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They invested in multiple properties and are now retrenched. (Two questions we should ask when buying investment properties.)

Saturday, September 13, 2014


People do lose their jobs and for those who are financially leveraged to the max, it could be hell.

A reader's comment:

"...recently I attended a workshop at LLI. I spoke to an uncle in his 50s who is unemployed after he was retrenched... He has friends in the same industry who bought multiple properties and are currently retrenched as well... Other friends working in a prominent engineering company received letters asking them to opt for voluntary retirement after 59..." 

Full comment: here.

If those multiple properties are rented out and if the rentals are able to cover the mortgages, good. 

With the rental market being what it is (i.e. high vacancy rate and declining rents) or if the properties were purchased in the last 3 or 4 years (i.e. relatively high purchase prices and low rental yield), his friends (without an adequate emergency fund) could be in trouble.

Don't let greed get to us. 

Always stay grounded. 

Over leveraging (explained at the end of this blog post) could lead to trouble.

Financial prudence will not make us rich overnight but it will ensure we avoid painful falls some of which we might not recover from.

(Up to November this year, more than 800 transactions involving non-landed private properties were loss-making, double the figure in 2015. Analysts told The New Paper that "unprofitable" deals are common in a cyclical downturn where market sentiment and employment prospects are poor. Expectations of a US Fed rate hike by the end of the year, which would increase interest rates here, are also driving these loss-making sales. Source: The New Paper, 13 Dec 16)

We always hope to make money from our investments and this could happen through capital gains, regular income or both. 

Knowing our motivations for being invested will go a long way in determining what are suitable investments for us.

It is well known that the luxury segment of the residential property market in Singapore has never been very good for income investors. 

In recent times, it has become worse. 

A gross rental yield of 2% is considered to be quite good for some properties in this segment, it seems, if tenants could be found at all as vacancy rate has been climbing.

Well, investors who bought into luxury residential properties in Singapore were probably going for potential capital gains and not rental income, anyway. 

This means that they hope to sell their properties at a higher price to another buyer later on.

The early birds did quite well but, increasingly, more buyers are resorting to leasing out their properties due to a lack of buying interest. 

This has depressed rentals further in this segment.

When monthly rental income declines to a point where it is unable to cover the mortgage payments, we could see fire sales and there is plenty of anecdotal evidence that this is already happening.

"According to Colliers International’s research, the average monthly gross rents of luxury/super-luxury apartments slid by yet another 1.4% QoQ to $5.20 per sq ft per month as of 2Q 2014, following the 1.9% QoQ fall in 1Q 2014." Source: Colliers International

I have been receiving emails offering discounts on properties in Singapore and some of them are of the high end kind. 

A small one bedroom (shoebox) apartment near Orchard Road for $1.1 million, down from $1.3 million, anyone?

I think that it is a sign of the times and we won't be wrong to expect more discounting both by developers and more marginal buyers of luxury residential properties here.

Buying a residential property in the hope that we could find buyers who would pay a much higher price for it in a short time is no longer a game we can play in Singapore unless the entry price were to be so attractive that even after accounting for the seller stamp duty (payable if the property is sold within 4 years of purchase), we could still make a decent gain.

However, if a developer had to resort to a 20% discount in order to move unsold stock, what makes us think that we would be able to sell at the pre-discounted price to anyone else? What? Not now? Maybe, 4 years later?

Well, with many more projects to be completed in the next few years, if anything, the secondary market will become even more challenging for sellers. 

Indeed, prices are more likely to trend downwards in the next few years than not.

When we take a speculative position, it is important that we understand that it is a speculative position. 

It means that we should be able to exit rapidly, cutting our losses, if required.

With conditions the way they are in Singapore now for the residential property market, this would be extremely difficult and also costly to do. 

For people without deep pockets, it could even be disastrous.

What do I mean by deep pockets?

Sometimes, we look at some companies' numbers and we might wonder why they have debts although they have more than enough cash to repay their debts.

It is because we should always have ample liquidity close at hand to take advantage of opportunities.

Having ample liquidity also means that if things go wrong like they sometimes do, these companies could pay down their debts rapidly.

Take a look at this company's numbers, for example,

So, for the more adventurous ones in our midst, please think again and again before handing over that cheque when temptations find their way into our mailbox.

"Is it a good deal?" is only the first question we must ask.

"Do we have deep pockets?" is an important second question.

"...overleveraging is a situation when people are borrowing money, hoping to make money but do not have enough capital assets to cover any likely future losses." (See related post #5)

Related posts:
1. CCR, RCR or OCR for rental income?
2. How to be rich when the world collapses?
3. Smaller apartments' prices more resilient.
4. Don't think and grow rich!
5. Leverage up and buy investment properties now?


Singapore Man of Leisure said...


My, my. 2 such posts in a row?

If I didn't know better, somebody is ringing his little bell of warning:

Sky looks like raining!

Go home and bring in the laundry!


AK71 said...


Oh, my. I have no idea if any warning bell is being rung. If anything, quite a few people think that I have bats in the belfry. ;p

Having said this, I will say that there are always people who are late to the party.

If we had dinner already, then, arriving at a party late to find the food and drink all gone, it is not so bad. However, if we arrived at the party late and hungry, it is not just about missing out on some fun anymore. -.-"

EY said...

Hi AK,

Your analogy to SMOL is very apt!

There is always profit to be made. We just have to ask the million dollar question - "Who is making it?"

Don't make the mistake of thanking the guy who sold us. And we paid to be sold? That's definitely a great deal! :P

AK71 said...

Hi Endrene,

I like to think that I will still be able to manage a respectable piece of poetry or prose if there should ever be a need. ;p

AK71 said...

Of all the private homes being sold through public auctions, about 70 per cent were put on sale by their owners, according to Colliers International which holds one such auction every month.

The remaining are put on auction by banks. Seventy-four per cent of all auctioned properties this year were condominiums while the rest were landed properties.

Colliers said more homes were being auctioned off due to rising interest rates and defaults in mortgage payments.

"This is because of the tighter financing and regulatory environment, which makes it difficult for borrowers on default to dispose their property on their own in the open market. Consequently if they are in default, the bank will repossess the property for auction sale," said Grace Ng, Deputy Managing Director of Colliers International.

According to numbers from the Credit Bureau (Singapore), 25 homeowners were unable to pay their mortgages in the first nine months of this year. This was compared to 10 in the same period time last year.

The number of those who delayed their payments for more than 30 days also rose by about 12 per cent, to almost 9,000.


AK71 said...

From my FB wall:

Daniel Tay:

"AK, what if a purchase of private property, term loan taken using bank loan such that initial deposit was already returned, and rental income covers itself, wouldn't it be a considerable safe upside?"

Assi AK:

"Limiting our debt load is a good idea esp if we are expecting interest rates to rise in future.
However, what is a "considerable safe upside"?
A monthly rental income that is sufficient to cover the monthly mortgage payment now might not be sufficient in future if we expect:
1. Supply to increasingly exceed demand leading to weakening rental.
2. Interest rates to increase which lead to higher monthly mortgage payments.
So, unless we have deep pockets, be afraid and I blogged about this before too.
Real estate investment is not suitable for marginal investors."

Betta man said...

Today I had a conversation with a colleague. She has a relative who is very unhappy at work due to unfair treatment and feels like quitting. However, this relative's family intends to buy a condo while retaining their HDB. The wife of this relative told him that if they go ahead and buy the condo, he MUST not quit.

If he buys a condo, he is stuck between a rock and a hard place, and that is not good for mental well-being. His wife has a history of depression.

Why go through all these mental anguish to invest in properties ? Like what AK says, peace of mind is priceless.

AK71 said...

Hi betta man,

Often, it is peer pressure.

Keeping up appearances is more than just financially destructive.

Do you believe me when I say that when I tell people I downsized from a 2 bedroom apartment to a 1 bedroom apartment, most of the time I would get a negative response?

Recently, when I told my new banker that I bought a small car, he said the same thing as my dad that he would not buy a small car unless he could not afford a bigger one.

It is peer pressure but it is also how we deal with it.

Allan K said...

Hi Ak,

I think is is timely that you sounded the warning bells now. Through the passage of time, what was used to be a profitable investment is no longer true now.

I stumbled into property investment by chance back in the 80's when my ex-girl friend (now my wife) were hunting for a house. We applied for HDB but dropped out during the flat selection when we found out to our disappointment that we were allotted a 2nd floor flat in Pasir Ris. Out of frustration, we opted for a private property. We went for many new condo launches but was unable to secure a unit as responses were very good. We finally bought a condo unit after paying $5,000 for the queue to agents who are in cahoot with the developer. 2 years later, the price almost doubled when the condo TOP and we sold off for a tidy profit as we didn't like the design of the condo.

The rest was history. I have been collecting rental for another condo I bought later. But over the years, I find it no longer attractive to stay on as a landlord. During the early days, when there were abundant foreigners with good remuneration package, it was easy to get tenants and the rental were good. But it is a different story now, rentals have fallen due to oversupply situation and immigration curb. My previous tenant, left my house in a sham and I had to spend a princely sum to renovate my house before looking for a new tenant. 2 years later, it was back to square one again - the tenant terminated the lease and I have to start all over again. That was when I throw in my towel - I am very tired of going thru the processes again and I sold my condo away. I was fortunate that I was able to dispose my house for reasonable good price.

Falling yield was not the only reason for the sale. I noted that my shares and bonds, which I have invested in are giving me a yield of 7%. I was asking myself- why settle for 2% yield from rental when I can get 7% yield from share investment by doing much less work?

I am keeping my option open now. I am not ruling out property investment and will invest only when it is at the right price (AK - I remember reading some articles you wrote which mentioned this). Meanwhile, I planning to allocate more my funds in share. But I am worried that I may be going in at the wrong time given that the stock market has gone up quite a lot lately. AK - do you have any advice on this?

AK71 said...

Hi Allan,

I guess you might be referring to my blog on the Rule of 15:
Rule of 15.
Or maybe:
Disastrous investments in property market.

Advice? Don't have lah. I am just talking to myself, you know. ;)

AK71 said...

Oh, I think it is this blog:
Affordability and Value for Money.

AK71 said...

Although investing in properties for rental income can be a good idea, it is not a good idea to be over leveraged.

AK71 said...

Ben Zheng:
Hi Ak, what do you think about the recent price hikes for property( esp new launches)? Does investing in property even make sense now in our current economic situation?

Buying a condo in Singapore as an investment for income really isn't very rewarding anymore. It hasn't been very rewarding for many years but even less rewarding now with interest rates rising.

Ben Zheng:
Agreed. Been a silent 'follower' of your blog for years! Haha. I still remember your post on record high prices at J gate way before the TDSR kicked in. Now even new launch price like verandah by Oxley is up to $1800 plus psf. Do you think there will be a short term increase in property prices followed by a protracted downturn? As you mentioned, interest rates are rising but we are in unprecedented times unlike the GFC and there could be a slow downturn in the global economy?

There is no accounting for market sentiment. Things could get crazy. Who knows? As investors, we should have our feet firmly on the ground. Speculators need to have deep pockets because unlike equities, it is not so easy to be nimble in real estate.

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