Most young couples in Singapore aspire to own a private property. Owning a private condominium will not fail to exude prestige and recognition for their career achievements. However, prices for Residential real estate will always reach a new high year-after-year and it is very difficult to obtain one using strategies recommended from past investors, which is to hold a HDB until it is past its Minimum Occupation Period (MOP), upon which it will be in the open market and valued at a higher price. The value is realized into actual gains and you can seek into looking into private properties as your next real estate investment.
Financial advisors will always mention that you should let your money work harder than you do, and they are right! If you are practicing this knowledge in other financial instruments, why should it be any different from the world’s safest form of investing? That being said, are you familiar with the following quote?
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett, billionaire investor and co-founder of Berkshire Hathaway
I am sure you do and are you aware that for the past two centuries, 90 percent of the world’s millionaires have been created by investing in real estate. This fundamental method of investing having survived through two world wars, countless financial crises and disease/viral outbreaks. Why should it be any different now?
Moving on to the main topic, Executive Condominiums (ECs) are a good way for any Singaporean to get started in investing in Real Estate. Being that they are being kept in tight control by the Singapore government, the moment it enters privatization, its value will drastically improve to match the private resale non-landed market. In this article, I will cover firstly if you are eligible for purchasing an EC, followed by the financial advantages and ending with the possible drawbacks that an EC will bring.
Are You Eligible for An EC?
You might ask, if ECs are such a fantastic form of real estate investment, why are not more real estate investors purchasing them?
ECs are first introduced in 1999 and it is a hybrid form of private and public housing. This is because they are similar to private developments built by private developers but still controlled largely by the Housing and Development Board (HDB). Most ECs will resemble private condominiums in Singapore with its gated compound with security, and with amenities and facilities which are actively maintained by a Management Corporation Strata Title.
Since ECs are partially public housing, it is the government’s imperative to control prices relatively close to public housing, yet at the same time, to meet the growing demands of Singaporeans who aspire for a better-quality living standard. This is akin to a child’s formative years under their parents until they are of age to undertake more responsibilities.
Now that you are aware of the conditions to purchase an EC along with the grants provided, further elaboration on the breakdown on how much you should be able to receive if you are in a SC/SC household or SC/PR household and how the grant amount will be distributed among all applicants.
Grant Quantum for Family Grant and Half-Housing Grant
Source:hdb.gov.sg
Distribution of Grant
Source: hdb.gov.sg
What Can Your Grant be Used For
Source: hdb.gov.sg
Advantages
Land Tenure Bought from Government (Leasehold)
Most ECs come with a 99-year leasehold; which leads to more affordable prices as compared to freehold properties. In addition, the land price is subsidized by the Singapore government. This allows end-consumers to have in a way, prices which are “below breakeven” for leasehold private condominiums!
The following image is a comparison between two ongoing new launches in Ola, an EC and The Florence Residence, a private condominium. Both of these condominiums are located in Punggol. On average, the per square foot (PSF) for Ola is lower by around $310 PSF.
The difference in price is partially contributed also by the land bid price.
Property developers, Evia Real Estate Private Limited and Gamuda (Singapore) Private Limited, acquired the land parcel at a price of close to $319 million which translates to a land cost of about S$576.20 PSF per plot ratio. The site was previously released from the Government Land Sales Programme (GLS).
In comparison, The Florence Residences land was around S$842 PSF per plot ratio. Compare the differences in PSF, which is roughly the same in regards to the launch price. However, there are other factors that go into influencing the prices too.
Stable Form of Investment as Most ECs Are in OCR
From my previous article on new launch condominiums, I have mentioned that the risks of the investment depend heavily on the areas in which ECs are located. The closer the real estate development is to the Core Central Region (CCR), the more expensive the property becomes. Developments within the CCR are usually non-occupied, and site location is important to tenants as mostly will consist of foreigners whose workplace is close to the city centre. This huge demand for landlords to provide the best rental prices. However, the constant demand to weather through difficult times is required as there is a potential loss in capital value as seen below.
Most ECs are located in the Outside Core Region (OCR) and only a handful is located in the Rest of Core Region (RCR). This is primarily to serve the needs of the people and to prevent similar prices to the ones located in CCR, which will place them out of reach for most middle-income families. ECs located in the OCR and RCR will, therefore, have a lower entry price. Another advantage is that a huge degree of speculation from the rental market is removed.
The best kinds of ECs that you should look into are the ones located around the city fringe, as there is huge potential. Let us look at Bishan Loft, which was a very famous EC which was launched in 2001 and Completion in 2003.
When it first launched in 2001, the PSF for Bishan Loft is significantly under prices from all condominiums in Singapore and Bishan. This low entry price made it a good buy for young homeowners who were searching for a home. Some people might hesitate as it is almost double the prices to HDBs in Bishan. The homeowners who bought into Bishan Loft, however, had good reason to be happy in the following years.
Have a look at the PSF during 2010, the point at which Bishan Loft had the same average PSF compared to all Singapore condominiums! This was partially contributed due to the fulfillment of the MOP. This resulted in ECs being able to be sold in the open market to Singapore Permanent Residents (PRs).
At this point in time homeowners who have bought in at launch price were rewarded greatly by doubling their investment during the property boom of 2010-2013. Bishan Loft was privatized in 2013 and it reached peak PSF before dipping due to the implementation of multiple cooling measures in regards to stamp duties and bank loans.
For homeowners who have bought an HDB in Bishan however, they were simply provided with just a home to live in, without much capital gain as prices remained stagnant.
If you want to catch the next wave of ECs, to frequently check out GLS sites at the HDB website.
The Drastic Increase in Value Upon Privatization
Upon privatization, most ECs experience a huge surge in PSF as most of the restrictions set to them are lifted. After all, ECs are considered hybrid public/private housing, and it is required to provide affordable housing to the general public, which is its key criterion based on its public housing component.
Have a look at the graph below, which is the price comparison of ECs (Before Privatization), Condominiums in Singapore and HDBs.
One clarification that I have to mention is that in this line plot, prices of ECs are not truly reflective of units that are already privatized. In that regard, after the initial 10 years from TOP into privatization, prices will realistically fall in between the ECs and Condominium lines. For those that are more optimistic, you can estimate an additional $200 PSF on top of the average PSF of condominiums in Singapore. However, do take in caution as generally, you will be competing with newer condominiums in a better state of repairs and implementation of newer, functional technologies.
Decentralization of City Centre
Maybe you are a homeowner who likes to live in the CCR due to the advantages they bring. For all the positive effects that a centralized business/financial hub can bring like standardization and cost-savings, it also brings negative repercussions like unnecessary economic stresses onto the country like traffic congestion, which results in uniquely Singaporean implementations, like our Electronic Road Pricing (ERP) gantries, a form of road taxation to “dissuade” movement into high traffic areas.
From the Master Plan 2019, numerous policies have been in place to lead to the decentralization of these areas so as to reduce such economic stresses. As a homeowner staying in high-density residential areas, this is promising as there is government contribution to the further development of the land in which you are residing close. This will directly lead to an increase in PSF of your property!
For financially-savvy investors who are thinking of renting out their EC units (After MOP only!), there will be constant demand in regards to tenants. Expats generally have more spending power in comparison to local tenants, this will result in them having a preference for EC units as there is generally better living standards. This, in turn, will lead to better rental yields as compared to HDB units.
The demand for residential units in the OCR and RCR can be linked to the supply and availability of commercial units available in the same region. Take a look at the infographic below which showcases the stock and supply of Grade A office units.
Infographic by: businesstimes.com.sg
With exception to the Novena/Newton, Chinatown/River Valley and Central Business District (CBD) Areas, the stock for other areas are kept in good control as they are generally under 2 percent. Grade A office rents for these other areas are also relatively low in comparison to CBD areas, this is to entice business owners to decentralize their workplaces.
Based on the incoming supply data, you will be able to tell which areas are “underdeveloped” in regards to commercial areas. Take a look at areas in Woodlands and Punggol, where previously there was little to no existing stock. This table is also further supported by the development of Woodlands Regional Centre and Punggol Digital District.
What about in the case of rental yields and how do they compare to other condominiums with a different land tenure like freehold? As reflected in the line chart below, since the average rental PSF of ECs is similar to condominiums across Singapore, technically, ECs will result in a better rental yield based on Return of Investment/Return of Equity (ROI/ROE). The difference in PSF is around $0.50 which adds up to around $500 per month or $6000 per year!
Low Supply Brings High Demand, Leading to Higher Prices
With so many advantages to purchasing an EC, the government will have to protect the open market for private condominiums as an oversupply of ECs can inversely affect its prices. This will have negative repercussions on the real estate market in later years. The following table will show the current supply of ECs in comparison to private residential units.
Source: ura.gov.sg
In reference to private residential units, ECs supply is usually less than one quarter. In 2021, there is no supply of ECs at all! This shows the tight control of the government over EC units.
This PDF which I have included will further detail the number of new units launched and the number of EC units bought from HDB and the resale market. In general, vacancy rates were close to negligible.
Deferred Payment Schemes
There are many schemes out there for private condominiums and some of these deferred payment schemes (DPS) also apply to ECs. In short, DPS refers to being able to defer the full cost of the EC after downpayment and only paying the remainder sum upon possession of the unit.
Save Costs in Renovation
Since ECs are considered part-private housing. Most of the materials used should exude a certain lavishness in reflection to the middle-income family need. If not, why are you even considering to purchase an EC? They are often ready for occupation with premium fittings and finishes. If you were to purchase a 3-Bedroom Executive condominium, you will be saving on average $20,000 to $30,000. Which is the renovation cost of an average Build-To-Order (BTO) flat from HDB.
Disadvantages
Steeper Costs as Compared to HDBs
Undeniably, ECs will be more expensive as compared to HDBs as they are being developed by private developers. This results in them having to earn a considerable profit upon sales completion of every unit. On average, new launch ECs will be double the cost of a BTO. Furthermore, you are obligated to take a bank loan for an EC which is up to 75%, as compared to an HDB loan of 90%. This means that you are technically made to pay upfront more money.
MOP
The MOP requirement which is for all HDB flats is also applicable to ECs. Homeowners are required to live in their flat for 5 years before they are able to sell their EC in the open market, rent out the whole flat or invest in private property, both local and overseas.
This will be a detriment for investors who are intending to leverage their new EC for rental yield upon purchase because it is not possible. However, these investors can always opt for DPS to reduce their financial load in the meantime
Purchasing an Executive Condominium as a Second-Timer and Resale Levy
This disadvantage can be considered as transient because it does not apply to everyone. For some homeowners who have purchased an HDB BTO first, received subsidies for this BTO and are intending to purchase an EC this time around, you will have to pay for a resale levy upon disposal of your BTO, which is a subsidized flat.
Source: hdb.gov.sg
Taking this, for example, if you and your spouse have previously bought a 4-room BTO unit and are currently booking your EC, you will have to make a payment of $40,000 by way of your flat proceeds and/or cash.
In addition, you and your spouse will be considered 2nd timer applicants and therefore will not be receiving any CPF housing grant for the EC purchase.
If you are still paying for your loan for your BTO, you will only be granted with a lower LTV for financing with a bank for your New EC. I will elaborate more on this in the point below.
Bank Loans Only
Unlike BTOs where you are able to take up an HDB loan, you will have to finance your EC purchase with a bank loan. The topic in regards to bank loans vs HDB loans will be pretty extensive and there are many articles on the internet that covers it well. Therefore, I’ll elaborate on factors that I feel will help you come to a decision.
Using bank loans might not be seen as a true disadvantage as the interest rates are substantially lower, i.e. around 1.5-2.0%, in comparison to HDB loans, which is a combination of current CPF Ordinary Account (OA) and a concessionary interest rate pegged at 0.10%, amounting to 2.6%.
Furthermore, banks will grant you with a lower LTV at max 75% as compared to an HDB loan, which is at 90%.
If you are currently serving a housing loan at the moment, banks will grant you at max 45% LTV for your property.
Summary
If you have the financial capability to purchase an EC as your first home, it is a fantastic investment vehicle to park your hard-earned money in as there are grants given by the government to reduce the overall property price. You will have to work out your financials and understand your cashflow carefully as unlike private properties, ECs are meant to be reserved for owner-occupation firstly and therefore not able to provide you with rental income for the first 5 years. Have enough savings to tide you in your mortgage repayments should there be any rainy weather seasons.
The light at the end of the tunnel, however, is incredible financial gains amounting to almost double your initial investment.
If you are purchasing it as your subsequent home after purchasing a BTO, be aware that the grants provided by first-timer applicants will no longer be provided to you.
Buying a new home or property can be a very tedious decision. If you are feeling overwhelmed by the choice of New Launches to go for, feel free to contact me at +6596329840 or at Joshua.loo@orangetee.com!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.