Factors To Consider For Singapore Home Loan
Jul 3rd, 2009 by master
Key factors for Property buyer: -
• Your Budget and cash flow
• Rental yield
• Capital appreciation
• Financing of your – property investment
Affordability and Holding Power for Singapore mortgage loan
If you are investing your own money without leverage, you should not over-stretch yourself.
You should also have good holding power to withstand home loan rate fluctuation as well as have enough cash flow set aside for up
to 12 months of property loan installment.
This is important as market conditions is unpredictable 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 to an extent.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 on rental yield can lead to over-paying for your property
Invest in Singapore property, you must take care of the risks of buying. And structure the right financing.
PROPERTY DEMAND
Singapore’s rental demands are mainly derived from foreign expatriates as
most Singapore citizens own their own homes.
RENTAL SUPPLY
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.
PROPERTY 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.
In order 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 SQUEEZE 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 effect does Rental yield have on property prices?
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.
Singapore property 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
Property developers time their sale or launches well. They also price their properties at a price which is disadvantageous to 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 you go in at 2008 thinking that a property is NOT BAD at 4% yield, 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, 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!!!
PROPERTY CAPITAL GAINS
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 Property Development
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 as well as profitability
Let’s say 600,000 sq feet is built into 600 condominium units of 1,000 sq feet
each.
If you buy one of these condo, your stake to physical land is only 333 square feet.
This is vastly different from owning a landed property where you own the lot of land.
Strata title risks.
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.
Over time, the building deteriorates. And if the land’s appreciation does not
offset the depreciation of the aging building, the capital value could be negative.
Should we go as low as possible?
As you own more “Physical land”, you are sitting on an appreciating asset if population is expanding and wealth of the population is growing.
Find useful experiences in the topic of what is forex – this is your own tips store.
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