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The key things to consider in Property Investments are: -

? Your Budget and cash flow

? rental income

? Capital gains

? Financing of your ? Investment property

Your Budget and cash flow for Singapore mortgage loan

Ideally, you should not purchase an investment that is way beyond what you

can Safely Afford.

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

falling market.

Rental yield and Income

Rental yield is important in a property investment.However rental yield

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 a property investment 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

Singapore property investor, you must take care of the risks of buying. And structure the right financing.

RENTAL 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 drives the

vacancy rate downwards to around 3 to 4%.

Rental prices start to shoot upwards 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.

Given that property developers are adding to the stock all the time, in 2008

forecast supply growth is around 4%.

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 soft and without direction.

What happens when RENTAL yields go up?

Depending on the typical rental yield in any location, it has a leverage effect on property prices

Temporary spike in yield can subsequently lead to an increase in property prices, it has a leverage relationship

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 yield is constant, 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

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.

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 gives rise to many potential conflicts. You are not in control of your own property if the majority votes to do something against your wishes.

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 lawsuits may ensue.

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 be build as tall as possible?

Typically NO, but of course circumstances vary. Taller buildings need more concrete and incurs higher cost of construction.

These costs are passed on to you in the form of “NICER

SCENERY” etc. But it depends on what price.

Taller buildings have many problems when it age. Leaking is one of those stickly issues. The building depreciate once the flavour of the year passes. While land generally appreciates (in a rising population with limited land supply), the rise in value of land may not offset against the loss in building value.

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.

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