October 27th, 2012 Posted in General
By Getty Goh and Ascendant Assets Research Team
In the past few years, the Singapore government has been actively cooling the Singapore property market by rolling out a series of anti-speculation measures. Some of the measures include:
1. Additional Buyer Stamp Duty (ABSD) – to make it more expensive for foreign investors to buy their first property as well as PRs and Singaporeans to buy their second and third properties respectively.
2. Seller Stamp Duty (SSD) – to deter property owners from flipping their properties by charging a stamp duty for owners who sell their units within 4 years from the point of purchase.
3. Lowering the Loan-to-Value (LTV) ratio – so that buyers who are thinking of buying a second property would have to come up with more cash.
As a result of these measures, some investors have started looking for alternative assets and locations to invest in. While some Singaporean investors have ventured overseas to look for worthwhile properties to invest in, others have turned their attention to commercial and industrial assets.
How do non-residential properties (i.e. commercial and industrial) measure up?
Some regular property investors have a good understanding of how the private residential market works and know what indicators as well as trends to look out for.Inevitably, they assume that the non-residential property markets behave in the same way as well. How mistaken they are.
To illustrate how different the residential market is compared to the non-residential market, let us first look at the transaction volume. I have written about this before in previous articles and even in my second book, Buy RIGHT Property, nonetheless, I think it is worth doing a recap.
Based on Figure 1, we can tell that from Jan 1995 to Jun 2012, the total number of residential transactions amounted to more than 360,000. In comparison, commercial and industrial property transactions only amounted to about 17,000 and 20,000 respectively. In terms of percentage, residential properties make up more than 90% of the total number of transactions. In comparison, commercial and industrial properties only make up less than 10% of the total transaction volume. Knowing this, the question any investor must ask himself is, “What are the odds of investors finding good deals in the non-residential market?”
Figure 1: Transaction volume for the respective property types from Jan 1995 to Jun 2012
Property types | Transaction volume | Percentage |
Residential | 363,250 | 90.42% |
Commercial | 17,707 | 4.41% |
Industrial | 20,795 | 5.18% |
401,752 | 100.00% |
Source: URA, Ascendant Assets Pte Ltd
Apart from transaction volume, let us take a look at the URA property indexes as well.Today, many people are very familiar with the URA Private Property Price Index (PPPI) as the local media often covers it. We presently know that the URA PPPI is at an all time high, reaching 206.9 in 2012Q2.
Figure 2: URA PPPI from 1975 to 2012Q2
However, what many people do not realize is that apart from having an index for residential property, there are URA indexes for industrial property, office space and shop space as well. And when we compare those indexes against the URA PPPI, we can see that although prices of residential properties is at an all-time high, the situation is quite different for the other types of properties (see Figure 3 to 5).
Figure 3: URA PPPI v PI for Industrial Property from 1975 to 2012Q2
Figure 4: URA PPPI v PI for Shop Space from 1975 to 2012Q2
Figure 5: URA PPPI v PI for Office Space from 1975 to 2012Q2
If you look at the 3 charts above, apart from industrial properties, the rest are still below the previous peak. The price peak for Shop and Office spaces was in the 1980s and 1990s respectively. The point we are trying to make through these diagrams is that the different markets perform differently. Hence, it would be wrong to use the assumptions we have on the residential markets to view the commercial and industrial markets, as the demand and supply as well as rental situation would be very different.
Conclusion
My seminar participants have asked me what could be some possible reasons behind the differences in prices between residential and non-residential properties. While there could be a variety of factors, one likely reason could be the limited pool of buyers.
Some of you may recall that prior to 2006, CPF monies could be used for the purchase of non-residential properties. Back then CPF members could invest their CPF monies to invest in non-residential properties as a means of risk diversification. However, on 1 Jul 2006, the non-residential property scheme was phased out as CPF members who were looking to diversify their property portfolio could invest in REITs. Hence, this could be the reason why the non-residential markets were not doing as well until recently.
To conclude, it is often important to do your research well before jumping into an investment. However, as an investor myself, I know it is often not possible to cover all bases as you may not even know that there are things you are not aware of. Hence, the best approach anyone can adopt to making investment decisions is to only use monies that you can afford to lose. If you do that, whether the markets perform well or perform badly, you know that you are financially secured.
