Pot of gold at end of Singapore property rainbow? Not a sure thing anymore
The attractive long-term capital appreciation in the past from owning Singapore private homes is unlikely to be repeated, say observers
Singapore
MANY here like to invest in No 1, physical properties (typically private homes) and No 2, real estate investment trusts (Reits). Either way, it reflects a predilection for property.
This strategy seems to have worked so far. But going ahead, would it be wise to park so much money in property?
Some observers caution that the attractive long-term capital appreciation in the past from owning Singapore private residential properties is unlikely to be repeated given the maturity of the market and cooling measures in place.
The outlook also appears uncertain for some categories of Reits. As Teh Hooi Ling, CEO of Inclusif Capital, which manages the Inclusif Value Fund, says: "The pandemic has hastened consumers' move to online shopping. It has also created a new norm for office workers to work from home some of the time. Only time will tell the impact of these trends on the demand for commercial and retail real estate."
It may be difficult for Singaporeans to let go of investing in real estate given the positive experience.
An analysis by OCBC Investment Research shows that prices of private homes and Reits have outperformed the general stock market here over five periods - ranging from one to 15 years and all of which ended on Dec 31, 2020.
Between Q4 2019 and Q4 2020, the Urban Redevelopment Authority's benchmark overall private home price index rose 2.2 per cent.
In contrast, declines were posted to the tune of 7.7 per cent for the FTSE ST All-Share Reits Index (FSTREI), 11.8 per cent for the Straits Times Index and 19.3 per cent for the FTSE ST All-Share Real Estate Investment and Services Index (FSTREH) over the one-year period to Dec 31, 2020.
Over a 15-year span, the URA's private home price index appreciated 85.8 per cent, exceeding the increases of 34.0 per cent in the FSTREH, 31.8 per cent in the FSTREI and 24.7 per cent in the STI.
Over two, five and 10-year periods, the FSTREI posted the highest capital appreciation, followed by the private home price index. (See table.)
Said Carmen Lee, head of OCBC Investment Research: "... for the medium term, from 2-10 years, the Singapore Reit sector clearly outperformed, partly supported by decent distribution as well as the good growth and acquisitions in the last decade as Reits widened their portfolio of assets."
She notes that residential properties are typically long-term holdings, due to the high capital outlay; liquidity is also not as high as for equities trading, and property cooling measures do not permit for a quick exit.
In comparison, investing in the shares of listed real estate companies or units in a Reit can be done with as little as S$100 and, because they are traded on the SGX, it's far easier to enter and exit the market.
"In addition, most stocks/Reits pay a decent amount of dividend per year," says Ms Lee.
"Based on our computations, the average long-term dividend yield (for a 10-year period ended Dec 31, 2020) for the STI 30 stocks works out to 3.6 per cent per year. On average, stocks within the FSTREH pay a slightly lower dividend yield of 2.6 per cent per year, while those in the FSTREI enjoy a higher distribution payout of 5.5 per cent."
Private residential properties typically offer lower rental yields.
According to JLL, the average net yield for its basket of typical prime apartments and condos for a 10-year period that ended in Q4 2020 is 2.3 per cent.
OCBC's Ms Lee says those investing in residential properties also need to look for tenants, maintain the property, pay for monthly maintenance fees as well as undertake sporadic repairs and renovations, among other things. "These additional expenses reduce the net annual returns from these assets."
"However, as seen from the data, for very long-term investors, residential properties do tend to perform and are a good hedge against inflation."
JLL Singapore's senior director of research and consultancy, Ong Teck Hui, notes that those who buy a physical property such as a private home can also leverage on debt for its purchase - which is especially advantageous when borrowing cost is low. "Therefore many investors favour including residential assets in their investment portfolio."
He attributes the resilience in private home prices last year despite the pandemic and recession, partly to the cumulative effect of the median household income in Singapore strengthening 45 per cent between 2010 and 2020 - outstripping the 12.8 per cent rise in the URA's price index over the same period.
Another factor was the decisive measures by the government that boosted public confidence - such as the Jobs Support Scheme and loan relief for homeowners. Moreover, bright spots in the economy such as healthcare, biomedical, e-commerce, tech and manufacturing - continued to provide stable employment in many businesses, contributing to positive sentiment among property buyers.
Low interest rates have also sustained demand for homes.
Providing some context to the 85.8 per cent gain in private home prices in the 15 years leading up to Q4 2020, Mr Ong said the bulk of the increase was between Q4 2005 (when the market was in nascent recovery, following a series of adverse events before 2005 such as the dotcom bust in 2001 and the Sars outbreak and Gulf War in 2003) and Q4 2010.
"History is unlikely to repeat itself. Over the past 10 years between Q4 2010 and Q4 2020, private home prices rose only 12.8 per cent as cooling measures were rolled out during that period.
"With continuous market intervention by policymakers, the days of strong capital appreciation are probably over."
In similar vein, Ku Swee Yong, CEO of International Property Advisor, said: "The Singapore economy has matured and the pace of population growth has been struggling to stay positive for the past few years (as job creation slowed due to technology, the gig economy, etc). The large jump in population growth during 2006-2012 due to the opening of the financial services market and two integrated resorts with casinos, cannot be repeated. We have opened up almost all segments of the economy. In fact, with work-from-home, professional services expats do not need to be based here even if they are employed by Singapore-based companies.
Ms Teh of Inclusif Capital, predicts that private home prices are likely to grow more or less in tandem with nominal GDP, citing tight immigration policies, falling birth rates and a government that is very vigilant against any asset bubbles.
In the Reits segment, Ms Teh says there should be more certainty in the outlook of logistics and industrial trusts as the economy is chugging along. "We still need food and other goods; it's just that the way we get them may be slightly different from before."
That said, she notes that Reits in general have benefitted from a benign and low interest rate environment in the past so many years. "Things may not be so rosy should we see a sustained rise in interest rates."
READ MORE:
TRENDING NOW
Grab CEO’s wife Chloe Tong on life with Anthony Tan and finding her purpose
Three ex-employees of Envy group join Ng Yu Zhi in bankruptcy
He built the Vingroup empire. Now South-east Asia’s richest man is handing some key roles to his sons
If AI has a one-in-five chance of destroying us, what do we do with the remaining four?
