Parents nudging 32 year old to buy private property.

Hi AK

I have been reading your blog for a couple of years. Very inspiring. Thank you very much for talking to yourself. 

I have been talking to myself a lot lately but I couldn’t get to anywhere. Not sure how should i proceed, appreciate you could talk to yourself if you were in my shoes. 

I am a 32 yr old Singapore PR - currently stationed overseas but will be going back to Singapore for good soon. 

Savings of around S$150k, investment of around 150k (which gives me around 10k in dividends per year), CPF OA of around 80k. I will be earning around 8k-9k per month when i return. 

All these while, I have been savings up - with the idea of buying a home in Singapore. Unfortunately, I could only buy a private  property. 

My parents have been encouraging me to buy a property in Singapore (as my sister who is 10 years younger will be graduating next year and she could live with me; my parents could also stay with us whenever they visit). 

I used to rent a room in a HDB flat, should I do the same when i return to Singapore? I have been waiting for the prices to drop but it is still not dropping significantly. 

What would you do if you were in my shoes? How to balance between comfort and being prudent? How to talk myself out that I need to own a roof over my head? 

I hope God AK could enlighten me. 

Thanks! YR.

Hi YR,

I would ask readers who are thinking of a bigger home to read this blog post:
http://singaporeanstocksinvestor.blogspot.sg/2015/07/do-i-need-bigger-home-and-what-to-do-if.html

Ask the 3 questions I shared in the blog post.

In your situation, you can only buy a private property since single PRs are not allowed to buy resale HDB flats and you need one by next year when your sister graduates.

If you are thinking of leaving your home as a legacy, then, you might want to get a freehold or a 999 years leasehold condo instead of a 99 years leasehold condo.

To be prudent and not to stretch finances too much, get a property that is priced $1 million or lower. 

This is going to be a consumption item. A (30 year) loan of $700,000 to $800,000 will keep monthly mortgage repayments at around $3,000 a month or lesser. This repayment amount will rise when interest rates rise in future but it should remain manageable for you, everything else being equal.

With a $1 million budget, a 2 bedroom or even 3 bedroom condo in OCR Singapore are within reach.

Best wishes,
AK

Sometimes, we might have to do what is less financially prudent because of more onerous obligations in life.

So, although it might make sense sometimes to rent a home rather than buy one, we just have to make the best of a financially less prudent decision.

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Interesting trivia:
Julian Cheung Chi-lam and Anita Yuen Wing-yi decided years ago never to buy property in Hong Kong. The reason was simple. Prices were outrageously high... Cheung once reportedly remarked: “With the amount I need to pay for a house [in Hong Kong], I can rent till I’m over 130 years old.”
Source:http://www.scmp.com/comment/insight-opinion/article/2020388/when-even-hong-kongs-super-wealthy-opt-rent-something-not

Related posts:
1. Affordability and value for money.
2. Wife wants to sell flat and buy condo.
3. Rule of 15: Buy or rent?

Why CPF only cares how much to take from our OA and SA?

The CPF is a tool which we should make good use of in planning retirement funding. 

How we make use of the tool depends on our circumstances.

Just do what we feel comfortable with. 

As long as we are approximately right, we will do OK.






Hey AK,

Thanks for sharing your thoughts although it can be very ambiguous and cryptic most of the time! 

I know how you are trying to not be made liable in case of anything here :)

In between our mails, I did actually drop by CPF Board to check with one of the counter people on my same ask.





So the long story short (correct as of today's goalposts) is that CPF only cares about how much to take from our OA + SA to setup our RA, in accordance to our choice of BRS, FRS or ERS, once we reach 55.  

How we get to that amount is none of their concern.

Yes, you may have addressed this previously or even known about it yourself but I must say, it's really assuring to hear it on my own from the horse's mouth.





Now, I'm even more motivated to get to my targeted amount I shared in my earlier mails by tapping on CPF's risk-free 4% p.a. rate. 

Of course, "downside" is that I can only enjoy at age 55 lah. 





Well, slowly lah hor... take care of my lowest hanging fruits first.

Like you said, as long as we're doing approximately right, we'll do OK :)

Have a good afternoon, AK!

Sincerely,
F

AK agrees with F, of course. 

So does my niece.

A present from my niece.
I think she is approximately right. ;)

Related posts:
1. Get the most out of ASSI.
2. A chat on CPF Top Ups etc.
"In investments, we go for low hanging fruits first. Why should it be different when it comes to planning for retirement adequacy?" - AK

An incomplete analysis of OUE Limited (Updated).

UPDATED (4 Oct 17):

OUE Limited is more of an asset play to me. Just like Guocoland (read blog: here) and Tuan Sing (read blog: here), as an investment for income, it isn't very persuasive for now. 

For now?

For those who work in the CBD, they will know that the redevelopment of OUE Downtown into a mixed-use development has been completed.





Downtown Gallery and Oakwood Premier OUE Singapore started operations in May and June 2017 respectively.

Downtown Gallery has 150,000 sq ft of retail space while Oakwood Premier OUE Singapore has 268 serviced residences comprising studio, one-bedroom and two-bedroom units. 

Logically, we should see income contributions in 3Q 2017. Recurring income stream should strengthen.


The 462 units OUE Twin Peaks is mostly sold.

Latest NAV per share: $4.38.

I like that OUE Limited seems more interested in pursuing recurring income instead of having a heavy reliance on development properties.




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I really enjoyed this email from a reader:

Hi AK,

I'm a long-time fan of your blog (around 5 years, I think!). I especially liked the back-of-the-envelope calculations you used to do when valuing stocks.

I read your post on OUE as an asset play a few years back but only got around to evaluating it myself last week over the long weekend. 

In OUE's latest financial report for 2Q 2015, it's NAV/share is reported to be $4.31. At the current price of $1.60, that's a pretty crazy 63% discount! But it immediately raises the question of whether reported net asset values can be trusted. 

So I decided to try and value the properties... Fortunately, OUE only has a few properties that haven't been divested to their REITs:

1. OUE Downtown - fair value S$1,477m

2. US Bank Tower - fair value US$530m

3. Marina Mandarin (30% stake) - fair value S$560m

4. OUE Twin Peaks - book value S$768.2m

OUE Downtown comprises 2 office towers, OUE Downtown 1 and 2, the first of which is being transformed to a mixed-use development. OUE Downtown 1 is having its low-mid zones converted to serviced suites and its podium converted to a shopping mall, while the upper levels, plus the entire OUE Downtown 2, will remain as office space. 

To value this building, I turned to URA's records of sale transactions for commercial properties over the past quarter (Jun-Sep 2016), looking for office buildings of roughly the same age and located in the same area (districts 1 and 2). I found transactions for office space in 3 buildings that looked relevant:

1.  International Plaza - S$1,626 psf

2. Shenton House - S$1,602 psf

3. People's Park Centre - S$1,296 psf

There were multiple transactions for International Plaza and People's Park Centre over this period, with the psf value increasing for higher floors, but since I wanted to value OUE Downtown conservatively I opted for the lowest psf values. Since OUE Downtown has a net lettable area of 867,000 sq ft, assuming it can be sold for the same S$1,296 psf as office space in People's Park Centre gives us a valuation of S$1.1 billion.

Going further back in time, in Nov 2015 the CPF Building, which is very close to OUE Downtown and which lease expires in the same year, was sold for S$1,697 psf of net lettable area. This gives me some confidence that my valuation is indeed conservative.

Obviously there are still some caveats with this valuation, I can think of at least 3:

1. OUE Downtown 1 is going to have retail and hotel components; these might be valued less than office space is, especially if the mall and the serviced suites are not successful.

2. OUE Downtown has about 50 years remaining on its lease, so depreciation each year henceforth is 2%.

3. There is significant supply of new premium office space coming online in 2017 and 2018 (e.g. Marina One, DUO Tower), which may depress valuations for older buildings like OUE Downtown.

For the US Bank Tower, I used pretty much the same approach. The US Bank Tower is a freehold Class A office building in downtown Los Angeles, so I looked for recent transactions for prime office buildings in the same area. Here I was able to find transactions for 3 entire buildings:

1. One Bunker Hill - US$300 psf, sold in 2015

2. 800 Wilshire Blvd - US$358 psf, sold in 2015

3. The Desmond - US$573 psf, sold in 2016

Again, I took the lowest psf value and multiplied it by the US Bank Tower's 1.44 million sq ft of net lettable area. This gave me a value of about US$430 million. 

Now if OUE did divest this building for this amount that wouldn't be a great deal for them, since they bought the building for about US$370m and spent US$50m renovating it - a total cost of US$420 million. But I believe they should be able to fetch a higher psf for the US Bank Tower, because:

1. It is an iconic building; when built in 1989, it was the tallest building in the whole of California (and is still the second tallest).

2. It is significantly newer than all 3 of the buildings listed above; The Desmond was built in 1916, One Bunker Hill in 1930 and 800 Wilshire Blvd in 1972. The US Bank Tower on the other hand was built in 1989.

Nevertheless there are also at least 2 caveats with 

this valuation:

1. Occupancy is still only 75%. This is an improvement from the 60% occupancy when OUE first purchased the building in 2013, but 25% vacancy is still quite a bit higher than that for Class A office buildings in LA overall, which is 15.6%. All 3 of the LA office buildings above had occupancy above 90% when they were sold. Then again, the 75% figure is for end-June 2016, which is when asset enhancement works had just completed, so it's possible that occupancy has already improved since then.

2. California is a seismically active region and although the US Bank Tower is supposedly designed to resist an earthquake measuring up to 8.3 on the Richter scale, obviously if the building is destroyed it will have no value.

With OUE Downtown and the US Bank Tower out of the way, that leaves us with the Marina Mandarin hotel and OUE Twin Peaks. 





I think these properties are less relevant to my investment thesis though. OUE does not have a controlling stake in Marina Mandarin (its effective interest is only 30%) and so it can't make the decision on whether or not to divest the hotel.

The Twin Peaks condo is more interesting. Popular opinion is that the prospect of paying extension charges if OUE is unable to finish selling all 426 units has been weighing on the share price. When I called an agent to inquire, I was told the following:

- Tower 2 of Twin Peaks is completely sold

- 50% of units in Tower 1 have been sold, 20% are under negotiation (including for the bulk sale of some floors) so only 30% are still available

- The developer has bought a few floors for himself (???) When I asked OUE's IR about this, I was assured that they had bought only a few units, but still.

There is an article in yesterday's Straits Times (13/9/2016) which states that half of a batch of 86 units at Tower 1 have been sold since the units were launched in July, so it does seem that sales have picked up. 

If OUE can maintain this sales momentum, I think there is a good chance that they will be able to avoid the extension charges that will kick in Feb 2017 if units are left unsold. That the company has reversed some of its previous impairment losses on Twin Peaks in its latest financial results is also a good sign. 

It's true that even if OUE manages to sell all Twin Peaks units the project may still be loss-making overall, but this also doesn't seem too important to my valuation since I am assuming that all the costs for the land and development costs have already been incurred and accounted for (please let me know if I'm wrong!).

If Twin Peaks and Marina Mandarin are not important to my valuation (as long as extension charges for Twin Peaks are avoided), that means I'm counting on the valuations of OUE Downtown and the US Bank Tower. I established earlier that I think conservative valuations of these properties are S$1.1b and US$430m  respectively. Assuming, again, a conservative exchange rate of 1.3 USD - 1 SGD, that adds up to S$1.1b + S$559m = S$1.66b.

What is OUE's current market cap? Each share trades at about $1.60 and there are close to 903m shares, so the market cap is about S$1.44b. 

In other words, the combined, (what I believe are) conservative valuations for OUE Downtown and the US Bank Tower, already exceeds what Mr. Market thinks the entire company is worth! 

That looks really compelling, especially since I haven't even taken into account the values of its stakes in OUE Commercial REIT and OUE Hospitality Trust, which are significant:

- 35% of OUE Hospitality Trust, which has a market cap of S$1.2b

- 65% of OUE Commercial REIT, which has a market cap of S$900m

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This fits in very nicely with what I said during the last "Evening with AK and friends".

I will add that if we look at OUE Limited as an asset play, we have to be very realistic about the time it might take to see value unlocked. It could be years before we see anything. 

So, we need to size our position conservatively as well unless we have money to burn and we need to be very patient.

Related posts:
1. OUE Limited: A nibble.
2. An incomplete analysis of Wing Tai.
3. OUE Limited: An asset play.