Recently, I spoke to a seasoned investor, Terry who has a portfolio of eight properties, comprising of residential and commercial properties. Some were bought directly under their names and some were bought under trust.
He shared that they would have to incur the higher 25% Additional Buyer Stamp Duty (ABSD) if they were to buy their next property. Yes, not 17% but 25%. He asked, "Is it wise for us to pay this ABSD, Pris?".
Should We Pay ABSD: A Proven Case of Property Wealth Planning
From that short chat, we can safely say that Terry is a strong believer of Property Wealth Planning and his family has benefitted from the price appreciation of these properties. Many of their properties are self-sustaining with the rental income supporting the mortgage loan.
Overall, they have a good eye for properties with good growth prospects, hand-picking good and rare gems such as:
Landed Homes - only 5% of the land in Singapore are dedicated for landed homes
Conservation Shophouses - no longer in production and thus very limited in numbers
Their properties are also freehold, which enjoy a lower impact of decaying lease on its value. Those who wish to know how age really matters in leasehold vs freehold condominiums, this recent analysis by Edgeprop would be a good read.
Property As A Good Investment Option - The Concept Of Leverage
For starters, properties are often deemed as a good way to store and grow wealth, vis-a-vis other asset classes such as stocks, shares, fixed deposits, gold etc. And one of the core reason is because of this concept called leverage.
For all other asset classes, the price growth applies only on the amount that you have invested. This means that if you use $200K cash to buy gold, you get $200K worth of gold. Common sense right? And if this $200K worth of gold grows by 1% per annum in 10 years, you get a profit of $200K x 10% = $20K
For property transactions, it is different. Buyers pay a down payment which is only a portion of its full value as the rest can be supported by a home loan. And the growth applies to the full value of the property, which is far more substantial than the amount you have invested.
For a 1st property loan, the down payment is 25% and made up of two parts:
5% downpayment in cash only
20% downpayment in cash or CPF
Depending on how much the buyers have in their CPF, they could buy a $800K home (if they don't wish to touch their CPF) or up to a $4 million property (if they use CPF for the 20%) with the same cash budget of $200K. Because the price growth is on the entire value of the property, this means that if these properties were to grow by 1% per annum in 10 years, you will gain $80K to $400K from your initial investment of $200K.
As such, based on the same cash budget and the same appreciation rate, the gain from a property transaction is much higher than other asset classes. Of course, some may point out that this example is overly simplistic and you are right! Because different asset classes would have varying growth rates, plus there would be additional cost incurred to owning this property in that 10 years
But this simple example helps to bring across the idea of leverage. So let's dive deeper to look at the respective growth patterns and its return of equity (ROE) of various assets in the last decade.
LET'S LOOK AT THE ROE FOR THE VARIOUS ASSET CLASSES
1. Property
For buyers like Terry who have multiple properties, the benefit from this leverage could be lesser because they would have to pay higher ASBD and face higher downpayment (see below table). So does it still make sense for them to buy more properties?
Let's do the math and take a look. Assuming Terry is taking his 3rd or more home for a $1 million condominium purchase with a loan tenure of 15 years, his down payment would be:
25% downpayment in cash only - $250K
40% downpayment in cash or CPF - $400K
Based on a 35% loan (1.8% for 15 years), his expenses and gains over 10 years would be:
No. | Item | 25% ABSD 35% loan | 17% ABSD 35% loan |
|---|---|---|---|
1 | Purchase Price | $1,000,000 | $1,000,000 |
2 | BSD (%) | $24,600 | $24,600 |
3 | ABSD (%) | 25% | 17% |
4 | ABSD ($) | $250,000 | $170,000 |
5 | Downpayment (%) | $650,000 | $650,000 |
6 | TOTAL INVESTMENT (2+5+6) | $924,600 | $844,600 |
| If monthly rental of $2,200 covers cost: | | |
7 | Estimated Value in 10 Years* | $1,380,000 | $1,380,000 |
8 | Outstanding Loan (121st mth) | $126,000 | $126,000 |
9 | Equity at Year 10 (7-8) | $1,254,000 | $1,254,000 |
10 | Return on Equity over 10 Years ($) (9-6) | $329,400 | $409,400 |
11 | % Returns on Equity Over 10 Years (10/6*100%) | 36% | 49% |
12 | % Returns on Equity Per Year (11/10 years) | 3.6% | 4.9% |
* Non-landed private properties grew by 3.85% per annum in the last 10 years. Assuming history repeats itself, a $1m property will be worth $1.38m in 10 years time.
Based on above calculation, the ROE for property over 10 years for 25% and 17% ABSD would be 3.6% per annum and 4.9% per annum respectively.
2. Fixed Deposits
Another common option to store wealth is fixed deposits, which are virtually risk-free and highly liquid. You can withdraw your money any time you wish, although this does mean that you might either get less interest or lose out on it altogether.
Based on an average 1% fixed deposit rates over 10 years, the ROE would be:
1 | Amount if invested in FD | $924,600 | $844,600 |
2 | 1% Return Compounded for 10 Years | $96,734 | $88,634 |
3 | Value in 10 Years | $1,021,334 | $932,964 |
4 | % Returns on Equity over 10 Years (2/1*100%) | 10.5% | 10.5% |
5 | % Returns on Equity Per (4/10 years) | 1.05% | 1.05% |
Using a compounding interest calculator, the ROE for Fixed Deposits per year is 1.05%.
3. CPF Ordinary Account
Many of us have funds in Ordinary Account (OA) that is enjoying 2.5% interest per annum. If the funds are not used for property and is left or put in the CPF OA account, what would its value be in 10 years' time?
Based on a 2.5% interest payout over 10 years, the ROE would be:
1 | Amount if invested in CPF | $924,600 | $844,600 |
2 | 2.5% Return Compounded for 10 years | $258,966 | $236,559 |
3 | Value in 10 years | $1,183,566 | $1,081,159 |
4 | % Returns on Equity over 10 Years (2/1*100%) | 28% | 28% |
5 | % Returns on Equity Per Year (4/10 years) | 2.8% | 2.8% |
Using a compounding interest calculator, the ROE for CPF OA over 10 years is 2.8% per annum.
4. Straits Times Index
Investing in stocks, shares, bonds etc is another common way to manage our wealth. For investors, you can buy/sell your own stocks and shares easily via many apps like SAXO, POEMS etc.
For those with a plumper budget, there is a ready pool of fund managers, bank relationship managers, investment bankers to manage your portfolio and offer you precise digital intelligence to plug a gap in your portfolio or put your idle money to work.
In view of the varied options of stocks and shares, we took reference from the growth pattern of the Straits Times Index (STI) for the past 10 years. STI would be a good reference point since it is the market capitalisation weighted index that tracks the performance of the top 30 companies listed on SGX.
From this chart, the ROE for Straits Times Index over 10 years is 3.2% per annum.
Of course, this is a weighted average percentage growth. After all, this is one of the more volatile market that carries various risk. If you happen to pick the lemons at the wrong time, you could be making a loss. If you make the right choices at the right time, you could be doubling or tripling your portfolio.
Summary of the Investment Choices
At a quick glance, here's the average ROE over the last 10 years of these common investment choices.
| Property | Fixed Deposit | CPF OA | STI |
|---|---|---|---|---|
% Return of Equity Per Annum | 3.6% - 4.9% | 1.05% | 2.8% | 3.2% |
With a 25% ABSD, Singapore properties still enjoy a relatively good ROE compared to the common investment vehicles, and the real estate market is generally a safer, regulated and protected playground in Singapore.
ABSD can be deemed as an investment cost for an asset that would generate good ROE. Although it is a high barrier of entry, it likewise is also a filter to allow those with strong holding power to invest in this market and eliminates the weaker hands from holding properties. Overall, it creates a stabilising effort in the long-term to weed out speculative forces and thereby reduces the risks in this market.
What are the key benefits of Singapore properties as an investment choice?
It opens doors to safer and good returns with lower volatility
It enables low-cost leverage to multiply wealth
As a basic need, it enjoys the compounding effort of property price inflation for growing wealth
For Seasoned Investors like Terry Who Could Pay The ABSD, What Are The Possible Property Options?
While we have established that property is a good investment option even with a 25% ABSD price tag, the portfolio can be further sweetened with the below options:
A. Invest in rare and limited properties
Rare and exclusive properties could be those that are no longer or limited in production. These includes pre-war commercial conservation shophouses, good class bungalows, or properties with unique selling features.
Belgravia Ace is one such example among many others:
One of the largest and last few freehold strata-landed development in Singapore
One of the lowest density development with more space for play. Under the revised URA guidelines, 45% of this development is dedicated to greenery and communal activities.
One of the few 3-storey landed area in its vicinity
Award-winning development, even before its launch
Affordable pricing starting of $4.5m, compared to many existing landed homes
An unique back-to-back semi-detached concept that gives the perception of a single landed home (see photo above)
B. Consider overseas properties
Overseas properties are another option. Its advantages include portfolio diversification for buyers which helps to reduce their risk of concentrating their investments in a single area. Buyers also do not incur any ABSD and it also gives them higher returns.
Generally, the global property index have been increasing well with global housing prices rising at 9.4% in the last 12 months to Q3 of 2021. Meanwhile, Singapore’s housing prices ranked 38th in the world for this growth, and this percentage was before the cooling measures in Dec 2021. With the Government's intervention in our local real estate market, our growth is likely to be sustained albeit at a more gradual pace aligned with the rising rate of inflation.
In comparison, the growth rate of overseas properties would offer a better source of investment with higher potential for future returns. Ideally, investors could consider countries with a strong history of currency strength against the Singapore dollar such as Australia and Thailand. Volatile currency rates will put your heart on roller coaster ride where you may see your property value doubling this year, and dropping by two-thirds the next year.
Of course, every decision will come with its pros and cons. For one, you won't be able to use your CPF funds for overseas property purchase. And more importantly, there are areas that you would need to research about such as the market understanding, the security of their property title, its regulatory framework, its tax structure, availability of financial options etc.
C. Review of portfolio
Every property would go through these three stages of life cycle - growth, stagnation and decline. This applies to freehold properties as well. While their lease is continuous, there is an age to its structure and that would affect the property value.
While investors can still receive rental income from these properties, they could be losing its value at the same time. For freehold condominiums, there could be a chance for temporary boost in value if there is en-bloc potential as it ages. If en-bloc fails, it may go deeper into a decline stage thereafter. For freehold landed homes, owners could look at reconstruction works. Or they could save the hustle, sell it and invest the money in a newer property which is at its growth stage.
Investors could also restructure their portfolio to cater for future needs of their family. If there is anything in the world that is certain to go up, it would be our age and inflation.
If so, buyers can consider buying properties at the current price for your family than for them to buy it at higher prices in the future. Then these buyers could look at revamping their portfolio to have properties that are in proximity to their family nucleus or near schools that their children/grandchildren would be attending in future.
Or they could also think of consolidating some units and investing in larger properties that are scarce. For example, investors could consider buying a large landed plot of one bungalow, which could be sub-divided into two semi-detached homes in the future and this would offer them greater price appreciation.
So Is It Wise To Pay ABSD?
From the above read, it does seem so even at 25%. In Singapore, properties are usually set to rise over time and it will help to have holding power. If you are hoping to come into a market and make a quick buck in the next 3-5 years, then property isn't the route for you. The real estate market has been intentionally and repeatedly cleansed to filter out speculative investors so that this garden of blooms can flourished well over time and can be enjoyed by our future generations. It is never the intent for real estate prices to crash as it will mean a lot of hard days for the whole economy. Instead, the aim is to allow a healthy growth, one that is aligned to our growing inflation rate and income levels, to allow home prices to be affordable. As such, those with the means and patience will see its rewards.
Interested to know more, come have a chat =)
ABOUT THE AUTHOR
Before the change to real estate, Pris Low was in the non-profit sector for close to 20 years, helping distressed consumers, disadvantaged families, children with special needs, persons with disability and frail seniors.
Now she finds it equally meaningful to be able to work directly with individuals, couples and families to plan their property path, find a right home within their comfortable finances and help them build resilient families that can flourish and overcome challenges.
Each property path is unique to the family, and there is no right and wrong path as long as it guides the family towards achieving their goals at its own pace.
You may hear many agents saying, 'Now is the best time to buy a property'. Pris Low believes that, 'Now is the best time to start planning'. Only when you have charted your plan will you know what the best course of action is.
Every journey starts with a single step. Contact me for a non-obligatory chat!