• Your Budget and cash flow

• Rental yield

• Capital gains

• Financing of Home loan – property investment

Your Budget and cash flow for Singapore home loan

Ideally, you should not purchase an investment that is way beyond what you

can Safely Afford.

You should also have good holding power to withstand Mortgage home loan

interest rates fluctuation as well as have enough cash flow set aside for up

to 24 months of Mortgage Home loan installment.

This is important as market conditions can become volatile and the last thing

you want to do is to sell your investment property at a huge loss in a

Singapore Property market stricken with panic.

Rental yield and Income

Rental yield is important in a property investment.However it

cannot be over-emphasized.

What is important is the Return on Invested Capital (ROIC), most commonly

referred to as ROI.

Rental yield is: -

(Annual Rental) / (Property purchase price)

Return of Invested Capital (ROIC): -

[(Annual Rental) - (Interest financing cost) - (Maintenance & Misc Cost)] divide by

Invested Capital

Looking at investment property and comparing yield can be very mis-leading. It is similar to looking at P/E for shares.

As rental prices fluctuate, so does property prices.

Buying based only on investment yield is the of the most foolish mistakes a

property buyer/investor can make.

Singapore property investor, you must take care of the risks of buying. And structure the right financing.

RENTAL DEMAND

Singapore rental property demand depends heavily on expatriates in Singapore

PROPERTY AVAILABLE FOR RENT

Property stock do not stay the same, as Property Developers will likely get

first hand information from Governmental development plans in order to add

to the supply.

VACANCY RATE

Singapore’s property vacancy rate have traditionally stayed at around 6 to

8%. There are always some property vacant at any point in time

From the recent late 2006, 2007 and 2008 experience, especially in 2008,

population grew around 5.5% to 4.8m in Singapore. The bulk of the population

growth is through foreigners coming to Singapore to work or stay. This creates rental demand.

Rental rates starts to increase when vacancy rate drops to around 3 to 4% as this indicates severe shortage.

For vacancy rate to go from 7% to 3% (within a year), based on the

private property stock of ~ 300,000 units of private property, that is 12,000 units of

additional rental demand that needs to be created.

Property developers are adding to the property supply as more units are completed and ready for occupation.

That means for 2009, there needs to be 24,000 rental demand (within a

year) in order to push up the rental market. Of course certain locations

will be more popular than the others and start to rise first.

Otherwise, the rental market will remain very SLACK and without direction.

What happens when RENTAL yields go up?

Depending on the typical rental yield in any location, it has a leverage effect on property prices

So it is important to look at YIELD for a rolling 2 to 5 years instead of simply

the latest and most recent yield.

As an illustration, a Property with a 4% Rental yield.

In 2006

$3,000 per month or $36,000 per year ——> $ 900,000

Singapore property yield in 2007

$3,500 per month or $42,000 per year ——> $1,050,000

Singapore property yield in 2008

$4,500 per month or $55,000 per year ——-> $1,375,000

Singapore property yield in 2009 onwards?

$3,000 per month or $36,000 per year ——-> $ 900,000

Given that property developers usually hold out till rental prices are good

before they launch so as to capture the BULK of the VALUE. And because

the property developers time it so well, the BULK of the VALUE created for

their company is from you and paid for BY YOU.

The average yield for SIngapore Properties is around 3 to 5%. At 4%, it

represents a 25 times leverage.

For every $100 increase in monthly rental, it leads to $1200 rise in annual

rental and hence $30,000 more for a property!!!

MAJOR RISK BUYING AT HEIGHT OF RENTAL PRICES

If yield is constant, is it

worth it to pay $1,375,000, you are exposing yourselves to a huge risk,

because if rental values cannot keep up or falls back and capital values drop, you are looking at a

$475,000 of capital loss.

FINANCING: WHAT IF BANKS ASKS YOU TO TOP UP CASH

And in case the banks exercise their clause to ASK YOU TO TOP UP your

equity in the home / property since the valuation has FALLEN, you will face

severe hardship!!!

CAPITAL APPRECIATION POTENTIAL

Some Singapore properties such as River Valley, Orchard road as well as

Singapore properties around District 9, 10, 11 and 15 have highly volatile

rental prices.

For example a yield of 10%, (formula 1 / 0.1 = 10) the leverage is 10 times.

For a rental of $12,000 a year, this leads to a

Capital value of $120,000

For a yield of 4%, (formula 1/0.04 = 25) the leverage is 25 times.

For a rental of $12,000 a year, this leads to a

Capital value of $300,000

So it is important to compare and get the yield from a Rolling 3 year

average, 5 year average from which to do your calculation.Otherwise you

are prone to make the “Mistakes of small numbers”, by basing your decision

on a particular short span of track record of the property market and it’s

possible income (rental).

Strata Title

No matter where you go, buying a condominium unit will entitle you to a

share of the land where the condominium is located. It depends on the plot

ratio of the development. Typically the higher the plot ratio, the taller the

Condominium have to go. And of course your share of the land is determined

by the plot ratio. Higher plot ratio means you have smaller share of the

PHYSICAL land.

Total land saleable is 600,000 sq feet

That can be either 3 storeys x 200,000 sq feet or 6 storeys x 100,000 sq feet

or 24 storeys x 25,000 sq feet each floor. Developers will build higher or

lower depending on regulatory requirements.

Let’s say 600,000 sq feet is built into 600 condominium units of 1,000 sq feet

each.

If you own a condo unit, your share of PHYSICAL LAND is only 333 sq

feet.

This is vastly different from owning a landed property where you own the lot of land.

STRATA TITLE CARRIES RISKS

[spin]Strata title land has some risks of collective decision making. For example You may have just spent a lot of money on renovation.

If 80% or 90% (depending on age of property) decides to sell to an en-bloc

developer, even if you disagree, you will have to sell.

Many residents end up becoming enemies.

En-bloc may not necessarily be a good thing in some circumstances.

Landed Title risks

Landed titles do not have the risks of Collective decision being imposed on

you. But it holds other risks. Due to the smaller cost for the government to

acquire your land under Urban redevelopment Authority’s land acquisition

act, in case the government wants to build a road through your house, your

house will be forcibly acquired. And although the government pays a market

price (or so they claim) for your property, most people whose property had

been acquired has never been really happy with the compensation. And the

government do time their purchase at a time when the market values are

low, leading to home owners capitalizing the losses.

Should we go as TALL as possible?

Typically NO, but of course circumstances vary. The reason is that higher buildings have higher costs of

building.

The developers pass on higher cost of construction to buyers by selling features such as “high floors”, “sea views”, etc.

Taller buildings have many problems when it age. Leaking is one of those stickly issues. The building depreciate once the flavour of the year passes. While land generally appreciates (in a rising population with limited land supply), the rise in value of land may not offset against the loss in building value.

Should we buy developments with lower number of floors

As you own more “Physical land”, you are sitting on an appreciating asset if population is expanding and wealth of the population is growing.

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