Investment philosophy and property market.

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.