Buying an apartment: Considerations for first timers (UPDATED).

A reader recently asked me if I would blog about buying an apartment for first timers in Singapore. 

I thought of this before but decided that I am not a good candidate for this topic because for most people in Singapore, their first apartment would be from HDB and I don't have any experience in this area.

However, I have blogged about buying real estate in Singapore before and quite a few times too. 





So, in case you are thinking of buying an apartment either for self stay or for investment, you might want to consider the following points:

1. To rent or to buy?

In some countries, there is a strong culture of renting. 

This is usually when buying a home is considered too expensive. 

This is the case in places like Japan, Taipei and Hong Kong, for examples. In a report, it was stated that more young people in London prefer to be renters in recent years.

Does renting make more sense in Singapore now as well with sky high prices? 


Well, according to the "Rule of 15", it could make sense anywhere in the world. 

In a nutshell,

"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.


Personally, I prefer to own the apartment I stay in but I can see how renting could make sense especially if prices of homes are sky high. 




2. HDB flats

Of course, as Singaporeans, we are lucky because we have good quality public housing. 

It is reasonable to assume that for most Singaporeans, their first apartment will be from the HDB. 

Of course, there has been and will always be debate on whether HDB flats are priced fairly but unless we want to move to Johor, we have to accept that HDB flats are the most affordable housing choice for most Singaporeans. 

Using the "Rule of 15" will help us stay grounded and avoid the atas DBSS which were going for as much as $888,000 at one time, for example. 

(Thank goodness, DBSS has been thrown out together with MBT.)

Although we could choose a housing loan with a duration that terminates at age 65 and I am assuming that most people need a loan to buy their first apartment, I think we should aim to keep the cost of borrowing down. 

This should become a more important consideration in an environment where interest rates are more likely to increase. 

3. Condominiums

Of course, there will always be people who would prefer to stay in private housing and anecdotal evidence shows that the numbers are probably larger than what we might think. 

If we think that HDB flats are expensive real estate, then, condominiums in Singapore are simply too extravagant. 

A new 5 room HDB flat in CCK costs about $300.00 per square foot. 

An executive condominium in CCK will cost at least 2.5x that amount while a 99 years leasehold private condominium in CCK will cost at least 4x that amount.

So, for those who want condo living and if they qualify, buying a new executive condominium seems to provide a margin of safety compared to buying a new 99 years leasehold private condominium.

After 10 years of occupation, executive condominiums will attain full private condominium status.







Remember, condo living is not a need. It is a want.

Consider carefully whether we can really afford it, which is an objective exercise, and consider carefully if it provides value for money, which of course can be quite subjective. 

It would be utter misery if we were to become a slave to our home as we sweat to service the loan instead of enjoying our home with peace of mind.

"If to stay in a condominium, we are forced to live like paupers, the price is too high."

MAS has a good page on "Buying a Home":
http://www.mas.gov.sg/moneysense/life-events/buying-a-home.aspx

If you are going to buy your first apartment soon, you might want to bear these in mind as you think of the options available. 

You might also want to read the related posts below which this blog draws from.

Buying an apartment is probably the single biggest financial transaction for most people. 

Don't be swept away by emotions.

Staying grounded will help people to keep their finances healthy and, also, their homes.




Related posts:
1. To rent or to buy: Rule of 15.
2. Slaving to stay in a condominium.

QAF Limited: Rising 5c to 93c a share.

I have had a long position in QAF for a while now and I have received a few rounds of dividends. Based on my entry prices, the dividend yield is more than 7%.

I like to think that the dividends received help to pay for some of my groceries like Gardenia wholemeal bread, Cowhead organic rolled oats and the occasional box of Farmland hash browns.

Today, QAF's share price rose by 5c. The counter is still trading CD for a DPS of 4c. I believe the counter will go XD in the first few days of May which is soon.

Technically, could share price go higher to close the gap at 95c or test the highs of 12 months ago at $1.05? It could, of course. There is almost no accounting for prices and my bowling ball agrees with me on this one.

Fundamentally, going through the annual report, although revenue improved year on year by some 4%, costs and expenses went up by 5%. EPS actually fell a bigger 15.2% from 6.6c to 5.6c, year on year. A big part of this was because of provision made for an unrealised forex loss of $5.4 million due to a much weaker A$ against the S$. Otherwise, EPS would have fallen by a smaller magnitude to 6.3c.

The other reason for a lower EPS is that the number of shares in issue increased by some 4.2%. Most of the new shares are from the QAF Scrip Dividend Scheme (SDS) while 6% of the new shares were share options exercised by employees at $0.536 per share.

There are 3,975,000 more options yet to be exercised by employees but these remaining options if exercised now will form less than 1% of the total shares in issue. So, any further dilution because of this is likely to be negligible. Whether there will be more shares issued because of SDS is harder to say.

Quite obviously, to a big degree, whether EPS will improve or not will depend on the strength of the A$. Assuming that the weak A$ persists this year and everything else remains equal, with a full year dividend payout of 5c per share and an EPS of 5.6c, it means that QAF now has a dividend payout ratio of about 92.9% which leaves very little by way of retained earnings.

As a reflection of difficult conditions that QAF faced, NAV per share also fell, year on year, from 74.8c to 72.6c at the end of 2013.

Buying at 93c a share means buying at a PE ratio of 16.6x and a 28% premium to NAV. Unless the A$ strengthens once more, QAF's earnings will have to improve quite dramatically through other means to justify a share price of 93c.

A few days ago, QAF reported stronger 1Q 2014 results. Now, are these numbers what we need to justify a share price of 93c?

1Q EPS improved from 2.2c to 2.3c while NAV/share improved from 72.6c to 75.6c, year on year. Although sales improved in Australia and Malaysia, their currencies' relative weakness means that results aren't as spectacular in S$ terms. Will the stronger results be repeated in the next three quarters of 2014?

If the stronger 1Q 2014 results are replicable for the whole year, then, we could be looking at a full year EPS of 9.2c and a NAV/share of 84.6c. This would make 93c a share inexpensive.

To buy or not to buy? Well, call me kiasu but if I believe that the NAV/share could be 84.6c by end of 2014, I would want to buy closer to that price, give or take a couple of bids. I rather wait to buy at a price I am more comfortable with than to chase after a rising share price.

See: 1Q 2014 results.

Relates post:
Supporting my companies and getting paid.