Singapore Property Weekly Issue 167

8/12/2019 Singapore Property Weekly Issue 167

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Issue 167Copyright 2011-2014 www.Propwise.sg . All Rights Reserved.
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CONTENTS

p2 Property Valuation: Money Not Math

p10 Singapore Property News This Week

p14 Resale Property Transactions

(July 16 July 22 )

Welcome to the 167 th edition of theSingapore Property Weekly .

Hope you like it!

Mr. Propwise

FROM THE

EDITOR
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SINGAPORE PROPERTY WEEKLY Issue 167

Page | 2Back to Contents

By Gerald Tay (guest contributor)

Many investors have NO idea how to get their yields right. An investor cannot evaluate anyinvestment, whether it's a stock, bond, rental

property, or option, without firstunderstanding how to calculate Return onInvestment (ROI).

Recently, a seasoned investor (let s call himHenry) asked if I could help evaluate hisinvestment yield for a property he just

purchased. He calculated a Net Rental Yield(NRY) of 8%. My calculation came to 1.5%.

Property Valuation: Money Not Math


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Whos right, whos wrong?

One BIG mistake investors make is failing tounderstand how to get their yields right.

Henry is among many investors who lostmoney for this reason, not because he boughta dodo investment. For example, NRY is themost basic form of yield every investor shouldknow to evaluate.

Surprisingly, in every real estate class I teach,

none of the participants (seasoned investorsincluded) have ever gotten it right! To provemy point Solve NRY by yourself below(answers can be found at the bottom of thearticle). Calculate the Effective Net RentalYield for the following property:

Purchase Price: $1,300,000

Down payment: $260,000

Annual Mortgage Payments: $27,700

Annual Interest Payments: $15,600

Stamp Duties: $33,600

Monthly Gross Rent: $4,000

Rental Agent Fees (1 year lease): $2,000

Renovations: $10,000

Annual Property Expenses: $8,660

The second big mistake investors make

Does Net Rental Yield (NRY) equal the FinalROI or Return on Investment?

NRY must be used mutually with other yieldratios to accurately assess the performance(or Value) of one s property and ROI (I llexplain more in future posts).


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Therefore, Selling Price = Total Cost +Seller s Profit

5. Cost of Land Approach

6. Rely on Expert ForecastersWhen you walk into the Investment GuruLand, you ll find that the investment guruwho eats his own cooking is the exception,not the rule.

Sadly, the above Try to beat the casinovaluation methods are sold as investmentwisdom to retail investors and home buyers.

Take, for example, the Developer s Cost-Based Approach. The major flaw in thisapproach buyers suffer the seller s chasefor profits. In the case of a propertydeveloper, if his cost rises, he simplytransfers these costs to buyers. This is anuntenable position, especially for the averagebuyer.

Another evident example - Indicative BankValuations. Different banks can come up withvery different valuations for the sameproperty, which is baffling for many.

Unfortunately, most people require a bankloan, such that the bank s valuation is thefinal word.

If we are buying or selling a property, thebank s valuation is a major determinant of theloan quantum. And herein lies another problem: SENTIMENT drives property prices.

Here s evident proof of the flaws in relying onIndicative Valuations:

MS YVONNE LEE LEK SIEW LING:Recently, I received two valuations from thesame bank for the same property whichdiffered by $200,000 or 15% of the asking price. (Reported in the Straits Times ForumPage on 18 Jan 2011)


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In response to the letter above,

Indicative valuation should not be interpreted as the proper valuation of a property ..While Ms. Fischer finds that indicativevaluations are useful, they must not be relied upon for one s property investment decision. ..it is not a subscribed valuation practice.

Evelyn Chang (Ms.), Executive Director,Singapore Institute of Surveyors and Valuers,

Feb 12, 2011 (The Straits Times Forum)

In response to a letter from another disgruntled buyer,

We caution against relying on suchindications, and urge buyers or sellers to

obtain proper valuation reports from licensedappraisers if they need to ascertain themarket values of their properties.

Evelyn Chang (Ms.), Executive Director,

Singapore Institute of Surveyors and Valuers,Jan 18, 2011

As you can see, the above valuation methodsinvolve plenty of guesswork and exuberantassumptions. They may work in a bull market,but fail miserably in a bear market.

I Just Want the Truth!

So how do we value property as close to itstrue value as possible even after taking intoconsideration all subjective elements likeemotions, hopes and sentiments?

How do you value your property objectivelyand within reason either as an Investor,Home Owner or Seller?

TIP: If you can get your ROI right, all other parameters, including price and locationwould have fallen into place.


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Simple start with the basics.

This is the thrust of the educational series of posts I will be writing on Property Valuation.

Test yourself!

Exclude property cooling measures for simplicity. Answers are at the bottom of thepage.

All you need is a pen, paper, financial

calculator and a few minutes, and you will beable to derive your property valuation. I llexplain my answers in future posts.

These questions are NOT purposefullydesigned to be confusing or to give you a bigheadache. I m sure you ll find that thesequestions reflect many similarities on actualgrounds for making critical buying and sellingdecisions.

It s okay if you fail to derive any answers welearn from our failures. For those of you whodid or came close, great job! You re on your way to being financially wealthy.

I m kind enough to provide many crucialnumbers for you to work on. In reality, thesenumbers are NOT present and you have tofind them by yourself! And this is the partwhere many investors fail .

Let the test begin

1. A property is priced at $1.4 million and isexpected to generate a yearly net cash flow of $41,200. Assuming no leverage, would aninvestor with a Desired Rate of Return of 8%be wise to invest at the current price and sell in five years?

S GA O O 16


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2. Refer to the table below: Which investment has a higher Rate of Return, A or B?

3. I m 35 years old today and estimate that I l

need $1,000,000 to retire comfortably at 65 years old. If I ve $100,000 to invest today,what annual Required Rate of Return would I need to reach my goal of $1,000,000?

4. Your investment s Desired Rate of Returnis 8% per annum. If a property has a 5%

Effective Net Rental Yield, should you

purchase it assuming all other parameters,including price and location, fall into place?Why?

AnswersQuestion at beginning of the article: EffectiveNRY = 2.7%

1. No, the Net Present Value (NPV) is -$292,212. Even though NRY is 2.9%, it is a

wealth-decreasing project.2. Investment B s Internal Rate of Return(IRR): 25%. Investment A s IRR: 20%

3. Required Rate of Return for retirement: 8%p.a.

SINGAPORE PROPERTY WEEKLY I 167


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4. Yes, 5% NRY is a stable yield investmentand with leverage, the Total Return will bemuch higher than 8%.

By guest contributor Gerald Tay, who is thefounder and coach at CREI Academy GroupPte Ltd , an organization dedicated toempowering retail property investors withsmarter investing philosophy and strategies.He is a full-time investor with over 13 years of solid experience in building his wealththrough Property Investment and is financially wealthy today.
http://www.crei-academy.com/http://www.crei-academy.com/http://propertymarketinsights.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/http://www.crei-academy.com/


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Analys t s op t imis t i c abou t p rope r ty marke t

despi te fa l l ing pr ices

According to Real Estate Developers Association of Singapore (Redas), the outlookfor the property market will remain positivedespite an expected 10 to 15 per cent fall inresidential prices in the coming two years.Song Seng Wun from CIMB Research saidthat market liquidity is high as buyers areanticipating a drop in residential propertyprices. Thus, Song believes that there is norush to lift cooling measures. Chua YangLiang, head of research for South-east Asiaand Singapore at JLL expects home salesvolume to continue moderating with the

implementation of the total debt servicingratio framework. While the framework wasintroduced in 2013, it only started takingeffect three quarters after it was implemented.On the other hand, Toby Dodd from Cushman

& Wakefield predicts that office rents andoccupancy rates will increase in the next year as the supply of prime grade office spaceremains limited. He expects the net demand

for prime grade office space to exceed 1.5million square feet by the end of 2016. Assuch, despite the expected fall in propertyprices, the longer-term outlook for theproperty market remains positive.

(Source: Business Times)

Commercial

Ris ing vacancy in ind us t r i a l spaces

Colliers International said that there is anoversupply of industrial space in relation to its

demand. This is likely to worsen the level of vacancies. According to Chia Siew Chuinfrom Colliers International, there is a need for the government to improve current policies on



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industrial space usage in order to boostoccupancy rates. Under the current rules bythe URA, 60 per cent of the total floor areahas to be dedicated to core industrial

activities while the remaining 40 per cent maybe used for secondary uses. Yet, Chia saidthat industrialists are moving away fromtraditional manufacturing activities, as morecompanies have begun to focus on after-sales services, product consultation and

conceptualisation. The current rules fail tocapture this shift in the market, as moreindustrialists are focusing on activities thatare not considered core industrial activities.Not only so, JTC will be restricting occupiersfrom subletting their building space beyond

30 per cent. According to Chia, this new rulewill also affect the uptake of industrial land.Besides that, from 2014 to 2018, about 76million square feet of industrial land space willbe supplied. Given the surge in land supply,

Chia forecasts that there will be a 3 per centdrop in rents for multi-user factories.


Two new Tuas s i te for sa le

Under the H2 2014 Industrial GovernmentLand Sales programme, JTC has launchedtwo sites at Tuas Bay Close and Tuas SouthStreet 7. The Tuas Bay Close site will ceaseits tender on September 23, while the other site will close on September 9. The Tuas BayClose site is 2.7 hectares and can be strata-subdivided. The 30-year tenure site is zonedfor B2 development which is for heavier industrial use. It has a maximum gross floor area of 4.6 hectares and market expertspredict that it will draw up to five bids. Theyexpect the winning bid to be around $65-80per square foot per plot ratio. On the other hand, the Tuas South Street 7 site measures



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only 0.5 hectares. It is on reserve list for thegovernment land sales. Bidding starts at$3.527 million for the site at Tuas South. Thesite is also zoned for B2 development but its

tenure duration is 20 years and 10 months.Its maximum gross plot ratio is only 1.0.Experts predict that the Tuas South site willattract contractor-developers and average-sized industrialists. It is expected to draw upto 10 bids and is expected to be sold for $68-

100 per square foot per plot ratio.


Fal l i n Q2 com merc ia l p rope r ty real e s t a t e

inves to r sen t iment s

A survey done by the Royal Institution of Chartered Surveyors (RICS) showed that realestate investor and occupier sentiments in thecommercial property market are down from

the previous quarter. The index measuresoccupier demand, level of inducements andrent expectations. According to the index, thenumber of respondents that expect a positive

outlook fell to 11 per cent in Q2. Due toshrinking demand for industrial and retail landspace, occupier demand has also fallen.However, office space rental prices areexpected to increase as the office land supplydecreases. While the Investment Sentiment

Index showed a drop of 14 per cent from Q1,it is still in the positive range as 4 per cent of the respondents are optimistic in the propertymarket. From the survey results, RICSexpects the property transaction volumes tomoderate in the next quarter.



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Singapore Property Weekly Issue 167