Young investors need to watch leverage

Singapore

PROPERTY investors, especially young ones, should be prudent by doing their homework on what they can afford and be realistic on the amount to borrow, advises JLL Singapore's senior director of research and consultancy, Ong Teck Hui.

Agreeing, International Property Advisor's chief executive officer, Ku Swee Yong, says young property buyers should not take more than 50-60 per cent loan on the property's value, even when purchasing their first home.

Instead, they should build up more wealth including through CPF savings, before entering the property market - so that when they turn 65 years, they will have sufficient reserves, especially given rising healthcare costs.

"The days of an iron-rice-bowl career are mostly over," says Mr Ku. "So there is no 100 per cent certainty that anyone can service home loans over the next 15-20 years."

This is on the back of tech disruptions and the gig economy which has resulted in a lot of temporary jobs, short-term contracts and project-based assignments, notes the 50-year-old father of two children, both in university.

In addition, Mr Ku, who has written six books on property investing in the past decade, urges would-be property investors to take into account that "the days of buying a second home to collect rental income are also probably behind us post-Covid".

Among other factors, he cites stricter immigration rules. With work-from-home, foreign talent hires of Singapore-based organisations can perform their jobs in their home countries.

Teo Yao Yang, senior research analyst at Singapore-based independent boutique fund management company Inclusif Capital, stresses the importance of diversification and keeping an eye on concentration and leverage risks.

"If a big part of your net worth comes from your property holdings, you face significant sector concentration risk. Furthermore, most Singaporeans are probably investing in local properties, and that adds another layer of country concentration risk," he says.

Unlike most other asset classes, investing in properties generally entails some form of leverage.

"If you are already facing significant sector and country risks (that is, the majority of your net worth is locked up in Singapore investment properties), the leverage risk can really decimate your financial planning if some unpredictable exogenous shock happened," says Mr Teo.

Mr Ku says another point potential buyers need to factor in is that Singapore residential property values may not climb as much as they have in the past - given the tight immigration policy and low birth rates which will result in a slower rate of population growth.

Agreeing, JLL's Mr Ong says property investors need to be clear about their expectations on capital appreciation and rental returns - and whether a residential investment can meet their expectations.

"Be discerning regarding location, proximity to MRT stations, amenities and other attributes that provide a competitive advantage in securing tenants," he says.

For young investors contemplating buying overseas properties, Mr Ong's advice is: "Go for markets that are established, with good legal framework, clarity of titles and ownership, transparency, the availability of funding and professional property services."

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