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CCR, RCR or OCR for rental income? AK talks to himself.

Saturday, July 19, 2014

When we buy properties in Singapore, there is often this idea that if we buy one in CCR (Core Central Region), we should do OK. It is like amateur watch collectors gravitating towards Rolex watches because the brand is deemed safe. To a certain degree it is true as many foreign investors naturally gravitate towards properties in CCR when they invest in properties in Singapore.

Those who are more familiar with Singapore will be braver in venturing out of CCR and into RCR (Rest of Central Region) or even OCR (Outside Central Region). This is probably a prudent choice if they are investing for rental income as well since it is not uncommon to hear of properties in CCR with rental yields of 2% or lower. Sheesh. Why bother?

According to the Singapore Real Estate Exchange Property Index, rental for private non-landed properties in CCR peaked in the months of July and August 2013, post GFC (Global Financial Crisis). It was some 30.8% higher compared to January 2009.  Since August 2013, rental has declined by some 6% by June 2014.

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For properties in RCR, rental peaked in the month of February 2013 and was 38.6% higher compared to January 2009. Since then, rental has come down some 6.7% by June 2014.

Click to enlarge

For properties in OCR, rental peaked in the month of January 2013 and was 33.8% higher compared to January 2009. Since then, rental has come down some 7.5% by June 2014.

Click to enlarge

From these numbers alone, it would seem that there is more resilient rental demand in the CCR and buying a property in CCR provides greater resilience in rental income. It is also probably because there is more limited new supply of properties in the CCR compared to RCR and OCR.

In terms of percentage growth from January 2009 to June 2014, rentals in CCR, RCR and OCR were higher by 23.2%, 29.3% and 23.7%, respectively. Interestingly, these numbers show that, in general, properties in RCR are clearly the winners when it comes to growth in rental income for the real estate investor, not properties in the CCR.

Also, if we should look farther back to the peaks achieved in January 2008 for all three regions, we would see a startling outperformance for properties in RCR and OCR compared to those in the CCR.

Rentals in RCR and OCR surpassed their peaks achieved in January 2008 by a wide margin while rental in CCR barely recovered to the same level. So, in the last few years, people who bought properties in RCR and OCR before the GFC for rental income would have done better and are still doing better than those who bought properties in the CCR during that time.

Buy a new condo in Queenstown?

Of course, we are only looking at rental indices here. We have not looked at purchase prices. For sure, if we managed to buy an undervalued property anywhere in Singapore, we would do better than the average property investor because we would have a margin of safety.

Where do we find undervalued properties in Singapore? You tell me. I am sure there are some around but they are just harder to find these days. Sounds like a lot of work and we might not even find anything for all our efforts.

So, I prefer to ask another question. When do we find undervalued properties in Singapore? If I were looking to invest in a property for rental income in Singapore now, I would wait. (Hint: Read related post #5.)

Then, CCR, RCR or OCR? You decide.

Source: URA

Related posts:
1. Don't think and grow rich.
2. Real estate: Affordability and value for money.
3. Apartments with rental yields of 4.95% to 7%.
4. Where to buy a shoebox apartment for investment?
5. Smaller apartments' prices more resilient.
"we expect the private vacancy rate to rise ... to 9.9 percent in 2016," ... noting that historically when vacancy rates hit 8 percent, rents and prices start declining.
(Source: CNBC)


EY said...

Hi AK,

CCR, RCR, OCR are just geographical/artificial constructs depending on where the urban planners decide the centre to be. :)

I think as an investor, being too preoccupied with the zoning may land us in value trap. For instance comparing 2 properties in D9. Should somebody who bought Mackenzie 88 at $1700psf feel smug about the deal and mock at 'the joker' who paid $2800psf for a unit at The Scotts Tower? M88 is a stone's throw from Little India MRT whereas TST is near Newton MRT and very near to Goodwood Park Hotel. Some may say, but both in D9 what? No meh?

I agree with you that margin of safety is a key consideration in any investment. The person who bought TST at $2800psf would likely have a greater margin of safety than the one who bought M88 at $1700. But to the layman, M88 would probably be a steal compared to the other D9 properties. :)

Ok, that's the buying part. For rental consideration, I would suggest an analysis on the options of substitute within the same zone - be it CCR, RCR, or OCR, or across the zones. When times gets tough, which locations would like be the most badly hit, i.e. risk of vacancy is highest? We want to make sure that the property which we own would be the preferred choice when competition stiffens. If there is little competitive/comparative advantage or USP in our property, then the only way to fight competition is through adjusting price which everyone else will be doing. To avoid getting entwined in a price war and get badly battered, we must buy the better locations within the CCR, RCR or OCR. But of course, buy with sufficient margin of safety.

As you like to say, if we take of the downside, the upside will take care of itself. :D

AK71 said...

Hi Endrene,

Thanks for weighing in on this. Definitely, within CCR, RCR and OCR, we would have to do more legwork. The idea is to get the best possible deal no matter which region we decide to invest in.

If we overpay for a property in RCR, it is likely that we could do worse than someone who got a really good deal for a property in CCR, after all.

One of the things I do is to compare similar properties within a radius of some 500 meters from the one under consideration to see if the property is undervalued or not. So, it is really going down to the neighbourhood level.

For sure, it is not about affordability but about value for money. :)

AK71 said...

"Private apartments in the suburbs posted the greatest decline in November, with rent falling by 1.2 per cent compared to October. Those in the city and city fringes saw rental prices fall by 0.3 per cent and 0.7 per cent respectively.

"The number of units rented also fell by 11 per cent from October. Some 2,892 apartments were rented in November, down from 3,251 a month earlier."


AK71 said...

“The trigger for the distressed sales of suburban small-formats may come from rising vacancy rates. Smaller units are typically bought for investments, but investors will find themselves hitting a soft market caused by the cutback in foreign labour and ballooning property supply,” noted CIMB.


Don't buy shoebox apartments in OCR and definitely not at $1,500 psf or higher like some I know. Those who did not overpay will still do OK.

AK71 said...

The relocation of Paya Lebar Airbase will only take place in at least another 15 years’ time, at about 2030 and beyond.

This is because, current airbases — Changi Airbase East and Tengah Airbase — will have to be first expanded to replace the Paya Lebar Airbase, Defence Minister Ng Eng Hen said in a written parliamentary reply to MP Christopher de Souza yesterday (Jan 20).

Mr de Souza had asked for an update on the Airbase’s relocation plans, which were first announced during the National Day Rally 2013 by Prime Minister Lee Hsien Loong.

The focus now is expanding the Changi Airbase East and building a new runway at Changi, Dr Ng said. Construction of facilities at Changi will commence after the completion of detailed site surveys and land preparation works.

As for the Tengah Airbase, Dr Ng said efforts are focused on developing a design for the airbase facility.


AK71 said...

Non-landed rents fell 3.7% in CCR, 2.5% in OCR and 0.2% in RCR from a year back.

Rents are set to fall by up to 8% in 2015 with the drop most pronounced in CCR as firms keep cutting back on housing allowances.

We could see 10% vacancy rate in 2015.

If another global crisis hits and unemployment goes up, rents will start to crash and there will be foreclosures.

MONEY section,
The Straits Times, 24 Jan 15.

AK71 said...

Good news for renters. Bad news for landlords. Those landlords who kept chanting "location, location, location" but overlooked the importance of not overpaying will be in hot soup. -.-"

AK71 said...

Decentralisation is a way to achieve a more sustainable growth by distributing commercial activities to various parts of the island, such as Tampines, Jurong and Paya Lebar – as well as an upcoming one stretching from Woodlands to Punggol, called the North Coast Innovation Corridor.


AK71 said...

The latest quarterly data from the Urban Redevelopment Authority (URA), which showed a sixth straight quarter of decline for both private home price and rental indices, reinforced views that the downcycle will persist.

GuocoLand dangled discounts of up to 19 per cent from the original price list at Sims Urban Oasis during Chinese New Year, and CapitaLand offered a 10 per cent discount at Marine Blue from listed prices during its preview.

"As both home sellers and developers direct their strategies towards an increasingly price-sensitive group of homebuyers, private home prices are anticipated to soften by about 5-8 per cent in 2015," she said.

Prices of non-landed properties fell 0.4 per cent in the Core Central Region (CCR), 1.7 per cent in the Rest of Central Region (RCR) and 1.1 per cent in the Outside Central Region (OCR). Prices of landed properties also slipped 0.9 per cent.

Chua Yang Liang, JLL head of research for Singapore and South-east Asia, noted that the slower pace of price decline in CCR over the past three quarters suggests that prices of higher-end condos are now closer to the bottom.

The steeper price fall in the OCR, however, suggests "a lack of support from HDB upgraders as resale prices and volume in the HDB market continued to soften by one per cent and 10.8 per cent quarter on quarter respectively".

Overall rents of private homes also fell 1.7 per cent in the first quarter, with the decline seen across all segments. Rents of non-landed homes in CCR fell the most by 1.9 per cent, followed by 1.8 per cent in OCR, and 1.6 per cent in RCR. Rents of landed properties fell 1.2 per cent.

Vacancy rate for available non-landed units came down to 8.3 per cent from a peak of 9.1 per cent in Q4 2014.

SLP International executive director Nicholas Mak observed that rents in the RCR and OCR are falling at faster clips than previous quarters, dragged by declining rental budgets of some tenants and the growing supply of private and HDB housing units for lease.

The impending supply of non-landed homes in the RCR and OCR is expected to weigh on rents in the next two years, and in turn keep prices of units in these localities soft, Mr Mak said. He is expecting a 4-7 per cent fall in overall rents in 2015 and a 3.5-6 per cent fall in prices for non-landed units islandwide.


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