Substituting a private residential property purchase?

A Close-to-Heart Investment Becomes Heavy
Residential properties have always been very close to heart of many investors. However, the consistent run up in prices have prompted the Singapore government to impose severe cooling measures twice in 2011, the most recent in December, leaving private residential properties as a heavy topic for many.

The latest cooling measures in December were expected to result in sales and price moderation but in January 2012, there was a surge in developer sales, primarily for creatively conceptualized or competitively priced projects.

This leaves various property seekers with mixed thoughts about private residential properties in Singapore. And together with the latest cooling measures which puts a cap to the number of private homes one is allowed to hold to be exempted from Additional Buyers’ Stamp Duty, some investors are increasingly opened to other property options.

Interested property investors have more or less a consensus of the other property investment options available. The choices are basically motivated by lower additional costs of entry, easier means to dispose properties or taking some risk into the unknown.

Hence favourite investment options are strata non-residential units in Singapore and even going overseas to invest in properties.

Looking at non-residential investments?
Strata shops, offices, industrial units and shophouses became an attractive alternative since January 2011’s cooling measures and are set to gain prominence among investors, particularly those who have met or exceeded their quota of private home investments which will render them liable for ABSD.

These seasoned property investors are fairly confident with non-residential property investments.

While there are upsides and easier entry to non-residential property purchases, such properties may have their inherent risk as the demand base is fairly niche and in the economic slowdown, smaller businesses may have difficulty or are unwilling to pay excessive high occupancy costs. Some smaller businesses rely on larger corporations for deals and where the economic headwinds in EU and US are affecting the bottom-line of the larger corporations, this further affect the viability of smaller businesses.

The investor who just purchased the unit will perhaps have to live with competitive rentals instead of the envisaged higher rentals to match his high purchase price. Most of the tenants in strata units are frugal– that was the reason why some qualifying businesses opt for industrial offices. If this benefit has diminished, the appeal of such properties may dwindle.

Consider overseas investments?
Over the years, particularly in Asia, many countries like Malaysia and Thailand are fast changing, presenting many property investment opportunities and property hotbeds with the development of growth corridors. In some cases such as Johor-Iskandar Malaysia, the phased development suggests continued long term property investment opportunities.

However, buyers who decide to venture beyond Singapore should critically examine the demand base of his investment property, such as the viability of the new financial districts which in turn is dependent on the country’s fundamentals like ease of doing business, the procedures and infrastructural systems.

It will certainly be worth being the first mover to invest in properties in these places and particularly if the investor still feels more comfortable in investing in residential properties. The benefit is also that such properties can be his home when he travels to the country. The interested investor should not over analyze and miss the opportunity but should at least be familiar with the place, market opportunities and whether there are concrete actions for the development blueprints.

There are distressed assets in international locations, such as US and Europe, available for investments. However, not all distressed properties present turnaround opportunities.

The root of the distress must be studied, whether it is property specific or could it be due to overall country’s ailing economic fundamentals. A property specific or weaker underpinning due to location may be easier to overcome than a cripple in overall country’s economic and social system.

That said, some locations may be passé or have little chance of revival due to its long-lost relevance with the world. Some nations are predominantly property ownership while some are rental societies; the latter is likely to present more investment opportunity unless there are accommodation requirements from expatriates who are based there.

Be on the sidelines?
Due to the uncertainties, some buyers may choose to be on the sidelines, but still hoping to have a valued private residential purchase.

However, it may be fairly inefficient to adopt a ‘come-what-may’ attitude, have a complete breather and still be in the property game in today’s context as there is a burning innate desire by many others to have a property.

It would certainly be worth continuing some property search and be open to possible opportunities. The quieter market is also an opportunity to extract more property information from marketing representatives and owners.

Understand Investment Objectives is Critical
It is understandable many are anxious in investing in alternatives to private residential properties by now. But it must be recognized that the property investment game can hardly be properly handled without a cool mind. And the issues faced by the private residential sector do not mean that other properties will thrive.

There will be increased buyers’ interest for other properties but it may be a different story for the buyer who commit hastily and risk not seeing the expected returns. After all, each property type has its niche demand, users’ requirements, issues, and property potential. The investor should understand his ‘skill set’ in property investments, his investment objectives and actively evaluate the underlying investment potential for each property he is considering.

Should the investor sink his money in a non-local private residential property hastily, he may run into liquidity risks or may be a leg behind if opportunities for private residential purchases happen – unless he is cash rich. For those who still have a penchant to local residential properties, it is quite unlikely he can be timely to sell off his investments to catch on any opportunity wave which occurs in private residential properties.  

 Ong Kah Seng, Director, R’ST Research