There are two topics that dominate social conversations in Singapore. Children’s Education and Real Estate. Nothing else seemed to loom as large.
In one of the earlier post on this substack, we discussed the important pieces of an investment portfolio. But we did not talk about property. Given that this would be a huge monetary outlay for most families, we believe property deserves a separate discussion. This post is an attempt to address this big topic in our lives.
I have to caveat that I have not gotten it very right with Singapore property. All the posts in the original infosite detailed my read about Singapore’s favorite investment topic and how wrong I have been by being somewhat bearish. That said, I have nonetheless benefited through luck, timing and some simple strategies which I do hope to share in the post.
This discussion is not about predicting where Singapore property will go from here or how the cycle will transpire. Like trying to time the stock market or forecast macro trends, it is just too difficult. Nobody thought property can rally the way it did during and after the pandemic. Just when we think the property sector was too hot and bound to cool, things heated up further in Singapore’s previous swamp site (see below).
A few months ago, we have a crazily popular project launched in Jurong, which was a swamp in the 1950s. People queue hours to ballot for units. When their no.s were called, it was as if they struck lottery. Winners celebrated when they have to write a million dollar check to buy a 99-year lease of a Mickey Mouse condo unit in a former swamp site. Only time will tell if they would actually make money.
I had a chance to look at proprietary data of many property transactions in the past thanks to a good agent friend. Properties that we know today that we thought should had done so well, e.g. The Sail (see below), people have lost their family fortunes. These sad datapoints with a lot of money lost can be seen across almost all condos in Singapore.
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The Sail @ Marina Bay had 30 unprofitable transactions and 27 profitable transactions. At the time of writing, the leasehold condominium has 28 unprofitable and 28 profitable transactions over a 12-month period.
Source:
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So, please remember, it is very difficult to predict anything. Nobody can consistently and successfully predict the markets, nor macro trends (recall that everyone said 2023 will see a recession, but it didn’t happen) nor elections and certainly not property cycles. It is important to invest in ways such that you will never risk the house. I cannot emphasize more on this point. We must be very careful with large % of net worth, with leverage and margins, with savings we cannot afford to lose and needless to say, with property investment due to its size.
This is so important, I feel I must repeat, be very careful with:
- large percentage of net worth
- leverage and margin trading / financing
- savings we cannot afford to lose
- property investment
To me, property discussion should also be in different basket because of the sheer size of the investment and how it functions as a life utility rather than financial instrument especially when we are talking about the first property. If we view property more as an investment and lump it in with our other investments, rather than part of our lives, things can get really complicated as we shall discuss.
I have dissected the discussion into the following sub-topics which we will delve into for the rest of the post:
- Thoughts on the first property
- Rent and mortgage
- Second property in Singapore
- Overseas properties
1. First property
The first property is not an investment and it is best not to lump this property together with the rest of the investment portfolio. It is difficult because the capital outlay is huge and if we ignore this capital outlay and simply look at what’s left of the investment portfolio plus savings, sometimes it doesn’t make sense intuitively because what is left is too small to matter.
However, it is an important segregation because when we see property as an investment vehicle and less as a shelter over our heads, we might be enticed to make the wrong decisions. The trick could be to buy a property we can afford (i.e. HDB in Singapore). Once we have secured the shelters over our heads, we can think more clearly about investments.
Recently, there was a video where Charlie Munger (RIP Charlie..) spoke about his view on his first property. I think it is very apt to share it here. I have paraphrased it though.
The property you live in also dictates how your family will live and behave. It is not simply an investment or a shelter. So if you see your property as such then the following logic should naturally hold - buy your first property and do not trade it. If you want to upgrade, do so in accordance to the way you want to live your life and always try to upgrade when dollar psf are at lower points (not easy) so that you can buy the bigger house at a relatively lower valuation.
On the flipside, when we do not have a property, we are essentially shorting the property market. As seasoned investors would be reminded, shorting something has unlimited downside. We may end up in a situation where we have to pay rent for years and the market rises and rises. The cost can be unbearably painful.
This is a good segue to talk about rent and mortgage.
2. Rent and Mortgage
I hate paying rent. You pay a significant amount of your salary to someone else and help him pay his mortgage. Shouldn’t we then buy the property and pay the mortgage ourselves? Then at the end of the day, we will own the property vs paying rent which we get nothing ultimately. When we first start out in our careers, it is difficult because the capital outlay is just too big. Yes, it is not an easy discussion. There are times when you cannot help it and you have to pay rent. For example:
- Working in a foreign city for just a few years
- Rent is subsidized or has other benefits (e.g. tax)
- The rent is way lower than mortgage and we can arbitrage rent (i.e. renting out our purchased property and staying somewhere else paying a lower rent)
Otherwise, if things checked out well, we should always strive to buy our first property well and pay mortgage.
We can have a whole debate about mortgage. But going by our logic that we should always treat our first property as a utility, then we should strive to pay down mortgage asap. We can take our time when interest rate is low. But as 2022-23 showed, interest rates can spike rapidly and we might get caught paying 4-5% on mortgage which is ridiculous. So always buy an affordable first home and strive to have a manageable mortgage.
Remember, when you are paying mortgage, the bank owns the house, not you. People talk about using mortgage and financially engineer profits with property’s leverage. I would suggest doing that with a lot of prudence with the first property.
3. Second property in Singapore
When we have the shelter over our head well covered, then we are eligible to think about second properties and how they factor into the investment portfolio. Here we can think about asset allocation and compare returns but property differs largely due to leverage. Based on just equity returns, without leverage, property usually generate mid to high single digits over time. This is not too different from stocks and just a tad higher than T-bills. Therefore, money should be deployed into real estate only if our analysis shows that the equity return on some particular property investment is better than the alternatives. The chart below is enlightening.
In the earlier post, we established that we could 2-4x our money if we can compound the portfolio at a high single digit return over 10-20 years. Property can achieve that because of leverage. However we do require many other elements to work as well. We are talking about good agents (cannot emphasize their importance more here), bank lending, support from family (parents, significant other etc) and legal and tax advice!
In Singapore today (early 2024), we need to do a lot of legal gymnastics because individuals are not allowed to own multiple properties without paying significant amount of taxes. For married couples, we need to “de-couple” legally so that husband and wife can own one property each. For foreigners, unless you have money to burn, it really doesn’t make sense because you need to pay 60% tax on buying the first Singapore property!
As such, investing in second properties in Singapore is not something we can just execute by clicking the buy button on the Interactive Broker platform. It requires a lot more effort.
4. Overseas properties
Overseas properties can be even trickier since we need to handle everything remotely. The biggest barrier is to find the right person / agent on the ground whose interest is aligned. If you have dealt with enough property agents you know that good agents who really have your interest at heart are like unicorns, very rare.
To sum things up:
- Don’t trade your first and only property
- Use mortgage wisely and try to pay down as much and as soon as possible
- Weigh second properties against the investment portfolio well and
- Don’t buy overseas properties
These are my views inherited from very smart people who had successfully navigated life in Singapore with some based on my own experience.
They are definitely not gospel truths and I would welcome further discussion.
Huat Ah!
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