retirement Archives - Holland Property

Is It Still Worth Buying A Freehold Property For Retirement?

hollandproperty — Fri, 05 Jan 2024 15:10:44 +0000

Is It Still Worth Buying A Freehold Property For Retirement?

A few years ago, I wrote an article, “FREEHOLD VS LEASEHOLD: Is It Always Worth Paying More For A Freehold Condo?”. Here, I am asking a related question, does it make a difference whether we are buying a freehold or leasehold condo for retirement?

Many Singaporeans would immediately answer yes, and some may even insist on only buying freehold properties if it’s for the long term. However, the property market has constantly shown that we cannot make assumptions, and in fact, one of the least provable statements is that “freehold condos perform better.”

As a matter of fact, historically, we have seen both leasehold and freehold condos enjoy capital appreciation.

Let’s take a more nuanced look before you decide to invest in one for retirement:

Why is it so hard to give a definite answer on whether freehold is better?

A common question is why we don’t just look at all the freehold prices, then look at all the leasehold prices, and see which one performed better overall. Well, this will never be accurate.

First, there are far more leasehold than freehold condos, which will distort the results (generally to the benefit of leasehold condos, as there’s so many more transactions.) In addition, all the freehold condos tend to cluster around prime neighbourhoods like Orchard, Tanglin, etc. On the other hand, leasehold condos tend to be found in newer or fringe neighbourhoods. This, again gives leasehold condos an unfair advantage, as they almost always have more room to appreciate.

On the other hand, you will find more leasehold condos that are conveniently located near MRT stations and amenities. So, if you want the added convenience, you will have more choices for leasehold condos than freehold condos. This added convenience does have a positive impact on capital appreciation.

Also, if you buy a condo in a very new area like Tengah, prices will be rock bottom, and there’s a lot of room for appreciation as the government will build schools, MRT stations, markets, etc. But if you buy in an already heavily-developed area, such as Anson Road or Orchard Road, how much more can the price increase? It’s already among the most expensive properties in Singapore. So this is why leasehold properties, as a whole, can show much more significant percentage gains than their freehold counterparts.

Even if prime region condos show good appreciation, we’re forced to ask if the appreciation is really due to their freehold status or just because they’re such a desirable place to live. Property prices move for many reasons; not all are related to lease status.

Case Study: Leedon 2 vs The Merasaga

These two condos are located in the prime Holland Road neighbourhood.

Leedon 2 is a 72-unit freehold condo built in 1996.

The Merasaga is a 114-unit 99-year leasehold condo built in 1995.

Even though The Merasaga is slightly older than Leedon 2, it has appreciated by 220% over the last ten years. In comparison, Leedon 2 has gained by 171%.

Why is that so? There are a few possible reasons:

The Merasaga has a better layout
The Merasaga has better landscape and facilities
The Mersaga is quieter
The Merasaga enjoys a better view
The Merasaga commands better rents

So, as we can see, the lease status of the condos alone does not determine its value.

So how can we determine if a freehold property is really good for retirement?

We can start by understanding some general factors and eventually moving on to scrutinise the actual property.

The first factor is the likely lifespan of the property. An interesting point to note is that, regardless of whether a property is freehold or leasehold, it tends to last the same amount of time. This article has some research on how long most properties last before they go en-bloc; regardless of lease status, the general answer is between 19 and 24 years. It is rare for any condo to last more than 33 years.

This is significant to your retirement for two reasons:

First, you may want to buy a freehold unit because it’s “there forever,” and you have something to will to the children, or perhaps you feel you can charge rent for the rest of your life, and so can your family.

But the average lifespan of a condo shows this is improbable: even if you pay 15 to 20% more for a freehold condo, you may find that the condo goes en-bloc in 24 years; exactly the same as a leasehold counterpart nearby. And if that’s going to be the case, do you still want to pay the freehold premium?

you may want to buy a freehold unit because it’s “there forever,” and you have something to will to the children, or perhaps you feel you can charge rent for the rest of your life, and so can your family. But the average lifespan of a condo shows this is improbable: even if you pay 15 to 20% more for a freehold condo, you may find that the condo goes en-bloc in 24 years; exactly the same as a leasehold counterpart nearby. And if that’s going to be the case, do you still want to pay the freehold premium?

Second, we need to consider that freehold status becomes more valuable with age. For example, when a leasehold property has only 60 years left, the value suffers as borrowers may not be able to get a full loan; this means they need more cash upfront. Buyers may even need to pay full cash for properties with 30 years or less on the lease.

In theory, freehold properties avoid this issue, as there is never any lease decay. This is part of the justification for the freehold premium. But again, consider how long the typical condo lasts: it would have to survive 39 years (dropping the lease to 60 years) before there’s an effect on the financing. As I have mentioned above, this is quite a rare age for condos.

If your condo goes en-bloc, or you sell it early on, you may find the lease decay has no effect, and that would mean paying for freehold status was a waste of money. You may as well have bought a cheaper leasehold unit and held it for the same amount of time.

If your condo goes en-bloc, or you sell it early on, you may find the lease decay has no effect, and that would mean paying for freehold status was a waste of money. You may as well have bought a cheaper leasehold unit and held it for the same amount of time.

But let’s put the property lifespan aside, and look at rental income

It may surprise you to learn that some very savvy property investors when picking a unit to rent out, will refuse to consider freehold. The reason is the higher price of freehold and the impact on rental yield.

Consider two condo units of the same age, quality, and location. The only difference is that one is a freehold, and the other is a leasehold.

The leasehold unit is $1.8 million and rents for around $54,000 per year.

The freehold unit is $2.1 million and rents for around $54,000 per year.

(Why are they the same? It’s because a tenant will never pay more for freehold status. Lease status has no benefit to them. All they care about is whether it’s a pleasant place to live, close to work, has an MRT nearby, etc.)

Gross rental yield is the annual income divided by the property price. So for the leasehold unit, the gross yield is 3% ($54,000 / $1.8 million x 100). But for the freehold unit, the gross yield is 2.57%.

Simply put, you’re probably making more money from renting the leasehold unit than the freehold one. So do consider if the extra $300,000 in price is better off in your retirement fund or some other investment.

But I am not buying to rent out, you may say. Granted, your purpose is for your own stay so you are not so much concerned about rental yield. But do consider two things:

There is a correlation between property value and rental yield. If it comes to a point in time that you do decide or need to sell your property, the one with a higher rental yield is likely to fetch a higher price than one with a lower yield.
As the property ages, the maintenance costs will go up. Owners will have to face the constant hassles of repairing leaking pipes, water seepage, spalling concretes, etc. More sinking funds will be needed for lift maintenance, facilities upgrades and structural repairs. Oftentimes, these repair costs can be very significant. After a while, frustrated owners might start to wonder if it is really worth hanging on to their ageing freehold condos.

Finally, we should consider that long-term changes to the area could trump your freehold value

There are certain factors that being freehold cannot overcome. Some examples of this are:

Several new condos are built nearby, increasing competition for tenants or buyers, and some of the new condos even block the view of your property.
Condo maintenance worsens toward later years; even if your condo is the only freehold one in the area, it still looks worse than its leasehold counterparts.
Cooling measures or market conditions change at the time you sell. If you sell during a downturn or (touch wood!) at a loss, at least a leasehold option would mean losing less money.

Ultimately, a leasehold property commits less capital and has a lower risk profile.

A private property is a great retirement asset, but it may not be necessary to make it a freehold

It is true that some of the most prime regions, such as Tanglin, Cluny, Orchard, etc. have properties that are good retirement assets. However, it’s unlikely that the savvier investors are buying there just because the properties are freehold. They are buying there for long-term value due to the location.

From a personal finance perspective, it’s also worth considering that a cheaper (leasehold) property can be paid off sooner or with less interest over the years. It’s seldom worth pushing your loan tenure too close to retirement, just for the sake of having a freehold condo.

Simply put, find a well-located and well-priced condo for your retirement asset; whether or not its freehold is a secondary concern

The key parameters are:

Affordability – Your monthly repayments should not be more than 30% of your monthly household income.
Rental income and retirement targets – If your targeted retirement income is $4,000 a month, and the property can produce $4,000 a month, then does it really matter whether it’s leasehold or freehold?
Targeted appreciation rates – Based on your retirement planning, you might target a certain rate of return (e.g., effective gains of 3% per annum when you sell). This must be the first priority. If you find that a freehold property that can do it, then go for that property. But if you find a leasehold property that can do it, don’t hesitate to go for that instead. Don’t be too hung up over lease status.

If you’re currently pondering a freehold (or leasehold!) condo for retirement, I can help you make specific comparisons. Do reach out to me for direct help, and I can advise you on whether the property meets your retirement objectives.

Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.

Danny has a genuine interest in people and firmly believes in personal integrity. While helping homeowners with their property needs, their interest always takes precedence over his personal gains. Hence, Danny has consistently earned his clients’ complete trust and loyalty. Many of them have become his personal friends.

Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.

Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.

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The post Is It Still Worth Buying A Freehold Property For Retirement? appeared first on Holland Property.

Is It Still Worth Upgrading To A Condo In 2024?

hollandproperty — Mon, 18 Dec 2023 12:47:19 +0000

Is It Still Worth Upgrading To A Condo In 2024?

As 2023 comes to an end, home loan interest rates are up, and private home prices are higher than they were in previous years (although frankly, home prices rising is something that can be said of most years). This has led some HDB upgraders to reconsider their motives: in light of higher costs, is it still worth making the jump to a private, non-landed property?

There’s no single answer that’s right for everyone; but here are some of the main considerations, in making your decision:

Can I Afford To Upgrade from an HDB To A Condo In 2024?

Before we decide if it’s worth doing, we need to consider if it’s even practical, or the numbers involved.

Let’s look at average new launch prices, as we head into 2024. As I write this, we are nearing the end of December 2023:

As we can see, prices of new launches have slowed over the past quarter, with new launch prices averaging $2,136 psf.

Resale condos have seen a sharper spike in end-December 2023, but this is somewhat expected; with new launch prices being so high, I would expect more upgraders to be looking for resale options. As an aside, there were a lot of new launches in 2023; and there is a knock-on effect where new launches will also pull up the prices of nearby resale condos.

Even with the uptick, resale condos average just $1,645 psf.

We’ll use a three-bedder condo as an example for HDB upgraders

A three-bedder condo is roughly around 1,000 sq. ft. We use this size because, practically speaking, most HDB upgraders are families; so one and two-bedders are considered too small. Also, most families do not like to “upgrade” into anything smaller than a 4-room flat (around 900+ sq. ft.), especially if their former flat was bigger.

So for a new launch condo, an upgrader would be looking at a quantum of about $2.1 million, while a resale condo might have a quantum of around $1.6 million.

How viable is it to upgrade? Let’s take a look:

Cost for upgrading from an HDB to a resale condo:

The average cost of a three-bedder, resale unit is about $1.6 million. We will assume the upgrader has sale proceeds of around $600,000*, after selling their flat. This means they need to bridge an amount of about $1 million.

The initial down payment, assuming a maximum loan quantum, is 25% of the property price. This means they need $80,000 in cash, plus $320,000 in cash or CPF. After paying this amount ($400,000), they’re still left with $200,000 in cash from the sale of their flat.

The remaining loan they need is $800,000. Assuming a floor rate of 4%, and a 25-year loan tenure, this comes to about $4,223 per month. Assuming a TDSR limit of 55%, this requires the borrowers to have a combined income of at least around $7,600.

Cost for upgrading from an HDB to a new launch condo:

This is much tougher, as the average quantum is now around $2.1 million. Again, we’ll assume the previous flat was sold at $600,000*.

The required down payment is (first 5%) $105,000, followed by (next 20%) $420,000 in cash and / or CPF. After paying this amount, they will have only $75,000 left.

Assuming they pay the $75,000 into the property as well, they still need a loan quantum of $1.5 million.

At a 4% interest rate, assuming a 25-year loan tenure, the monthly loan repayment is around $7,920 per month. This would require a minimum combined income of about $14,400 per month.

You can see that, barring big developer discounts, the majority of HDB upgraders in 2024 will be much more comfortable with resale condo prices; but for those who have higher-value flats to sell (e.g., DBSS flats, flats at Pinnacle @ Duxton), the sale proceeds may be sufficient to bridge the gap to even a new launch condo.

*For simplicity’s sake, we will assume they have no outstanding home loan, and a sufficient amount in cash for the down payment. There are also other costs, such as stamp duty, agent’s fee and legal fee, which are not factored in here. For a more complex breakdown, do reach out to me and I can help you work out the numbers specific to your situation.

Is upgrading from HDB to condo worth the cost?

This will depend on the following factors:

Your ability to cope with the higher interest rates going forward
The role that the condo will play in your retirement
For younger buyers, potential delays in right-sizing
Whether you see value in cash-out refinancing as an option
The condo as a “safety margin”

1. Your ability to cope with the higher interest rates going forward

Singapore home loans are based on SORA rates. It’s a combination of your bank’s spread, plus the underlying three or one-month SORA rate (these are the most common home loan packages).

The higher the SORA rate, the higher your home loan interest. You can check historical rates here. SORA rates as of end-December 2022 were at 2.9%, but they reached over 3.7% as of end-2023.

The rate hikes are expected to slow in 2024, but they’re still likely to head upward in the near-term. Rates are also nothing like what we saw in the pre-Covid period, where 2% was the norm.

That being said, note that the floor rate for the TDSR (see above) assumes a 4% interest rate, which is already higher than the average rate – so if you can pass the TDSR, odds are you can handle the higher interest.

2. The role that the condo will play in your retirement

When it comes to resale gains, private homes still have a clear edge.

Over a 10-year period, private home prices (resale only) rose between $1,259 psf to $1,645 psf. This is an increase of about 30.6%.

In the same time frame, HDB flat prices rose from $461 psf to $571 psf. This is an increase of about 23.8%:

We also need to consider that Singapore has an ageing population and that non-Singaporeans cannot buy HDB flats. By the year 2030, about ¼ of all Singaporeans will be aged 65 and older.

Consider that when the next generation passes on, there will be a lot of vacant HDB flats. Children probably cannot inherit these from their parents, as you cannot own more than one HDB flat. At the same time, non-Singaporeans cannot absorb this supply of leftover flats.

In such a high-supply-lower-demand scenario, there’s a serious risk that HDB flats will no longer see the appreciation they have in past decades.

So for those thinking long-term and into retirement, this is a factor worth considering.

3. For younger buyers, potential delays in right-sizing

If you are below the age of 55, and you sell off a private home, you’ll need to wait 15 months before you can buy a resale flat (for a BTO flat, you need to wait 30 months). This does not apply to those aged 55 and above, including their spouses, who are moving to a 4-room or smaller resale flat.

This is a serious consideration for younger upgraders. If you make the jump to private, and later find you cannot sustain the costs, you will have a problem downgrading to a flat again. Even after liquidating the condo, you may incur additional costs in the form of rental needs, while waiting to be able to secure a flat.

As such, those who are not in a financially stable situation may not find the risk to be acceptable.

In general, it’s best to upgrade only if the monthly loan amount is kept to around 30% of your monthly income (even if the TDSR allows for more).

Also, if possible, leave enough money in your CPF funds to tide you over at least a year (longer the better) in case you are out of job for a while.

4. Whether you see value in cash-out refinancing as an option

One lesser-known advantage of owning a private property is cash-out refinancing*. This allows you to take out a loan against your property, at a much lower interest rate than personal loans, credit cards, etc.

You might, for instance, be able to borrow up to 75% of your property value, minus your CPF usage. As of 2024, most banks would have an interest rate that’s broadly similar to mortgage rates.

Taking out even a 50% loan against a $1.6 million resale condo is quite sizeable: it can fund a child’s overseas education, or start a business venture, without the high interest of many private education loans, business loans, etc.

It can also be seen as a way to monetise your property, without having to sell or rent it.

*Read my article on Wealth Accumulation Through Equity Loan

5. The condo as a “safety margin”

If you have a private home, and your financial situation turns bad, you can at least right-size back to an HDB flat. In this sense, the condo acts as a safety margin of last resort.

If you have an HDB flat, your only choice is to right-size to a smaller flat; and it’s likely that the proceeds are slim, and may not get you out of your financial complications.

As such, some buyers find emotional peace-of-mind, in knowing that their home can provide for them in alternative ways. This can be a strong motivation to upgrade, more so than factors like having a nice pool or view.

In essence, those who view their property as being an investment, retirement asset, or fallback are still likely to derive value from upgrading. However, as of 2024, the combination of higher interest and prices unfortunately restricts this possibility.

It’s likely homeowners who have higher-value flats, or paid-up properties, who are in a stronger position to upgrade. For those who have just started with their first home, a longer period of disciplined savings may be necessary, before they make the leap.

In addition, given the higher quantum of new launches, a better question may be: is it worth upgrading to a new launch condo? This is likely to be an issue that upgraders will grapple with, in the coming year.

For a personalised look at whether you should upgrade, do contact me for a consultation.

Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.

Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.

Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.

Subscribe to receive updated practical property investment insights, property reports and good investment deals

The post Is It Still Worth Upgrading To A Condo In 2024? appeared first on Holland Property.

How Your Property Can Still Provide For Retirement In 2023 And Beyond

hollandproperty — Fri, 10 Nov 2023 20:53:00 +0000

How Your Property Can Still Provide For Retirement In 2023 And Beyond

Retirement planning is paramount to many Singaporeans. Beyond the traditional portfolio of stocks and bonds, real estate has always been a compelling and tangible asset class that can redefine your golden years. In this age of uncertainty, where economic landscapes can shift unpredictably, the stability and resilience of real estate make it a beacon of hope for those seeking a robust retirement strategy.

The past few years have seen significant changes in the Singapore property market – from a sudden upsurge in prices to a new Prime and Plus model of flats to increased stamp duties. To top it off, we’re headed into a more volatile economy, due to external factors like wars in Europe and the Middle East. This has led to questions over whether residential property remains “the way to go” as a retirement asset, and how expectations have changed.

HDB flats as a retirement asset?

HDB resale flats

In considering HDB flats as a retirement asset, let’s first look at the situation with resale flats today.

At the time I’m writing this, it’s November 2023. Here’s a snapshot of prices today, and how far they’ve moved in the aftermath of Covid:

Note: All data is from Square Foot Research

HDB flat prices saw their sharpest uptick in prices throughout the post-Covid period. Resale flat prices now average $572 psf across Singapore, up from $452 psf in 2020.

Prior to this, resale flat prices had actually declined since the last peak in 2013. To grasp how big a change this is, the past two to three years have managed to reverse almost eight years of decline since 2013. Here’s what it looks like over a decade:

Back in 2013, the government imposed the Mortgage Servicing Ratio (MSR). This capped monthly loan repayments to no more than 30% of monthly income, when buying an HDB property.

On top of that, HDB no longer allowed sellers to do a valuation report before selling their flats because they were using the valuation as a benchmark to set their prices, resulting in Cash Over Valuation (COV).

The issue of lease decay, especially for older flats, came into the spotlight in 2017 when our minister, Mr. Lawrence Wong, cautioned that not all flats will be eligible for the Selective En Bloc Redevelopment Scheme (Sers). This caused many homebuyers to shun older flats.

The result was a gradual decline in resale flat prices, making them much more affordable right up to Covid. But once Covid struck, construction of BTO flats came to a screeching halt. Even after the lockdown period, the resumption of construction was very slow. Completion of BTO flats was delayed. Naturally, many people turned to resale flats. This caused a surge in demand for resale flats, thus pushing resale flat prices very quickly over a very short time, as you can see above.

(I wrote in May 2021 what is driving the red-hot HDB resale market)

The introduction of the new Prime and Plus housing models may compound this effect, at least over the near-term.

BTO flats new classifications: implications for HDB flats as a retirement asset

In August 2023, it was announced that the old system of mature versus non-mature neighbourhoods would be scrapped. Flats will come in three categories: Prime, Plus, and Standard by 2H2024.

Prime flats are located in central areas, such as Queenstown or Tanjong Pagar. Some currently existing Prime projects include Verandah @ Kallang, Farrer Park Fields, and Alexandra Vale.

Plus flats do not yet exist at the time of writing. However, these are flats that will be closer to malls, MRT stations, or their individual neighbourhood hubs (although the neighbourhood may be a fringe area.) The first of these will be Bayshore, to be launched in 2024.

The main differences between Plus, Prime, and Standard (normal) flats include:

Plus and Prime flats will enjoy more subsidies than Standard flats but will be subject to a Subsidy Recovery (SR), which must be paid back when the flat is sold. This applies only to the first batch of buyers, and the amount varies for each project. This is to make up for the bigger subsidies involved.
There is a 10-year MOP on Plus and Prime flats, including for resale buyers.
During the 10-year MOP period, owners can’t rent out the entire flat or invest in a private property.
Other eligibility requirements, such as the income ceiling, continue to apply to Plus and Prime flats, even at the point of resale (normal resale flats have no income ceiling.) The exact list of requirements for Plus flats will be disclosed in greater detail when the information becomes available.

However, existing resale flats, which are close to Plus and Prime flats, have seen no rule revisions. These flats now have an equally good location, but also don’t suffer from restrictions like the 10-year MOP, or some eligibility factors like the income ceiling. As you might expect, this has caused many sellers close to Prime projects to ramp up their asking price. They have all of the advantages and none of the drawbacks.

However, existing resale flats, which are close to Plus and Prime flats, have seen no rule revisions. These flats now have an equally good location, but also don’t suffer from restrictions like the 10-year MOP, or some eligibility factors like the income ceiling. As you might expect, this has caused many sellers close to Prime projects to ramp up their asking price. They have all of the advantages and none of the drawbacks.

This being said, the momentum in the resale flat market is likely unsustainable

Those who sold their flats in the aftermath of Covid may well have seen windfall returns, compared to the eight years preceding the pandemic (ref: the chart above.) However, this surge in resale flat prices is unlikely to last.

HDB aggressively ramped up flat construction after Covid, with the deliberate aim of keeping resale prices low. In 2022, for instance, HDB completed 23,782 new flats, which is the highest amount since 2017. The government built so aggressively, that HDB incurred a $5.38 billion deficit to ramp up supply.

The number of BTO flats, along with interest in Plus and Prime flats, is likely to siphon some demand for resale units. In fact, given the high prices of resale flats, some first-time buyers have no choice other than to wait for BTO units. And in the long term, these new flats will end up joining the resale market, thus satisfying demand.

As such, I wouldn’t be over-optimistic regarding flats as long-term assets, despite the surge in prices over the past couple of years. Covid was an outlier event and not part of a natural market cycle.

Implications regarding resale flats as retirement assets

There are two notable implications going forward:

1. Plus and Prime flats show a repositioning toward ageing-in-place

One of the consequences of Plus and Prime flats is the phenomenon of self-sorting. By this, I mean that buyers of these flats are unlikely to want to upgrade, and hence take themselves out of the competition for standard flats.

Both Plus and Prime flats are not ideal, for those who want to make the jump to private property. The main reason is time: the MOP starts from the point of key collection, and stretches for 10 years. As such, if you factor in construction time of four to five years, buyers of Plus and Prime flats need to wait 14 to 15 years. During this time, private home prices would have appreciated even more (see below), thus making it harder to move up into condos.

The further restrictions on Plus and Prime flats – such as having an income ceiling and subsidy recovery – also limit the flats’ future gains; the wealthiest buyers would be earning too much to purchase these homes (the income ceiling on an HDB flat is $14,000.)

For these reasons, those who seek to upgrade will choose standard resale flats instead.

That the government placed so many restrictions on Plus and Prime flats also clarifies its position: these homes, which are in high-demand areas, are angled at those who want to live in them indefinitely; possibly for their entire lives. This shows a growing regard for HDB flats’ roles as pure homes, rather than investment vehicles.

Simply put, you may be rewarded with a better location, if you’re willing to stick with the same flat for the rest of your life.

Both Plus and Prime flats are not ideal, for those who want to make the jump to private property. The main reason is time: the MOP starts from the point of key collection, and stretches for 10 years. As such, if you factor in construction time of four to five years, buyers of Plus and Prime flats need to wait 14 to 15 years. During this time, private home prices would have appreciated even more (see below), thus making it harder to move up into condos.

2. Increased supply could moderate long-term appreciation

The larger number of flats, which will eventually enter the resale market, will place downward pressure on resale flat prices. Based on lessons learned during Covid (and the subsequent shortage), one possible outcome is HDB moving away from the slow BTO model.

That is, HDB may decide to build-as-appropriate, rather than wait to see sufficient interest before commencing sales and construction (the current BTO model.) If this happens, we will see even more supply in the market going forward.

Simply put, I think HDB has learned its lesson from the last supply crunch and will keep numbers high to avoid a repeat spike in flat prices.

Private condo as retirement asset

New launch condos

New launch condos are still priced at dizzying heights, averaging $2,339 psf, up from $1,815 psf back in 2020. Do note that the price has actually dipped slightly from February 2023 though, which saw a peak of $2,627 psf.

It’s quite a struggle for new launch prices to fall, even as more condos are completed. This is because developers are facing high land costs, increased material and labour costs, as well as higher ABSD and Land Betterment Charges, which limit the amount of discounts they can give. Profit margins have also been very slim.

Despite the high prices of new launch condos, many investors still prefer them to resale condos.

See my article on 6 reasons why new launch is better than resale as investment property.

Resale condos

In the resale condo market, prices also soared to an average of $1,585 psf, rising from $1,261 psf back in 2020. This is also, to some extent, related to the uptick in new launch prices (new launches in a neighbourhood have a knock-on effect, and will also cause local condo prices to rise slightly.)

As with HDB flats, however, the supply crunch is being resolved. This year, a number of particularly large meta-developments, such as Normanton Park (1,862 units!) and Treasure at Tampines (2,203 units!) will be completed. This is likely to soak up demand from the existing market, and we’re already seeing the impact in rental markets. In August 2023, rental rates were already slowing from a six-year high, as more units finally became available.

However, it remains to be seen if recent ABSD hikes won’t curb resale supply. Owners of multiple properties may be resistant to selling, even in collective sales.

Consider that, if you bought a second condo without ABSD before, selling now means that your replacement unit will cost 20 percent ABSD. As such, en-bloc sales have yet to see a resurgence, despite the 2017 tranche of properties already being completed and sold.

Hence, it’s unlikely that private property prices will fall per se though volume has dropped; at best, we may see a slower pace of price hikes.

As the last round of cooling measures was so recent though (June 2023), we will have to wait a while to gauge the extent of its impact. For now, it’s possible the full consequences of the ABSD rate hike may not yet have fully sunk in. A chief concern here is the ability of individual buyers to take on a full mortgage.

Because the ABSD rate is so high, investment properties make the most sense if you can decouple to buy separately (i.e. a husband and wife both buy units under their individual names, to avoid incurring ABSD). The problem is that, with home prices and interest rates currently high, it is tougher to qualify for separate home loans. For now, it’s a toss-up on whether many can afford to decouple and dodge ABSD.

Implications of condo units for retirement planning

Due to higher costs, it becomes ideal to upgrade before the age of 40, when financing restrictions start to bite
There may be more impetus to upgrade if possible, as flats become less investment-oriented
En-bloc sales have become less reliable as an exit strategy

1. Due to higher costs, it becomes ideal to upgrade before the age of 40, when financing restrictions start to bite

Consider decoupling to avoid ABSD. This requires each spouse to take on an entire mortgage individually. Given that a 1,000 sq. ft., new launch unit now averages $2,339 psf, this means at least one spouse is taking on a family-unit with a quantum of over $2.3 million.

On top of this, the Total Debt Servicing Ratio (TDSR) caps monthly loan repayments to 55 percent of monthly income, using a floor rate of four percent per annum.

Now assuming a maximum loan quantum of 75 percent of the property value, at 25 years, this is a loan of around $1.67 million. This is a monthly repayment of $8,815 per month, which would require an income of over $16,000.

This is already quite a high bar, and most buyers would end up having to make a bigger down payment to meet the TDSR. But if you wait past the age of 40, your maximum loan tenure will decrease (as your age plus the loan tenure cannot exceed 65, or else maximum financing falls to 55 per cent.). Shorter loan tenure will translate into higher monthly mortgage payments.

In short, those who want dual properties without paying ABSD, and rental income after retirement, need to act sooner. The older they get, the harder it is to get financing; and again, property prices may not fall, so much as just slow the pace of increase.

In short, those who want dual properties without paying ABSD, and rental income after retirement, need to act sooner. The older they get, the harder it is to get financing; and again, property prices may not fall, so much as just slow the pace of increase.

2. There may be more impetus to upgrade if possible, as flats become less investment-oriented

HDB has given clear signals that flats are intended for home ownership first. Investment benefits are secondary; it’s nice if it happens, but it’s not the primary benefit. This is not entirely a bad move, by the way, and it’s much fairer to those who seek pure owner-occupancy.

However, this could fuel motivation to own a private property, with regard to having a retirement asset. Because if all else fails and retirement funds run out, a condo can still be sold off while you right-size to a flat. But if all you have is a flat, there’s not much left to downgrade from (except perhaps to a smaller flat, or to sell off the excess lease, which may only be a marginal help.)

They are not, however, as lucky as the previous batch (from the 2008 to 2013 era) who were able to buy without ABSD concerns.

3. En-bloc sales have become less reliable as an exit strategy

Unless sale proceeds for en-bloc become so high that sellers can replace the property, even despite 20 percent or higher ABSD, I would expect tooth-and-nail resistance to collective sale. Doubly so from investors who are foreigners or corporate entities, as their replacement units would cost 60 percent ABSD (!)

Developers are already facing higher ABSD rates and financing rates, and the surge of Chinese developers with deep pockets – as we saw in 2017 – is unlikely (China’s real estate market is in a severe crisis, so we shouldn’t expect their big developers to come and throw money around like before.)

For these reasons, I would be cautious of counting on en-bloc sales as an exit strategy going forward. Private property can still be a retirement asset in terms of providing rental income, or resale gains to individual buyers; but not in the sense of developer buyouts.

For insights into a specific property for retirement, or a review of your property progression in 2024 and beyond, do contact me for personalised help.

Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.

Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.

Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.

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The post How Your Property Can Still Provide For Retirement In 2023 And Beyond appeared first on Holland Property.

Property Investors Don’t Think About Retirement Age

hollandproperty — Mon, 26 Aug 2019 04:44:07 +0000

Property Investors Don't Think About Retirement Age

I was glued to the TV last night listening to the PM’s National Day Rally speech. One thing caught my attention: government’s plan to raise the retirement age from 62 to 65, and re-employment age from 67-70 by 2030.

Will I want to work till I am 70?

I don’t foresee myself stop working in the near future. But I also don’t see myself as working right now. Huh? What do I mean?

Marc Anthony aptly puts it this way, “If you love what you do, you’ll never work a day in your life.”

If you love what you do, you’ll never work a day in your life.

Marc Anthony

I enjoy what I do right now. By the nature of my work, I have control over my time. I enjoy my family time. I go on family vacations. I am also actively involved in some religious works.

Raising the retirement and re-employment age may be good news for some people.

But I am thinking of many people who are working because they have to work. They need the money. They don’t get to enjoy their golden years. Or grand-parenthood. Or travel. Or doing the things they have always wanted to do.

Sad. Very sad indeed.

In contrast, others are enjoying the best time of their lives and doing the things they have always wanted to do.

Do You Have A Plan For Retirement?

How are they able to do it? Some enjoyed high incomes during their active working years and have good savings. But they are rare.

You can do the sum. Assuming you work from age 25 to 55. You get to live till 85-year-old. So you work for 30 years to save for another 30 years with no active income. Every year that you work, you have to save for 1 year of retirement. And you need to factor in inflation because $1 now is not worth $1 30 years from now.

If you want to retire with $3,000 to spend every month for 30 years, you need $1.08m. If you factor in 2% inflation rate a year, you will need $1.47m!

Sound depressing?

How many people have that much money to retire?

That is why most of us can’t stop working.

To retire, the only way is to make your money works hard for you.

Property Investment

The most common vehicle is property investment because it is the best hedge against inflation. The property is not the house you live in. It must be investment properties/properties that can give you passive rental income or capital gains.

One investor of Commonwealth Towers bought a 689sf unit in May 2014 for $992,849. In Dec 18, it was sold for $1,310,478 for a profit of $317,629.

Another seller of a unit at The Nexus made a whopping $1.22 million which was bought for $1.375 million in February 2007, and sold for $2.595 million on July 19.

How long does it take a person to save this much money? Imagine saving $1000 per month – how many months will it take to save even $100K?

The investor probably put in only 20-25% of the purchase price and paid the rest with a bank loan. If it is rented out, the rental helps to cover the loan. The smart investor uses other people’s money to make money. The investor’s language is return on equity.

That’s the power of property wealth planning. Intentional early planning is the key.

That’s why private property owners never think about their retirement age.

Read: Is Your HDB Flat A Retirement Asset Today?

If you are thinking about Property Wealth Planning as a means to your retirement plan, do contact me for a non-obligatory discussion.

Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.

Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.

Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.

The post Property Investors Don’t Think About Retirement Age appeared first on Holland Property.

retirement Archives - Holland Property

Is It Still Worth Buying A Freehold Property For Retirement?

Is It Still Worth Buying A Freehold Property For Retirement?

Why is it so hard to give a definite answer on whether freehold is better?

Case Study: Leedon 2 vs The Merasaga

So how can we determine if a freehold property is really good for retirement?

But let’s put the property lifespan aside, and look at rental income

Finally, we should consider that long-term changes to the area could trump your freehold value

A private property is a great retirement asset, but it may not be necessary to make it a freehold

Simply put, find a well-located and well-priced condo for your retirement asset; whether or not its freehold is a secondary concern

SUBSCRIPTION FORM

Is It Still Worth Upgrading To A Condo In 2024?

Is It Still Worth Upgrading To A Condo In 2024?

Can I Afford To Upgrade from an HDB To A Condo In 2024?

Cost for upgrading from an HDB to a resale condo:

Cost for upgrading from an HDB to a new launch condo:

Is upgrading from HDB to condo worth the cost?

1. Your ability to cope with the higher interest rates going forward

2. The role that the condo will play in your retirement

3. For younger buyers, potential delays in right-sizing

4. Whether you see value in cash-out refinancing as an option

5. The condo as a “safety margin”

SUBSCRIPTION FORM

How Your Property Can Still Provide For Retirement In 2023 And Beyond

How Your Property Can Still Provide For Retirement In 2023 And Beyond

HDB flats as a retirement asset?

HDB resale flats

BTO flats new classifications: implications for HDB flats as a retirement asset

This being said, the momentum in the resale flat market is likely unsustainable

Implications regarding resale flats as retirement assets

1. Plus and Prime flats show a repositioning toward ageing-in-place

2. Increased supply could moderate long-term appreciation

Private condo as retirement asset

New launch condos

Resale condos

Implications of condo units for retirement planning

1. Due to higher costs, it becomes ideal to upgrade before the age of 40, when financing restrictions start to bite

2. There may be more impetus to upgrade if possible, as flats become less investment-oriented

3. En-bloc sales have become less reliable as an exit strategy

SUBSCRIPTION FORM

Property Investors Don’t Think About Retirement Age

Property Investors Don't Think About Retirement Age

Do You Have A Plan For Retirement?

Property Investment