THE SINGAPORE LANDLORD’S CLARIFICATIONS
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading !
My friend who is the landlord with over a hundred tenants for his various properties that we talked about last week also happens to be an active bond and equity investor which is all we really need to have that “helicopter” view of asset markets.
Not impressed with my short write up, he decided to give me another earful to clarify his stance and correct my “misrepresentations”. Therefore, it was whisky time again and another stroke of luck for me with another free double of double shots.
Residential market is “policy driven”
The residential real estate market in Singapore is now well and truly in a slump shall remain so until the additional buyer stamp duties are removed which he thinks will not happen this year, at least.
Historically, the well-heeled have supported real estate markets but with 15% ABSD, there is little buying interest.
Interestingly, the first-time buyers who traditionally have gravitated to new launches are the only real source of liquidity. Thus the premium for new launches versus secondary market sales has widened significantly.
Commercial Property is the “next shoe to fall”
Residential property has always been more volatile than commercial real estate. Residential real estate has always been an emotional card because home-ownership is not always an analytical decision. In contrast commercial property is a approached from a more logical perspective.
SIBOR, the main funding rate for most real estate loans in Singapore, has more than quadrupled from its lows of 0.1-0.2% last year to its greater than 1% levels today. This means that interest rate burdens have increased four to five fold.
If you add say a spread of 150 bps to 1%, we get 2.5% interest costs. The cap rates of a lot of commercial real estate is at the 3% level, and this is a gross cap rate, which ignores property tax, and service charges. If we assume that net rent is say 80% of gross yield, then a 3% gross yield translates to a low 2.4% net yield and similarly 3.5% gross yield translates to 2.8% net yield.
Indeed, SIBOR has averaged 2.5% over most of its life, and LIBOR has not even started to go up yet. When the Fed finally tightens, SIBOR could go up more, and thus, why should capital values stay where they currently are?