Singaporean's fascination with property investment is not to be taken lightly. After all, we are a nation of homeowners. In fact, over 80% of us own the homes we live in.
Property prices have increased steadily over the years. In line with the government policy of gradual asset appreciation, property investment remains an attractive option.
In land-scarce Singapore, a physical property not only provides us with a roof over our heads, it is also a commodity that serves as a good hedge against inflation. On top of capital gains, those fortunate enough to be considering a second property will also be able to derive a steady stream of income from rental returns.
However, the situation has not been too rosy for landlords in recent years. A few factors are coming together to depress yields.
For a start, interest rates are on the rise. After remaining at historical lows of less than one percent for the last five years, the interbank SIBOR rate has more than doubled. At the time of writing, the 3-month SIBOR is hovering around the 1.25 percent mark. If a property investor takes up a mortgage loan that is pegged to the SIBOR, a rising SIBOR rate would mean homeowners would have to pay more to service their loans. This eats into their monthly cash flow.
In addition, the number of vacant residential units remains at an all-time high. According to URA figures for 4th Quarter 2015, slightly more than 5000 units or up to 8.1% of private residential property remains unoccupied. To add to the owners’ woes, the vacancy rate will only increase due to the completion of over 26000 units in 2016.
This will no doubt have an effect on the rental rates as landlords slash prices to attract tenants.
To illustrate, let us take look at an example from Bayshore Park, a condominium development in the east of Singapore.
Asking prices for a 2-bedroom rental unit range from $2500 to $2800. Units of the same size are going on sale for $900k to $1million.
Let's say an investor buys the cheapest unit with the intention of deriving rental income. She puts up the 20 percent down payment and takes up a 30-year loan at an interest rate of 2 percent. The instalments will set her back by $2661 monthly.
Assuming she is able to rent out the unit for $2800 per month. After taking away the monthly maintenance charges, annual property tax and the agent fees at the beginning of the lease, the net income derived from rental is close to zero.
Should the property remain vacant, it will eat into her yields. Should the expected increase in interest rates materialise, cash flow will turn negative. There will be no rental income to be derived from the property.
Given this challenging environment, investors should consider other investment opportunities instead. There are savings and investment plans that can cater for the various needs of investors. These range from those that comes with guaranteed yields to others with higher potential returns which comes with market risks.
Jon writes about behavioural finance and investing at Bigfatpurse.com. He is happiest when reading, writing, travelling and playing with his kids.