No Additional Buyer Stamp Duty
For the savvy residential real estate investor, most of you all by now will have realized that there will be an additional buyer stamp duty for the 2nd, 3rd or more counts of properties. For Singaporeans, the first property will usually be free whereas for the 2nd or 3rd count, as of 4th Mar 2020, the percentages are 12% or 15%. This will actually add up to the cost of the gross pricing of a property! Besides the sticker price of the residential property that you have in mind, remember to take into account these other miscellaneous fees.
Let’s do a quick case study.
Janet is a 30-year-old Singaporean property investor who is keen on purchasing her 3rd Property, she is currently looking to make a $2 million dollar investment. Here is the financial breakdown in her circumstance.
Asking Price for New Launch Condominium: $2 million
BSD: 4%* $2mil - $15,400 = $64,600
ABSD (3rd Count): $300,000
Total Cost: $2,364,600 (Excl. misc. fees e.g. legal fees = est. $2000)
Total Downpayment (Assuming 25% LTV, 1st property loan, incl. BSD + ABSD): $864,000
James, who is a 26-year-old Singaporean, is seeking an alternative form of investment, namely through industrial properties. This is the 4th industrial property that he is looking to invest in.
Asking Price for New Launch Industrial Property: $2 million (Inclusive of GST)
BSD: 3%* $2mil - $15,400 = $54,600
ABSD: None as it is Industrial Properties
Total Upfront Investment: $2,054,600 (excl. misc. fees e.g. legal fees est. $2000)
Total Downpayment (Assuming 25% LTV, 1st property loan, incl. BSD, GST): $589,600
Take a look at the vast difference in regards to both $2 million investments, it amounts to $274,400! This difference was contributed by the lower BSD. In addition, the asking price of the new launch property is inclusive of the 7% GST. Your upfront cost can be further reduced if the asking price is lower by 7% or if you are a GST registered person or entity. If you were to ask me, I rather invest this money in a basket of high yield dividend stocks!
Of course, some people will argue that the residential property can always be placed under trust for their child. However, whenever money is involved in family matters, you should always understand the potential risks before proceeding with such an event.
Rental Situation
Now that I have explained in the case of initial capital outlay, discussing on the rental situation is very important too. In my opinion, positive cash flow is what makes or breaks a real estate investment. Let us take a look at how the current market is trending in regard to vacancy rates and rental yield.
Residential Property
Source: ura.gov.sg
Since 4Q 2018, The Property Price Index (PPI) has been steadily increasing, close to the highest peak in the 2013 property cycle. This increase is partially contributed by the huge increase in new launches from the start of 2019.
Source: ura.gov.sg
Overall, rentals of private residential properties have been trending downwards since 2015, with only a slight recovery from the start of 2019.
Source: ura.gov.sg
With the release of more units in the coming years, the increase in residential supply will cause rentals to decrease further.
In my opinion, if you are intending on making a residential property investment, do take caution as there could be government intervention soon.
Industrial Property
“We believe that the outlook for Singapore’s industrial sector will remain stable in the immediate term with a slight increase in 2019 as it started to bottom out from 2018 onwards on the back of abating supply risk. Rental rates have reversed from the downtrend in 2019 to a positive rental status going forward, where rates are expected to increase by 1.5% on average. Vacancy rates are expected to drop going forward, with the exception of a rise in 2020F.”
Source: DBS Bank
Source: JTC Corporation, DBS Bank
The increase in 2020F supply of industrial property is expected to decrease in the coming few years. Furthermore, demand is expected to remain consistent, this will ensure that vacancy rates will decrease.
Source: JTC Corporation, DBS Bank
In 2020F, a slight increase in the vacancy rate is expected in 2020F, this is due to the increase in the supply of industrial units, but a downward trend is expected in the years to come.
Source: JTC Corporation, URA, DBS Bank
Rentals have been falling since 2019, but from 2020F onwards, rentals are expected to pick up due to the decreasing supply.
Why Industrial Property?
Now that I have laid out the figures of the past few years and the years to come, let me dive deeper into why I feel that industrial properties should be looked at by this should be an investment that is worth considering.
No ABSD
The costs of ABSD from residential properties are too high. The reason why ABSD is implemented in the first place is that the government feels that there are too much speculation and optimism on residential property investment. An upward trending property market ensures that Singapore’s properties remain highly desirable and spurs further foreign investment into Singapore.
However, what goes up, must come down. Investors should always be reminded that even though real estate is a good store of value, it is still essentially a home, a criterion to fulfill man’s fundamental need. Once that need is met and no longer needed, the initial perceived value becomes transient.
Less Speculation
Most industrial property investment is usually done by companies with an important need to fulfill their company’s core competency, be it as a store for their material or as a manufacturing facility. This means that there will be less speculation. Will you expect a big MNC company to pack up and leave due to higher rental rates? Other factors will come into play for their business and as long as the agreed rental is still within reasonable rates, they will likely stay in the situation of a downturn. This brings about a more stable investment, as a positive cashflow is more important.
Costs of Setting Up
When companies do setup operations within an industrial facility, the costs of setting up is steep due to the high degree of technical specifications which are often required to get things running. The cost of setting up can easily range to millions. This ensures a higher level of commitment on their end, and as a landlord, will get to enjoy a longer lease.
Conclusion
If you are a first-time real estate investor/owner, consider owning a residential property first to get a feel of the market. Understand clearly how your initial capital outlay should positively, and not negatively improve your financial situation in the years to come. Also, think about other extrinsic factors other than capital investment. If you are intending on holding the property for a short period of time, i.e. less than 5 years, a capital yield of more than 5% is very high. Sub-5% yield, however, should be expected more often.
Always be ready for minor fluctuations within the property market. You do not want to be in a situation where you are unable to meet mortgage payments. Know the difference between gross and rental yield, which I will be elaborating more in a future article.
If you have plenty of residential investment and are looking for alternative forms, consider industrial properties as in the current market state, will make a good investment based on current market data. Furthermore, there is no ABSD and are generally less speculative in nature. Most owners of industrial units are not solely motivated by capital gains/rentals but also on how choosing a good location and its surrounding facilities/amenities can bring a boost to their business operations, which growth can be potentially exponential.
For tenants, once their mind is made up, usually a longer lease is discussed and arranged, which adds further stability in your investment. Furthermore, other alternative forms of rental payments can be negotiated! For the business savvy landlord, why not discuss on a profit-sharing model?
Want to find out what are the up and coming new launch industrial properties in Singapore with good yield? Contact me at Joshua.loo@orangetee.com or +65 96329840 to learn more!
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.