Planning to invest in property? A friend asked me the question and particularly to elaborate on below topics on whether to invest in property today. Thought I will post here and share it as well.
Q) With the high supplies of new launches, can we find the next buyer if we invest in property now?
The Number Of New Launches Vs Take-Up Rate
The question suggests capital appreciation as a key strategy when one invest in property. This implies the need to know when to enter and when to exit.
Looking at historical numbers, yearly new development launched is about 8000 – 12,000 units with the take-up about 8000 – 10,000 units. Based on the units launched in the first half of 2019, and assume continuity till the end of the year. Indeed we will be looking at slightly higher number of units launched in 2019, rather than significantly more than usual.
Q2 2019 Private Property New Launches Vs Take-Up
We see a close match in the number of units launched and actual take-up. This is because developers will time the release of the units to be launched based on the market demand.
You may see a peculiar gap across the period of 2017 with take-up > launches. The previous cooling measure in 2013 had resulted in poor buyer sentiment. This led to developers not replenishing enough land, whether from Governement Land Sales (GLS) or En-Bloc activity.
As a result, it caused a reduction in supply pipeline, and consequently the number of units they can launch. This is also a concern, as lower supply can cause price surge in the future. This explains the reason of the Gov’t loosening the cooling measure in mid 2017, to support demand sentiment and developers to come in to replenish their land bank hence supply pipeline.
To be clearer, we should instead look at the estimated number of units to be completed in the respective years moving forward. As seen from the chart below, we will see a significant increase in the number of units completed in 2021 and especially 2022.
The 2020 estimated number of units to be completed is especially low compared to historical numbers. This is due to the lack of land banking replenishing activity by developers from 2013 – 2016.
Q2 2019 Private Residential Property Supply Pipeline
So yes, indeed if by any chance a recession falls nicely in place in 2021, there will be buyer (as you see the historical number of resale units changed hands over the years is there, even during a major recession in 2008), but definitely as one invest in a property and planning to exit and sell out during this time frame, may not be positioned in the most ideal situation in the event of a recession.
Market Uptick in 2017 And How It Affects Your Decision On When To Invest In A Property
It is important to note that your selling price, hence profit, is not solely dependent on the supply of completed units at the point in time. Just refer to the recent history, below chart is a snapshot of the supply pipeline during Q4 2017.
You can see that the number of units to be completed was especially high in 2018. Yet, if you recall, the following 2 quarters Private Property Price Index (PPI) during early 2018 was the highest, before the Gov’t came in to implement the 9th cooling measure in July 2018, that cause the price to stabilize again.
Q4 2017 Private Residential Property Supply Pipeline
Some key factors that attributed to this upward movement for the year between 2H 2017 – 1H 2018 in private property prices include:
Pent-up demand from the past few years, yet income growth and cash savings had been rising over the past few years.
Increased in land cost from En-Bloc activities.
Positive market sentiment.
Q1 2018 Private Property Price Index
Q2 2018 Private Property Price Index
Q2 2018 Private Property Price Index Trend
Current Supply Pipeline & Absorption Rate
Looking at the current unsold units in the supply pipeline of about 43,000 units at this point, compared to the average take-up rate of about 9,000 units, the absorption will take about 4 – 5 years.
This is generally a healthy number, albeit on a higher side, because generally it takes 3 – 4 years for construction to complete. On the other hand, having too low an inventory say 20,000 units in the pipeline may spell for trouble to a destabilized surge in prices.
Will 2017 Market Uptick Occur Again In 2021 – 2022?
Looking ahead, if the developers are not replenishing sufficiently for their land banks due to the muted sentiment, we may in fact face similar situation in 2021 – 2022 like what we experienced back in 2017 when the supply pipeline is low, which can cause uptick in the market. However, of course any upward movement of the property market will be limited if the recession coincides.
My take is, when one invest in a property, it should be considered as a long term investment. There’s different strategies to adopt. For this case, as an investor if we are not able to exit at a good price, then we can consider going back to the fundamental of rental income, which still deals with relatively favorable return on investment (ROI) in the long run.
Barring any external shocks or recession, the current situation actually gives investors a good time to enter the market, especially with current market sentiment, developers are pricing the projects attractively.
In 3 – 4 years time, investor today will be able to exit at a relatively good price during the next upturn in the cycle. This is because when these development TOP and clears the Seller Stamp Duty (SSD) period of 3 years, the supply pipeline today would have been substantially absorbed by then.
Are You Ready Start Your Property Investment?
Above do suggest some timeline for exit to think about from the time when you invest in the property. However, it is generally difficult to time the market or the depth of the recession, if any. The key is holding power and proper analysis of the properties to invest in,. This will give us a higher certainty of a better long term ROI.
In fact, time is the most important element that we need to remember at the back of our mind. Our age affects the amount of loan/leverage which in turn affects our ROI as well as the number of cycles we can take advantage of.
Above are just some macro view of the property market today, which I hope will help give a clearer idea of what the data actually tells. There’s many other elements to look at from the micro view. For instance, how to identify the right properties and investment strategies. Or how to customise and structure your property portfolio based on your financial projections and circumstances. We will leave it for future posts 🙂
Q) Assuming we want to invest in a property, what would be an ideal entry point? 1BR? 2BR? 3BR?
To determine the exit demand, we can look at the resale market data, in terms of the price movement $ psf and the number of units that exchanged hands in the resale market. From the past 15 years data below, there isn’t a clear winner or observable trend among the 1br/2br/3br units.
Though we can observe the volume of 1br units transacted higher in recent years, it is still lower than that of 2br and 3br. This is likely due to change in demographics, taste and preferences, developments pricing and unit distribution in the recent years.
1 Bedroom Resale Price ($ PSF) & Volume Q4 2004 – Q4 2018 Data
2 Bedrooms Resale Price ($ PSF) & Volume Q4 2004 – Q4 2018 Data
3 Bedrooms Resale Price ($ PSF) & Volume Q4 2004 – Q4 2018 Data
Again, to determine the right property to invest, we need go into the micro level for more detailed analysis. The aim is to enter at a price of low risk and with elements suggestive of higher potential growth. Due to the already lengthy information here, we will discuss more about this in future posts.
Hope that above gives you a better idea about certain aspects of the market today. Happy investing 🙂
*If you have any specific property requirement, please contact us here and we will get back to you shortly. Or you can estimate your current property valuation here to begin working out an investment plan.
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