Throughout my years of encounter with countless clients, i came to realised almost 80% of them are not aware of this important fact that could have help them to make better decision and avoid incurring hefty loses when buying a property in Singapore. This simple understanding of how a property performs has help me to advise my clients on their next step towards retirement planning and most importantly also avoiding losing hard earn money. Regardless you are a first time buyer, investor who is looking for rental yield, a resale buyer or a home owner deciding if you should sell your current home, i guarantee you make a more informed decision.
There is this typical myth that all my clients and friends seems to think that you can’t go wrong as long as you buy into a good location or and it will continues to appreciate. I had the same thinking as well before i entered the real estate industry. For the purpose of this research, i will bring out all the performance of ( leasehold) condos that are within 500m from the MRT from the east all the way to the west.
From the above 3 examples , we can see a similar pattern as the property ages through the years. The initial years where you can see a steep appreceiation or what it is also known as the T.O.P effect will continue to appreciate when investors starts selling and constantly pushing the price up till a stage it gets stagnant or start depreciating in worst case scenario.
By now you should be in a rude shock that even such a strategic centrally located development like Citylights has already stagnant for 8 years.
I like to bring out a case study on this Citylight example. I was helping a client to restructure his portfolio which he bought a 2 bedroom unit in 2012 by himself. A young and first time buyer back then and absolutely unaware of how condo performs he decided on the citylights unit without expecting that he had to sell his place at a loss 7 years later. What if he continues to wait? This is a sad reality of how leasehold properties performs which later i will elaborate more on. In the end, he decided to move on accepting the fact that the prices will never go up and took my advise to try gain back his losses from his next property instead. He incurred a painful $75k loss excluding additional buyer stamp duties of approximately another $25k. In total it amounts close to negative $100k.
As we continue down the East West line , we continue to see consistency even in very prime and high demand areas like Redhill and Queenstown.
You must be puzzle by this phenomenal by now , basically there are a few reasons behind this stagnation. To understand this you must understand what causes price to appreciate in the first place.
1)Supply and demand
The psychology of every buyer is hoping to pay as much less as possible while every seller hopes to sell as high as possible. After a property peaked due to initial push by the T.O.P effect, the appreciation will continue to climb until the buyers decided its too expensive thus the stagnation of price.
2) Bank Valuation
Almost 99% of the buyers in the market would need a bank loan for a property purchase, and a bank valuation will be subjected to the bank’s evaluation . To prevent overexposure to uncessary risk, banks would usually does its evaluation based on rental yield, past transections & surrounding transections before deriving its valuation price. Thus with a given valuation, it also limits the potential for further appreciation as most buyers are unwilling to pay above valuation in today’s market.
Do not forget these examples given are all leasehold properties which its lease will eventually decay regardless it is a HDB or a condo. From a buyer’s point of view and the constant temptation from newer launches in the market, it dosen’t make sense for a buyer to pay high price or above valuation for a older condo.
We have finally arrived at the west side of singapore. It is clear now how typical condos now perform even including those with good locality. so what can we learn from understanding how condo performs? I will address some of the most common questions on a daily basis i received in my line of work.
When is the best time to sell?
Based on researches on the performances of all condos in singapore, most of it will reaches its peak on an average of 10-12years. It would be a good time to exit if you want to get rid of a older property, higher maintenance fee, etc for a new property with warrenty and most importantly potential capital gain.
Can i still buy resale?
The most important question is to understand your own objective and end goal for your next purchase. You have to accept the fact that you have to pay a premium over a immediate resale or condo that just gain T.O.P. if you want to move in immediate. Many buyers and young families in the market are still buying newly T.O.P units or resale for their own needs. There are still opportunities for resale leasehold properties to profit, at the end of the day its still about supply and demand. As long there are willing buyers to pay more, there will still be capital gain in some examples, but do manage your expectation. Alternatively, do consider only freehold resale in specific areas only like city fringe to core central region. These freehold condos usually appreciate but at a much slower rate of 1.5%-2% on average per year depending on areas. I will elaborate more on a Part 2 of this article.
New launch prices are much higher now, can i still buy ?
I get these questions a lot especially from investors and first time buyers. Let me highlight one example that just recently T.O.P. Commonwealth tower sits beside Queenstown mrt and was sold at an average of $1600/psf back in 2014 during launch. Just right opposite is an older project call Queens which was selling at $1300/psf. As you can see from the chart , commonwealth continues to enjoy the T.O.P effect of capital gain while the Queens remain stagnant in prices.
This is normal from the buying perspective because buyers are willing to pay more for a brand new project than a 20 years old project. New project comes with newer facilites and also a newer lease. I will elaborate more on the important differences between brand new vs resale in another article.
The smallest 2 bedroom in Queens is 915sqft, in 2015 , a #13 floor 2 bedroom unit transected at $1.19m at $1301/psf.
The smallest 2 bedroom in Commonwealth tower is 689sqft, in 2015, a #13 floor 2 bedroom unit transected at $1.003m. $1456/psf
When the buyer enter the market to buy back then, it was more affordable for a buyer who only requires a income of $6000 to buy the Commonwealth tower compare to a minimum income of $7000 to buy the Queens. The newer development though much smaller in size, has more efficent layout without bomb shelther & bay window
From the comparison between the 2 projects, it seems like if a homeowner of the queens had decided to exit and went on to purchase commonwealth tower back in 2015, he would have enjoy capital appreciation than keeping on to a stagnant property.
I hope by sharing with your these actual facts and data , it can help you decide better on your next purchase regardless you are a first time buyer, investor or someone looking to buy resale. Do note this case studies only applies to leasehold projects in very good location and within 500m from MRT. Do note this applies to generally 90% of how leasehold condo performs only, it does not applies to condo in certain areas for example , CBD or areas where there are high in demand but low in supply. As these is a very big topic, i would continue a 2nd part where i cover about freehold performances in another article. Feel free to share the post if you think it value added you and you can help someone who might benefit from these as well.