Singapore property investment. For example, a property that is near the Central Business District is more desirable than one in the suburbs. A property that is near an international school will be also more desirable. The reason is simple! These properties will see high demand from expatriates working here, especially those with children. As such, they will fetch higher rentals. Tenants care little whether your property is freehold or leasehold.
What is important to them is convenience.

There is no difference in rental prices between a leasehold and freehold property of similar attributes. But due to the lower cost of the leasehold property, its ROI will be higher. For simple illustration, a leasehold property cost 2 million dollars while a freehold cost 2.2 million dollars (assuming a 10% premium). If both fetch the same monthly rental of $5,000 per month, the annual rental yield of the
leasehold works out to be 3.0% compared to the 2.7% for freehold.

Besides rental yields, the following charts further illustrate investing in leasehold properties could be a better choice. Over a 10-year period, leasehold properties appreciated an impressive 86.7% compared to 60.81% for freehold properties.

Price trend: freehold versus leasehold properties

And how about collective en-bloc sales? Theoretically, freehold developments should attract strong interest as there are no rundown of leases which allow owners to demand higher prices. Considering the en-bloc craze over the past decade, especially in 2017 when Chinese developers bidded aggressively, freehold condominiums did narrow the gap a little against their leasehold counterparts. Leasehold units only appreciated by about 12.2% more than freehold (refer to chart below). This was down from 13.6% a year earlier but then it widened back to 15.4% in 2018.

Price trend: freehold versus leasehold for en-bloc properties

But before you plunge straight into leasehold properties, you must also take note of the following factors to maximise the potential of your Singapore property investment.

Amenities – Are there any shopping malls, public parks, popular local schools or international schools nearby?

Conveniences – Is the property served by an MRT station, bus interchange or an expressway?

Future Development – What is the future potential of the area? Has it been earmarked by the government for rejuvenation or future
development? Some examples of exciting upcoming developments include:

  • Greater Southern Waterfront
  • Jurong Lake District
  • Punggol Digital District

Location creates desirability, desirability creates demand, and demand raises real estate values. This is illustrated in the chart below,
which compares the prices of freehold and leasehold condominiums for the past 15 years in the prime district of Novena against farflung Sembawang.

Property trend of prime location versus suburb

What can be observed is, the average psf prices in the 15-year chart shows the upside of 99-year leasehold condos in Novena is much bigger than their freehold counterparts in Sembawang.

The other noteworthy observations are:

  • The price difference between 99-year leasehold and freehold condominiums in Novena is negligible. In fact, there are periods
    in which 99-year leasehold properties had higher average psf price than freehold.
  • The price trend of 99-year leasehold condominiums outperforms their freehold counterparts in Sembawang.

So, when looking at Singapore property investment, do not be too hard-nosed about freehold status. Instead, stay focused on the
property’s location, rental yield, amenities and conveniences, as well as future development potential.

Demographic And Lifestyle Changes

The extended Singapore family unit is getting rarer nowadays. It is not a given that children will live with their parents when they grow up. In fact, many married couples prefer to live on their own. If your children or grandchildren will not be staying with you, is there a need for a freehold property? Will buying a leasehold property makes more sense as you will be spared many years of excessive loan
repayment?

Also, if you want to bequeath your wealth to your descendants, isn’t it better to buy leasehold with a clear exit strategy to maximise our investment returns?

As shown above, the capital appreciation of leasehold properties is actually higher than freehold. For a first property, buying a leasehold could make more sense if you are faced with a tight cashflow. In later years when your cashflow improves along with the expected capital appreciation of your existing property, you can always switch to freehold should you desire a more diverse investment mix. Speak to your real estate consultant or salesperson who will be able to help you strategize and realise your property investment goals

Obsolescence of Properties

Whether properties are freehold or leasehold, all of them face the risk of Economic, Functional and Physical Obsolescence.

Economic Obsolescence – This happens when the environment around your property changes and cause the value of the property to diminish. For example, there is a change in zoning of the neighbouring land into cemetery.

Functional Obsolescence – This is when the design of old freehold properties is no longer desired, resulting in a reduction in demand. For example, apartments with no lifts that do not meet the needs of the rapidly ageing population.

Physical Obsolescence – This is when a property is deemed to be physically obsolescent if it costs more to repair than rebuilt due to gross mismanagement and physical neglect.

There is always the common fear that when the lease of a 99-year property runs down, it will depreciate faster than freehold. Although such fears are not totally unfounded, this is only likely to happen 30-40 years down the road. In the meantime, freehold and leasehold properties rise and fall in tandem during property cycles without exception.

Within this time-frame, ask yourself what is more important: Cling on to the existing property for sentimental reasons or flip it for
investment gains to build up your retirement egg nest?

For a strictly Singapore property investment viewpoint, its makes better sense to buy leasehold instead of being tied down by a more expensive freehold property. This is especially so if, in a couple of years down the road, you wish to invest in your second property. Obviously, the last thing you want is to be locked into a freehold property with higher mortgage and lower rental yield, right?

If you choose the former, be prepared to fork out more money for the upkeep of your property. As a building ages, many things will begin to fall apart. These may include faulty electrical wiring, leaking roofs and rusty pipes. If you stay in a condominium that is 25-30 years old, do not be surprised that all the lifts will need to be replaced. This can be a very costly affair, especially in a small development where there are not that many owners to share the upgrading cost. All ageing properties face such major issues, no matter how well they are managed or maintained. Perhaps, the money spent on upgrading can be better utilised by investing in a newer
leasehold property?

Hence, the tenure of the property is not always the most important when it comes to Singapore property investment. In conclusion, we
will like to reiterate the critical factors we have highlighted:

  • Location (Eg, CCR, RCR or OCR)
  • Future developments (Eg, future business park, lifestyle hub, theme park)
  • Rental yield
  • Potential capital appreciation
  • Amenities (Eg, shopping mall, public park, popular &/Or international school)
  • Conveniences (Eg, Existing or potential new MRT station, bus interchange, expressway)

Similarly, such factors apply to HDB flats as well. Should you require more advice, please do not hesitate to Contact Us for an
obligation-free consultation. We are the biggest real estate agency in Singapore with a wide network of seasoned professionals to help you make an informed decision on your property investment.

We will be happy to share with you our in-depth research and the use of market-driven data to help you realise your investment objectives and build your retirement egg nest.

What Singapore Properties Can Foreigners Buy?

 

If you are a foreigner or Singapore permanent resident looking for a property, there are many rules and regulations you need to be aware of. There are restricted properties that foreigners are not allowed to buy. You can find more information here.

In addition, you need to take note of the stamp duties payable as this could add substantially to your cost of Singapore property investment. If you are in the market for a new home, check out these new property launches:

  • Provence Residence, an executive condo near Canberra MRT station and Canberra Plaza
  • Parc Greenwich, an executive condo at Fernvale Lane, next to the Seletar Springs Estate
  • Bartley Vue, a 115-unit condo development 400m from the Bartley MRT station
  • The Watergardens At Canberra, a low-rise condo development near the Canberra MRT station
  • Canninghill Piers, an integrated development at Clarke Quay beside the Singapore River
  • The Reef At King’s Dock, an exclusive waterfront development at Harbourfront opposite Sentosa island
  • Midtown Modern, an integrated development to be built atop the Bugis MRT station
  • One Bernam condo, a mixed-use development at Tanjong Pagar within the Central Business District
  • The Atelier, a freehold condo development at Newton in Singapore’s prime District 9
  • Kopar At Newton, an exclusive condo development opposite the Newton Food Centre
  • Ki Residences At Brookvale, a 999-year development in the idyllic Sunset Way estate
  • Parc Central Residences, the first executive condominium to be launched in Tampines in eight years
  • One-North Eden, a mixed-use development in one-north, Singapore’s high-tech, research and innovation hub
  • Pasir Ris 8, an integrated development beside the Pasir Ris MRT station, bus interchange and White Sands shopping mall

You may also wish to check out the following properties where prices have been discounted: Developers’ Property Sale, Discount And Offer.

Please speak to us if you require more information or assistance on Singapore property investment. Meanwhile, you may also be interested in the following articles: