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Investment philosophy and property market.

Friday, August 4, 2017

After my blog about nibbling at Tuan Sing Holdings, a reader commented that I seem to be building up a position in property counters and asked if I am waiting for a rebound in property prices. 

At the same time, a couple of readers shared that DBS is expecting residential property prices in Singapore to recover by up to 10% in the next two years.




Here is what I have to say:

I know some analysts are positive that residential property prices have bottomed and are going to rise next year or the year after. 

Is this going to happen? Your guess is as good as mine (or the analysts'). The best anyone could do in such an instance is to make an educated guess. 

When it comes to buying a property, if I am looking at a possible capital gain, I am probably speculating unless I am pretty sure I am buying it undervalued which gives me a margin of safety and probably an arbitrage opportunity. 

The decision should be guided by valuation which should logically be guided by rental yield.

To have an idea of my philosophy when it comes to property investment, recall my relatively large investment in Saizen REIT. It was trading at a big discount to valuation although its assets were generating steady and meaningful rental income which, together, offered an attractive yield of about 10% based on my entry price. 

Even if the sale of assets a few years later to another investor at a slight premium to valuation did not happen, it would not have mattered to me. Why? Because it was a good investment, not a speculation.





Bombarded by invitations to "invest" in properties, we have to be at least discerning enough to know if these are invitations to "invest" in properties or are they really invitations to "speculate" in properties. 

There is a difference and one that vested interests will not take pains to highlight even if they are aware of it.

I remember a family friend bought a property here during the Gulf War. Property prices here plunged back then. He went and bought a landed property at a bombed out price. Pardon the pun. 

The observation was that although property prices plunged, rental income was relatively resilient. That gave rental yield an uplift. For sure, he made a good investment.

Some might remember that I blogged about why I stay in a condo and some might remember that I bought my first condo during SARS. 

Why during SARS? 




Mr. Market was suffering from a severe bout of pessimism and I got a good deal. 

Based on the price I paid, potential rental yield was about 5%. This increased to almost 9% by the time I sold. There was a robust growth in rental demand in those years. 

Based on my selling price, however, the rental yield would have been just shy of 4%. Prices rose and they rose a bigger percentage than the growth in rental income.

Today, that same property's rental yield is barely 3% based on my selling price but based on the recent selling price of a unit in the same stack, the rental yield is not even 2.7% now. 

Market price of the property is about 10% higher but rental income is more than 20% lower than when I sold the property. To any investor for income, this combination should be an alarm bell.

To continue along the same line, I bought my current home during a lull in market activity after all the rounds of cooling measures were implemented a few years ago. Back then, the potential rental yield was 6% and I verified this. 

Today, based on my purchase price, the yield has come down to 4.6%. Based on the current market price which is quite a bit higher than my purchase price, it would be less than 4%. Again, market price has gone up but rental income has reduced.

So, lowering rental income does not mean that property prices in Singapore could not increase in future. It just means that the property market is simply one that doesn't make sense to the rational investor in me now.

However, Mr. Market can stay irrational for a long time. Look at Hong Kong for an example of sky rocketing property prices and miserable rental yields. Invest in Hong Kong properties? Not me.






My nibbles in property counters do not represent any belief that property prices will rebound in future.

Instead, they are pretty consistent with my philosophy to buy at bargain prices which make sense to me. 


Being able to own a bit of Tanjong Pagar Centre, OUE Downtown and Robinson Tower at a big discount to valuation is pretty attractive to me.

I emphasize that I will not tell anyone if they should or should not buy anything.

I am only sharing my philosophy and experience in my blog. I am not here to make a decision for you. 

What you do is up to you.

Related posts:

1. Invested in Tuan Sing Holdings.
2. Ask 2 questions before buying.

15 comments:

K said...

Hi AK,

Are the NAV of the counter based on valuation done each year?

If, so I assume the valuers are still giving the properties a high price even though the yield (rental) is very low. Based on your remark in the article, this may continue for a long time.

The question is then what are the value of properties based on if it is not on "rental"?

AK71 said...

Hi K,

Very often, the last done price sets a benchmark. So, valuations can be a rubbish in, rubbish out process. Take it with a pinch of salt. If you have been following the drama at Sabana REIT, you will know what I am talking about. ;)

Laurence said...

The moment AK blogs about OUE, Guocoland and Tuan Sing, prices of all three stocks went up despite STI in the red as if by royal command. Lol.

AK71 said...

Hi Laurence,

I am sure it is all a coincidence. ;)

Cory said...

Just for sharing. Taiwan rental yield is only 1.5x %. I think whether it can go lower or higher could depends on national median income and gov policies. Surely recession will change everything.

http://www.globalpropertyguide.com/Asia/Taiwan/rent-yields

AK71 said...

Hi Cory,

It is pretty sad.

My Taiwanese friends tell me there is no hope for the young people in Taiwan. In Singapore, at least, young people can hope to buy their own homes.

Kevin said...

Hi AK,

URA's latest vacancy rates for residential properties is still at 8%. I don't see how rent rates can move up much unless there is massive population growth over the next 3 years which is unlikely due to looming General Elections due by year 2020. ;)

AK71 said...

Hi Kevin,

It is obvious that the political agenda is a strong one. The high vacancy rate is quite likely to persist for many years to come. I won't be surprised if it hits 10% or higher.

Kevin said...

Hi AK,

Did you made your first pot of gold by buying at market bottom and selling at market high(my guess is year 2007) for your condo bought during SARS period in year 2003?

Looking at the chart, 15 quarters of decline for private residential market back then during SARS period is even more bearish as compared to the combination of decline of both AFC and dot-com bubble burst of events.

http://i.imgur.com/T14o61v.png

AK71 said...

Hi Kevin,

I didn't sell until 2011. So, making money from properties is a relatively recent thing for me. I replied to another reader on this before. I am having some difficulty finding that reply. It is hidden in the comments section somewhere. -.-"

AK71 said...

Hi Kevin,

OK, I give up.

I cannot find the reply I made to a reader, Whowillbe, when he commented (maybe in 2014 or 2015) that I was able to generate so much passive income from stocks only because I had capital gains from selling my properties to invest with.

However, you will find a reference to when I made money from selling my properties in the following blog:

How did AK create a 6 digits passive income?

Point number 5 has a hyperlink to a blog published in 2011. :)

redponza said...

Hi AK,
I am amused that the rental income in Singapore residential property did indeed go down after several years!

How can it be the case when the economy is doing ok?
Is it due to oversupply in Singapore?

In HK, and the rental yield situation is even worse than Singapore, although the rental is still in an upward trajectory.

AK71 said...

Hi redponza,

Yes, supply has been increasing while demand has been weakening. The economy is barely growing. Landlords are having a tougher time now.

AK71 said...

Reader said...
Avid Reader of Your Blog and I have two situations that I need your help.
Gotten Some Inheritance and Planning what to do with it. 500k Cash and was toying with the idea of buying a second property, paying ABSD as I see that the market seems to be recovering. Aged 32 with two kids.

AK said...
Oh dear. Don't ask me what to do with the money.
I don't know you well enough to know what is best for you.
I do know that buying a property thinking the price will go up in future is speculation which is not to say that it is a bad thing. It could turn out well. Who knows?

AK71 said...

http://singaporeanstocksinvestor.blogspot.sg/2015/04/buy-that-second-residential-property.html

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