Finally bought a property! (Part 3)

Then, we chanced upon Topiary, which looked very far off on the Singapore Map near Sengkang, along Fernvale and Yio Chu Kang Road.

It is not within 5 minutes to walk to Fernvale LRT. It is a good 15 minutes. We walked over to Greenwich, which has a cold storage and a number of nice restaurants. The nearest MRT was Buangkok 3km away, followed by Yio Chu Kang, a 10 minutes drive away.

Clearly, the location was not the best. However, we noticed that new condo developments just across the road were selling for at least $1100 PSF. Even older developments can be rent out at about $3,000 for 1000 square feet condominium. There were not many condominiums in that area, being a new estate, but at seletar area, there are many landed properties, similar to Kembangan, Siglap area.  The area gives me a nostalgic feel, with Holland Village as a similar feel (before MRT was up then). I am likely to drive and continue to drive hence dropping off my wife then at MRT station in the morning will alleviate her transport woes.

The pricing was reasonable. On average, they are selling for $730 PSF. The unit I am eyeing for, a 21^st level pool facing 3 Bedroom unit is selling for $716,000 for 915 square feet. This works out to be $783 PSF before grant. As our income is at $12,000, we are eligible for deferred $10,000 grant when my fiancée becomes citizen. This will further reduce our cost to $772 PSF.

Assuming ECs will trade at a 15% discount to nearby similar age properties, there is at least a $100 PSF upside for Topiary. This allows me to floor my downside risk of purchasing market at current levels. Assuming I am able to rent out my condo after 5 years at $2800/month, my gross yield will be 4.76% after grant, before interest costs.

My cash portfolio of stocks generates at least $20,000 per annum of dividends returns, which can comfortably cover the monthly installment of the purchase.

This allows me to continue my cash investments and not be afraid of losing my job. At most I become a tuition teacher, taxi driver or full time blogger; I will not lose the condo over my head. Both my wife and I can work in a $2,500 job and still afford the monthly installments without touching our retirement nest egg.

My CPF investments can continue as well as I am only utilizing $60,000 from my OA account for the down payment and stamp duty, the rest shared with my partner.

The calculations are as follows:

5% cash = $35,800

15% CPF = $107,400

3% Stamp Duty - $5400 = $16,000

Total = $159,200

Loan = $573,000

Monthly installment base on 2.5% = $2,270.

Risks:

We are actually buying at the peak of the property cycle. I must be prepared for a 20% downside for my property. Hence, I am likely to liquidate my property counters to avoid taking double layered risks.

My partner and I have about 3 years more before we move in. We need to ensure that we can wait till then and not break up before marriage or we will lose 20% of the property price.

There are at least 2 more sites reserved for ECs, thus limiting upside for Topiary. I do hope that developers bid higher prices for the land so as to translate to higher selling prices.

The next post will be on why we chose a 3 Bedroom instead of a 3 Bedroom dual key and forgo the potential for rental when Topiary is just minutes away from the Seletar Aerospace hub.

Finally bought a property! (Part 2)

Upon deciding to purchase Riversail, I brought my family members, fiancée, colleagues to view my chosen unit. They all feel it is a good buy, given current market situation. My fiancée who started work 6 years ago also said she could contribute some money for our future (be it for own stay or investment). All the better, then I will include her in the mortgagor as well. We did our sums and financing was extremely comfortable; she has about $70,000 CPF and $20,000 cash to contribute, I can cover the rest plus monthly installments till property is completed and ready to move in. It will be a tenancy in common 40%-60% arrangement.

We place a cheque with the agent and chose the highest floor unit.

However, if it is not meant to be yours, it will not be.

One morning I woke up and went to the IRAS website. I realized that because my fiancée is a PR, we are subjected to pay ABSD of 5%, even though I am a Singaporean. This pissed me off big time. I spent 2.5 years in NS and just because I am not married and want to get an unsubsidized private property, I have to pay 5% additional stamp duty? If we factor the usual 3%, we have to cough out almost $57,000 as taxes to the government! This is an excess of $39,000 in cash to the government. We were quite upset as this is no way to treat a SIngapore citizen, who refused to buy subsidise housing meant for more needy Singaporeans but will be treated as a PR instead. It is not about whether we can afford the condo unit, but rather whether we are willing to pay the tax that is a deadweight loss to us and society. It creates no value to anyone except the government.

We decide to retrieve back our cheque and look elsewhere for better valued properties.

We rationalised that since government wants to tax us, we will go the conventional way to enjoy subsidies on housing by leveraging my Singaporean identity and pink IC.

We were not keen at BTO, since the locations are poor and construction takes forever to complete. 2017 for the earliest in non mature estate. I will be a old man by then.

We went to look at the Design Build Sell Scheme at Parkland Residences, which was marketing almost $700,000 for a 2^nd level 5 room flat. We decided that DBSS stands for Don’t Be So Silly (DBSS). It is simply not worth the premium when your competitors are just BTOs and by paying a little more, you will be able to get a similar location but smaller sized Executive Condominium (EC).

We went to look at Heron Bay, which left only west sun facing units and low levels dual key 3 bedroom units. The finishing was decent, but the leftover units did not excite us enough to even stay more than 10 minutes at the showflat.

We went over to 1 Canberra. The showflat was already there for about 1 year. Most of the units are west sun facing. If you choose units that are not facing the west, your balcony view will be blocked partially by the unit that covers your west sun. The layout of the condo development was extremely packed, possibly constrained by the small and trapezium shaped land.

Prices are not cheap, selling for 750 PSF with eight courtyards beside selling for 810 PSF. It does not seem to be of value and capital appreciation will be capped by the full condo beside 1 Canberra. The nearest eatery is koufu a good 10 minutes walk away.  There was some defects in the showroom, which we were appalled, given that even a showroom can have defects, we have little confidence in the actual delivery of the unit. The developer is from China, which has little track record in Singapore.

We decided to focus on looking for EC, given the subsidies by government and cheaper PSF would allow us to purchase a unit comfortable and not rush into marriage till 2-3 years later.

The next post will talk about our purchase of EC.

Finally bought a property! (Part 1)

The next few posts will document my journey to search for a value property and the thinking process, dilemma I had during the hunt.

The first property showroom I went was Riversail near upper Serangoon Cresent. It was a private condominium developed by Allgreen. The property was about 3KM from where I am staying. I like the property for several reasons.

- Near to my current home. I am familiar with surroundings such as Hougang Mall, Buangkok, Compass point, Nex, Kovan heartland mall.

- Next to park connector that allows cycling to punggol and kallang.

- Efficient internal layout, with very little wastage space.

- Separate living and dining area instead of having to split your living room to dining and living into half.

- Decent pricing of $850 PSF. A 2+ study 915 square feet unit will cost on average $778k. Assuming a modest rental of $2,800 a month, gross yield is 4.3%.Even if rental is $2,500 monthly, gross yield is 3.86% P.A.

- Downpayment of 5% cash will cost only $39,000, the rest 15% of $117k can be paid by CPF since I am a first timer. It is extremely affordable. Monthly installments will be about $2,150 @1.5% interest; $2,460 @ 2.5% interest and $2,800 @ 3.5% interest.

- The furnishings are excellent for a mass market condominium. It comes with marble flooring, marble wall (hotel standard) in the master bedroom toilet, build-in fridge, shoe rack (outside your unit), branded kitchen appliances.

- Choice units are available and not released yet. I can place a blank cheque and be almost assured to secure my high floor 2+study pool view unit.

- Free 2 years shutter bus service to Hougang MRT was available upon TOP, which looks attractive to my fiancée who doesn’t drive.

- Nearby Executive Condominiums (EC) like Heron Bay are selling on average $750 PSF. Just by paying about $100 PSF higher, or about 100k more, I will not be subjected to HDB complex binding rules and regulations. Even completed ECs (park green) are selling for $800 PSF when it is already 10 years old.

Cons of the project

- Too many units of 900+

- Many condominiums under construction, Austville was sold at about $700 PSF, boathouse residences at $900 PSF, Heron Bay at $750 PSF, BTOs and DBSS projects can be seen under construction. It will definitely affect the traffic, rental yield, living quality, resale value of Riversail, in time to come.

However, the main purpose of purchasing a property is to ensure I have a roof over my head when my parents pass on and the current HDB is dividend among my 2 siblings. Hence, my consideration is for own stay rather than investment. Even if I were to sell off 1-2 years upon TOP, it will be of good value given that boathouse residences are selling for above $900 PSF, the ECs and HDB projects cannot be sold until 5 years after TOP.

 

Despite benefits outweighing the cons, I did not purchase Riversail and purchased another one 3.5KM away.

 It will be explained in the next post.  

6.9M population? I don't believe...

I do not follow a lot on the ranting of increasing our population to 6.9M. The existing infrastructure have their own constrains to be able to cope with another 1.5M of population. Look at our expressways. If we were to widen the roads, it will cut into temples, homes, pavements. Our main MRT stations are already near to maximum capacity. How much more can they transport? Our cars are already very expensive. Must cars be so expensive that it is only a privilege for the wealthy?  

 

The fundamental argument for population growth is to improve the quality of life for Singaporeans. But what I have experience for the past 5 years of rapidly increasing population is a perpetual downward trend to poorer quality of life.

So many people, almost no space to put them in my BLOG!

 

In a nutshell, we have experienced a 1M growth in population in less than a decade, but I do not see my quality of life improving. Instead, I have to work longer hours as the work market becomes more competitive. I have to handle difficult foreign talents as they demand higher work quality from Singaporeans. Everyday unhappy Singaporeans lament on the increase in population that led to the increase in property prices.

I bought my car at $46,000 when I was earning $46,000 per annum. Today, I earn $100,000 a year, but a similar car cost $140,000. Is my life better?

Back in the same year, an EC at La Casa costs 450k. Today a 5 Room BTO easily cost $450k as well. Is this an improvement in quality of life?

If population growth clearly had not improved my life, why would I believe it will improve in future?  

A Visit To #1 Loft at Geylang

Few days ago I passed by a condo showroom about 400M away from Mountbatten MRT. I was curious about the climate of sales in new launches and decided to pop in. 

As usual, the actual location of the development was not at the showflat but about 1km away at Geylang Lorong 24.



Nice bed that matches with decor

There were only 2 prospective buyers in that afternoon (including me) in the showroom. The agent was very warm, telling me it is a 5 minute walk to Mountbatten MRT and Aljuned MRT stations. He added Geylang Lorong 24 is left with 1-2 brothels which will be “phased out” when the rest of the apartments (at least another 3 boutique residential developments) are completed.

Decent bathroom

The showflat was tastefully done up, the selling points of this development are as follows:

The loft does allow privacy between 2 levels

- Cheap financing. The list price of a 1 bedroom unit is about 780k, or about $1392 PSF (560 sq ft build up area). Buyers need to pay 5% cash, 5% CPF. The developer will pay for you 78k upon completion and you can take up a 80% loan from UOB or Singapura Finance. This means I only need to pay $39k cash and $39k CPF, developer will pay remaining 78k cash for me!!! Effectively, I am obtaining a 90% loan! Innovative!

Staircase up the Master Bedroom

- Ability to convert 1 bedroom to 2 separate bedrooms. The showroom displayed a typical 1 bedroom layout. The master bedroom is on the 2^nd floor with balcony, the living room comes with additional bathroom. The living room can be converted to a bedroom after adding a door, with a common kitchen with washer cum dryer. You can rent out to 2 singles!

- High investment yield. Assuming you rent out each “room” to 2 singles with near service apartment facilities, you probably can rent to them at $1600-$1700 each. After deducting utilities, maintenance, housekeeping, broadband, taxes and agent fees, you could possibly receive about $2,600 monthly.

Factor interest costs of 1.5% of loan ($624k) = $9360 per year

Return on initial investment= (2.6k x 12 months)-$9360 / ($72k + $18k Stamp duty + $3k Legal fees) = 23.5% per annum

Given the attractive investment yield, I decided to pay a site visit to Geylang Lorong 24. Some observations:

- There were at least 3 operational brothels. One of them was in between enbloc terrace houses. Hence, there is a likelihood your condo has a brothel beside it.

-  There were MANY PRCs men sitting on the pavement.

- There were at least 2 budget hotels in a side road at the end.

- The road along Geylang 24 is narrow, not suitable for drivers as you are likely to be stuck outside your house, inside your car when all the other developments are completed.

- #1 loft is definitely not suitable for families with children, but rather for individuals/ couples and prostitutes operating their own online vice.

- Aljuned MRT is a good 10 minute walk away, Mountbatten MRT is much further as you have to cross an overhead bridge, cut through pine close HDB, about 15 minutes walk away. This is accurate for my leisure walking speed.

I am impressed by the low capital outlay and financial innovation of the developer. The agent claimed that this project is by SC Global, but I couldn’t find any links between SC Global and #1 Loft. In fact, I have never heard of this developer.

The high yield comes with high risks. Interest rates may go up. Once it hits 3.5% and if you can only rent out at $2,000 a month, you will be running a loss after all expenses. You need to make the assumptions that it is always rentable and interest rates remain low to commit to this investment.

Majority of the 80 units are 1 bedders. 3 bedders come with 4 bathrooms so you can even convert the living room into another bedroom. What kind of tenants are the developers asking the buyers to target?

Notice you can build a door to split this living room to become a bedroom

Given current market, it is fairly difficult to achieve 7% consistent returns on investments. A 23.5% P.A investment seems extremely attractive, especially for a single like me who do not mind staying anywhere that is convenient. However, the PSF price seems so high that there is little room for capital appreciation. Unless the project is selling below $900 PSF, there is little margin of safety given the inertia of existing brothel houses and budget hotels.

Would you buy this project?

SBC wouldn’t.



Beware of BID and ASK Spread for Cars!

Lately out of curiosity, I decided to check out the value of my 7 year old Japanese car. A search at sgcarmart revealed that the same make/model/year cars would have asking prices of between $20,000 to $25,000 depending on mileage and month of registration.

I bought this car in 2006 for $46,000  (no loan) and the car has a residual value in 2016 of $6,000. This means the average depreciation over 10 years is $4,000 yearly, assuming a straight line depreciation accounting.

However, if I can sell my car at $22,000 now (lower end of asking prices), my average depreciation will be ($46,000-$22,000)/7 years =$3429.

This means that I should sell my car now, as if I have held to “maturity”, my depreciation will be at a much higher rate of $4,000 per year!

According to straight line depreciation of $4,000 per year, my car should be worth only $46,000 – ($4,000 depreciation x 7 years) = $18,000.

This calculation is similar to bonds valuation. We should be selling above PAR value since bonds will eventually move towards PAR value when it nears to maturity. However, the switch should be to another similar or higher yielding asset class to mitigate the opportunity costs.

Similarly, what should I switch to, if I were to sell my car now? Logically, I should use the bond valuation concept of comparing it with a 7 year old car. A search on the “car runs” showed similar Japanese/Korean makes, which doesn’t appeal to me, given that I will only be incurring transactional costs without having real benefit.

A 7 year old BMW 523i (2500CC) caught my eye. It has a residual value of $25,000, relatively low mileage of 90,000KM and costs $58,000. If I were to trade in my car for $22,000, I will only need to cough out $36,000 to drive for 3 years and receive $25,000 back in 2016. I will be $11,000 poorer (or $3666 additional costs yearly) in exchange for the experience to be a BMW 523i owner.  

Wow, so cheap after trade in!

 

The allure of it sounds too good to be true. I decided to call the 2^nd hand firm to find out more.

The car dealer is willing to offer what was stated on the sgcarmart website. However, they are only willing to take in $14,000 for my car.

This does not make sense to me. Even if there is a bid and offer spread, it should not be up to 44% {(25k-14k)/25k}

Imagine if I have to sell DBS at $9 (when it is trading for $15) to buy UOB at $19 which is trading at $19 on the same exchange (sgcarmart).

The dealer explained to me the last transacted price for similar cars of my ride was 20k. No one would offer higher than that and they need to earn a mark up (aka brokerage fee).

The high costs totally puts me off. My calculation will tangent off significantly if I were really to trade in my ride for 14k. My depreciation would be 4570 yearly (a 15% increase) and the cost of owning a BMW for the next 3 years will increase to 19k instead of the original expected 11k. 72% increase!!

It is not the 8k that matters (to me), but it goes against my principle of value, market efficiency and fairness. Why would I want to allow middle man to rip me off just because I have a 2^nd hand car to trade in? Why are car dealers “exempted” from transactional costs (whereby they can sell near asking prices) and I must sell my own car 40% below THEIR asking prices?!!  

Technically speaking, I can sell my car on my own first (at 20k-22k) and buy whichever car I fancy thereafter to avoid the hefty “bid ask” spread. This is similar to buying unit trust from fundsupermart at 0% and later transferring out to another service provider (free of charge) to avoid the quarterly platform fees at one and sales charge at another.

But this is too much of a hassle and I rather wait for my ride to be scrapped before shopping for a new/used car 3 years later.

 Notice I analyse general purchase of daily consumer products using frameworks for financial asset classes. This has been my thinking logic for many things and has helped me save/avoid costly decisions.  

 

HDB prices will come down because

1) Genuine HDB upgraders to private homes will have higher incentive to sell their HDB now. They can save 7%-10% (for PRs) on stamp duties and possibly obtain the full 80% loan of the valuation of private properties. (Though most HDB owners who buy 2^nd home for investments are likely to have fully paid off their HDB mortgage.)

2) PRs can no longer sublet their HDB homes and they are likely to sell off their HDB in time to come as it is no longer a viable investment vehicle for them. This creates a larger supply of resale HDB in the market, creating downward price pressure.

3) The current market has fears of increasing population with limited housing. The government has time and again reassured the market with its ample supply of housing pipeline. Most HDBs transacted at high prices are relatively old, some above 20 years old. Technically, aging homes should depreciate accordingly as their lease shortens, however, due to mismatched supply and demand by policies, it has appreciated, going against economics principles. This phenomenon will revert to classical economics when supply and demand reaches the equilibrium. Again, this point to lower HDB prices in time to come.

4) MAS has set a Mortgage Servicing Ratio (MSR) limit of 30% for loans granted by MAS-regulated financial institutions for the purchase of HDB flats. This means that financing has been tightened on HDB resale purchasers and they may not even qualify for the loan after paying hefty COVs. For instance, a couple earning 8,000 a month on 30 years loan can qualify a maximum of $534,000 loan and HDB valuation of $667,000. If they are above 35 years old, their loan tenure will be shortened, lowering their loan quantum. Hence COV are likely to come down due to stricter financing rules for HDB. Interest rates have to be assumed at 3.5% when calculating MSR. This policy will hit large, pricey HDB homes.  

5) Private property owners who have bought new homes in 2011 onwards should not be expecting much capital appreciation on their properties, since many developers are offering lower prices now. Property as an investment vehicle will lose it shine as rental starts to fall gradually and vacancies start to increase. A Singaporean property owner who buys another 1M property will have to cough out almost 100k in stamp duties. Assuming a 3% rental yield, the breakeven period is at least 3.5 years! A PR will have to cough out almost 130k in stamp duties, with breakeven period of 4.5 years! This does not factor into the rental decline and vacancies risk. Property tax, agent fees, income tax on rental income will continue to eat into the returns of investors yield. Hence, attractiveness of private property as an alternative investment will decline significantly. The correlation of private (non landed) properties to HDB is 0.9. This means that decline in private property prices will have a 90% impact on HDB.

Conclusion

With massive supply of properties in the HDB and private market coming into the market from this year to 2015, aspiring home investors should wait for cooling measures to be lifted before entering the market to invest in properties.

Home seekers should wait at least 6 months for reality to sink into their heads to lower their asking prices before entering into the resale property market.

Overpriced new launches will see developers dangling more discounts, stamp duty rebates, rental guarantee, furniture vouchers, tour packages and other innovative packages to move sales. In this situation, the late bird will get the best deals.