Singapore investors eyeing Asia-Pacific real estate for greater yields

MORE Singapore investors are turning their eyes to residential real estate markets in the Asia-Pacific region as yields moderate in the city-state. In some other markets, it is the opposite – this is especially the case in emerging economies such as Indonesia and Thailand, where yields have risen up to 8 per cent. 

A new hot spot has also emerged in the Japanese real estate market, given its low interest rate climate and weaker currency.

Data crunched for The Business Times by real estate consultancy Cushman & Wakefield showed that net yields of prime residential properties in Singapore ranged between 1 per cent and 3 per cent.

This figure goes up to 8 per cent in Jakarta, Indonesia; 5.5 per cent to 6 per cent in Bangkok, Thailand; and 4 per cent to 5 per cent in Ho Chi Minh City and Hanoi, Vietnam. In Manila, Philippines, net yields are lower at 2.5 per cent to 3 per cent. 

Net yields are the estimated total annual rent revenue of a property, after deducting property operating costs and taxes, over its market value. 

Japanese real estate, in particular, has grown increasingly popular among wealthy families here, thanks to its comparatively low interest rates and a weaker yen, noted Knight Frank’s head of private office Nicholas Keong.

“(That), plus gross yields of 4 per cent to 5 per cent, are drawing buyers into the Japanese multifamily space.”

Ultra-high-rise condominiums in Tokyo’s prime areas, such as Azabu, Akasaka and Roppongi, also continue to attract more capital due to Japan’s lower tax base and additional tax benefits, said Mari Kumagai, Cushman & Wakefield’s head of research and consulting for Japan. 

Inheritance tax on property in Japan, for instance, is based on the total value of both the land and building. For high-rise condos, land area is split across multiple units – meaning that the taller a building, the lower the tax liability, regardless of the property’s real value. 

Although the Japanese government will be introducing a new assessment method for tax calculation in 2024, Kumagai believes that tax benefits are still expected to remain “to some extent”. 

The average capital value of a unit in these prime areas rose to 3.2 million yen (S$29,459) per square metre as at the second quarter of 2023, at a compound annual growth rate of 3.8 per cent since Q1 2006. 

Average yields in Australia, on the other hand, are lower at around 2.9 per cent, with major cities such as Sydney and Perth seeing tighter yields of 1.9 to 2.2 per cent, said Christine Li, head of research at Knight Frank Asia Pacific. 

Still, the country enjoys a stable political environment and mature political system; it is also a popular education location with stable economic growth. These factors are draws for investors here, said Ruben Koh, Savills senior director and head of international residential sales. 

“Its property market has also demonstrated its resilience even in volatile times,” he said. “On top of that, the rental vacancy rate in Australian capital cities is only at 1.1 per cent, and home prices have increased by circa 12.2 per cent per year in Sydney on average and 8.6 percent in Melbourne in the past 10 years.”

Sydney ranked fourth in capital value growth in the first half of 2023 with 3.3 per cent, Koh noted. This was followed by Tokyo, with a capital value growth rate of 3.2 per cent. 

The bottom line

Cushman & Wakefield’s head of research for Singapore, Wong Xian Yang, pointed out that property yields in emerging markets, such as in Indonesia and Thailand, tend to be higher than those in developed markets. 

“Generally, property yields reflect the market’s perception of risk and expected returns, or risk-return trade off,” he said. “(For example), Singapore’s net yields are low as the Singapore residential property market is well-established and seen as a ‘safe haven’, given limited land supply, political stability, low developer risk and a stable currency.”

Some investors here have also been priced out of Singapore’s property market, following the recent waves of cooling measures, including the hike in Additional Buyer’s Stamp Duty, and the surge in home prices since 2021, said Wong. 

They are therefore looking abroad for alternative investments that are more affordable, he said. “Additionally, a strong Singapore dollar would increase investor appetite for outbound investment as it could potentially cost less to own overseas properties.”

Looking ahead, Li from Knight Frank predicts that prime residential prices in Singapore will climb 3 per cent for the whole of 2023. This is just a notch lower than the 4 per cent rise projected for Tokyo, and higher than the rises anticipated in Sydney and most of emerging South-east Asia, which are likely to remain stable. 

“However, Manila will leave these cities trailing,” she said, noting that prime residential prices are expected to rise by double digits there.

The future also looks promising in Japan, said Savills’ Koh. For one, real estate prices for the country’s key cities Tokyo and Osaka have “enjoyed” an average growth of 5.3 per cent and 4.4 per cent, respectively, from 2014 to 2022. 

Osaka’s first and upcoming integrated resort will open its door in 2029, showing Japan’s commitment to domestic and international tourism, he added. “With Sapporo adding to the mix with opportunities in vacation rental and commercial properties… (and) its current low interest rate environment, Japan is shaping up to be an extremely popular destination for investment.”

Risks when investing abroad

Nonetheless, Wong of Cushman & Wakefield cautioned that there are some risks when investing abroad. 

“It is important for investors to do their due diligence to ensure that expected returns have a good chance to materialise,” he said. “For example, if the market is not as liquid as expected, there could be issues cashing out in the future.”

Currency risks could also impact expected rental and capital returns, said Wong. 

Lastly, local investors should understand the rules and regulations of overseas property markets before making a purchase, he said. “Depending on the market, there could be additional costs and restrictions for foreign buyers.” 

For example, foreigners are allowed to purchase property in Australia if they are granted permission to do so by the country’s Foreign Investment Review Board. Even with the board’s approval, foreigners can only purchase property in new buildings, those under construction, or vacant land with a view to development.