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In this issue:
- Why I’ve Not Lost Money in 13 Years –Understanding the Time Value of Money and IRR
- Singapore Property News This Week
- Resale Property Transactions (September 17 – September 23)
In this issue:
- Why I’ve Not Lost Money in 13 Years –Understanding the Time Value of Money and IRR
- Singapore Property News This Week
- Resale Property Transactions (September 17 – September 23)
In this issue:
- Why I’ve Not Lost Money in 13 Years –Understanding the Time Value of Money and IRR
- Singapore Property News This Week
- Resale Property Transactions (September 17 – September 23)
Copyright 2011-2014 www.Propwise.sg. All Rights Reserved.
Contribute Do you have articles and insights and articles that youd like to share with thousands of readers interested in the Singapore property market? Send them to us at info@propwise.sg, and if theyre good enough, well publish them here, on our blog and even on Yahoo! News. Advertise Want to get your brand, product, service or property listing out to thousands of Singapore property investors at a very reasonable cost? Head over to www.propwise.sg/advertise/ to find out more. CONTENTS p2 Why Ive Not Lost Money in 13 Years Understanding the Time Value of Money and IRR p9 Singapore Property News This Week p16 Resale Property Transactions (September 17 September 23 ) Welcome to the 176 th edition of the Singapore Property Weekly. Hope you like it! Mr. Propwise FROM THE EDITOR SINGAPORE PROPERTY WEEKLY Issue 176 Page | 2 Back to Contents By Gerald Tay (guest contributor) This post requires a basic understanding of using a financial calculator. Explaining how to use it is beyond the scope of this post as I dont want to turn it into a bed-time lullaby if youre one of those who has never touched a financial (not scientific) calculator. Its impossible to learn math by reading! Rather, Ill try to explain in layman terms so you can grasp the basics of what Internal Rate of Return (IRR) and Time Value of Money are, respectively, as well as why they are essential for property investment. Why Ive Not Lost Money in 13 Years Understanding the Time Value of Money and IRR SINGAPORE PROPERTY WEEKLY Issue 176 Page | 3 Back to Contents Tip: Cash flows are worth more today than they are tomorrow. One reason why Ive not lost money in 13 years The Internal Rate of Return (IRR) is arguably the most holistic measure of an investment propertys return potential. That said, many investors fail to utilize this key metric, or underestimate its utility in measuring value. But dont feel relatively uninformed if you dont. I took courses in Financial Analysis and Investment in the mid-2000s. The Time Value of Money and Internal Rate of Return (IRR) was one of the topics covered. I flunked my Math! Ive always been a B/C Math student in school. I received a C grade for Additional Mathematics for my O levels. At 17, I dropped out of Engineering School because I flunked each of my Engineering Math subjects (I prefer to write and speak rather than fix things up anyway). My point is you would have been a better math student than me. You dont need to be a Math genius to understand what Im going to tell you. All you need is to understand basic principles and how to input a few numbers into a financial calculator - and voila! Internal Rate of Return (IRR) is an extremely powerful valuation metric for property investment, and have been successfully applying it for a while. But few of those who use the Internal Rate of Return (IRR) in the real estate industry know how to use it as a powerful valuation tool. A property investor can be a real estate professional but a real estate professional may not be a real investor. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 4 Back to Contents In this post I will address the following: 1. Internal Rate of Return (IRR) 2. Net Present Value (NPV) 3. Modified Internal Rate of Return (MIRR) Internal Rate of Return (IRR) The Internal Rate of Return is the interest rate that brings the Net Present Value of all future cash flow to zero. Heres a hypothetical example: For every $100 you lend to a friend, hell repay you $10 per year forever and ever! How much do you get every year in percentage terms? $10 divided by$100 equals10%. This 10% is called the Rate of Return. But be careful; this is NOT yet the Internal Rate of Return. This 10% rate of return tells you how quickly you get your money back in exactly 1 year compared to your original $100. It was very easy to find the rate of return of 10%. Now. What if your friend pays you back a different amount every year? In some years, he pays $20, in other years he might pay only $5. And in some years he doesnt pay! And what if its not forever? What if its exactly 7 years? The rate of return is now hidden, and is called the Internal Rate of Return (IRR) In layman terms: The Internal Rate of Return is a good way of judging an investment. The bigger the better! SINGAPORE PROPERTY WEEKLY Issue 176 Page | 5 Back to Contents When using the IRR to measure the performance or do a valuation of a property investment, the investor must establish a target yield over a period of time, and then project the year-over-year performance of the three key return components of a real estate investment: amortization, appreciation and cash flow. Tip: The 3 key components of property investment are Amortisation, Appreciation and Cash Flow. Running these numbers on a financial calculator will solve for IRR and provide valuable insight into the strength of a particular investment. Why is the IRR important? The IRR is important because it tells you exactly how hard your money is working for you. It is not misleading like many other measures of rate of return. Novice Investors use average return in their vocabulary. The Master Investor uses IRR to evaluate the real performance of his investment. Lets illustrate how an alternative such as the average rate of return can be extremely misleading. Year 8: 60 + 100 (initial investment) = 160 Year 8: 20 + 100 (initial investment) = 120 SINGAPORE PROPERTY WEEKLY Issue 176 Page | 6 Back to Contents In Investment A, the average rate of return p.a. over the investment period is 28.8% i.e. (0+0+20+20+40 +40+50+60)/8. But in Investment B, it is only 22.5%. Yet, the Internal Rate of Return (IRR) is higher in investment B than in A (25% versus 20%). Funds invested are working harder in investment B. The reason is that the bulk of returns are received earlier. Even more misleading is when sales prospectuses report an average rate of return for only part of an investments life. In investment A, some prospectuses might state the average rate of return p.a. after the second year is 38.3% (20+20+40+40+50+60)/6)! This is a way of excluding the zero cash flows from years 1 and 2 in an attempt to improve the appearance of returns. In an extreme example, the rate of return in some timber plantation investments is very high in year 25 when trees are harvested. But there is no income in the first 24 years! An IRR is essential to get a real perspective on the rate of return. Tip: In real estate investment, returns in the early years are more important than returns in the later years. Be wary of published rates of returns So, beware of investments which show high rates of return in the later years and publish these figures (and not IRRs) in sales prospectuses. Always use the IRR for the most accurate indication of returns. The Losing Investor will say, Im still making money in investment A even though the IRR is lower. So why should I care about IRR? SINGAPORE PROPERTY WEEKLY Issue 176 Page | 7 Back to Contents Thats why the Losing Investor makes mediocre returns, while The Master Investor makes extraordinary returns. The difference here is about first having the right mentality to make money, and not the other way round! This is one reason why I repeatedly mentioned how buying off-plan properties as investments (uncompleted/new launch) can be an expensive gamble. The first 3 to 4 years have zero cash flows. After construction is completed, the performance of the property is highly questionable as too many optimistic assumptions from the time of purchase seldom materialise eventually. If we measure our IRR from buying a re-sale property instead, well easily find that our returns are a better (or safer) bet than that of a new property. Tip: The IRR will tell you exactly how hard your money is working for you, irrespective of the pattern of income distribution over time. No other measure of return will do this. Concluding Comments The IRR has been a popular metric for evaluating investments for many years primarily due to the simplicity with which it can be interpreted. However, the IRR suffers from a couple of flaws. The most important flaw is that it implicitly assumes that the cash flows will be reinvested for the life of the investment at a rate that equals the IRR. A good project may have an IRR that is considerably greater than any reasonable reinvestment assumption. Therefore, the IRR can be misleading at times. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 8 Back to Contents The Modified Rate of Return (MIRR) and Net Present Value (NPV)solves this problem by using an explicit reinvestment rate (i.e. bank deposits). We will cover these in a future article. By guest contributor Gerald Tay, who is the founder and coach at CREI Academy Group Pte Ltd, an organization dedicated to empowering retail property investors with smarter investing philosophy and strategies. He is a full-time investor with over 13 years of solid experience in building his wealth through Property Investment and is financially wealthy today. SINGAPORE PROPERTY WEEKLY Issue 176 Singapore Property This Week Page | 9 Back to Contents Residential 400 applications made for Woodlands EC Bellewoods, which is the first executive condominium launched this year has drew 400 applications. The condominium which is located in Woodlands comprises of 561 units and is expected to be sold for between $750 and $820 per square foot. Buyers would not need to pay HDB resale levy when they purchase a unit at Bellewoods as it is one of the last executive condominiums in the northern area of Singapore to be privatised. Since January 2013, developers are required to put their executive condominium projects up for sale after only 15 months from the date of award of the site. This has moderateddevelopers bids for executive condominium sites in the Government Land Sales programme. (Source: Business Times) Private residential market and HDB resale market softens in Q3 Market experts believe that the weak holding power of private home owners and developers has pushed prices of private homes and HDB resale flats down in Q3 2014. Flash estimates by the Urban Redevelopment Authority (URA) showed that the overall Private Residential Property Price Index (PRPPI) has fell 0.6 per cent in Q3 this year. This follows a 1 per cent fall in the PRPPI in Q2 this year. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 10 Back to Contents Over the last four quarters, prices of private homes have fallen by 3.8 per cent. On the other hand, resale HDB prices have also fallen due to the implementation of the mortgage servicing ratio. Not only so, the increase in supply of build-to-order flats has reduced demand for resale flats. Flash estimates from HDB showed that resale price index has slipped by 1.6 per cent in Q3, while resale prices have dropped by 6.8 per cent in Q3 2014 from Q3 2013. Ong Teck Hui from JLL does not expect the private home market to rebound soon. URA flash estimates also showed that prices of landed properties have fallen 1.7 per cent in Q3. Ong believes this is because the total debt servicing ratio has reduced the demand for landed properties. Eugene Lim from ERA Realty also added that the gradual fall in prices is an effect of the governments cooling measures. (Source: Business Times) Condo prices in August remains flat According to flash estimates by the National University of Singapore, resale prices of completed private apartments and condos have been flat in August. From July to August, prices for the overall market and the central region, including the financial district and Sentosa Cove, have remained unchanged. Yet, small apartments in the non- central regions have increased by 0.1 per cent in August. LumSau Kim said that the low turnover is likely to be due to fewer successful transactions. This is because sellers have not adjusted their asking prices to meet buyers expectations. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 11 Back to Contents Not only so, only 318 condo units were transacted in August. This is a fall from the 376 units that changed hands in July. Nicholas Mak from SLP International believes that the Hungry Ghost month has slowed sales in August. Mak added that there were no launched private residential projects in August, and as such, condo sales have been flat. (Source: Business Times) Sembawang EC site sold for $353 psfppr A Sembawang executive condominium site has been sold for $353 per square feet per plot ratio, which is marginally higher than the $350 psfppr that an adjacent site had fetched in January this year. The bid was won by Qingjian Realty. Despite the high price, the tender had only attracted two bids. The low participation in the tender reflects the developers sentiments in the executive condominium market. Ong Kah Seng from RST Research believes that Qingjian Realty may have offered a high bid price as it believes that the government will soon lift cooling measures on the executive condominium market. Currently, executive condominiums can only be released 15 months from the date of award of the site. Also, there is a mortgage service ratio cap that impacted residential property demand. Nicholas Mak from SLP International predicts that Qingjian Realtys breakeven cost is as high as $740 per square foot. (Source: Business Times) Marina One to be launched on Oct 11 2014 M+S Pte Ltd will only be launching 150 to 200 units at the expected launch of Marina One Residences. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 12 Back to Contents The released units are part of the first residential block. The second residential block, which has about 521 units, will be released after the projects temporary occupation permit has been issued. Market experts believe this will help moderate the supply of residential units. The mixed-used project, which comprises 1,042 units in total, is expected to be released on October 11. Prices of the residential units will range from $1,960 to $3,100 per square foot. One- bedroom units start from 700 square feet and are priced at $1.4 million while a two- bedroom unit is about 1,001 square feet and is selling for about $2 million. On the other hand, a three-bedder is going for $3.46 million. Since the project does not come under the qualifying certificate rules, the developer will not be required to sell all its units within two years of its completion. Kemmy Tan from M+S expects the property to fetch a rental yield of 2 to 3 per cent due to its prime location. (Source: Business Times) Lake Life launches before 15-month sale- launch rule is up To moderate the market, developers can only launch their executive condominium projects 15 months after the date of award of the site, or after the completion of foundation works, whichever is earlier. The Lake Life executive condominium is likely to be the first executive condominium that will be launched before the stipulated 15 months as it is slated to be released for sale on October 4. Vincent Ong from Evia Real Estate said that developers have been able to complete foundation works within the first eight months. The Lake Life executive condominium consists of two- bedroom units of about 969 square feet, SINGAPORE PROPERTY WEEKLY Issue 176 Page | 13 Back to Contents three-bedroom units from 1,033 square feet and four-bedroom units from 1,195 square feet. The units are expected to be priced between $880 and $890 per square foot. Commercial Havelock II well received among buyers Since its soft launch in July, about 70 per cent of the 50 units at Havelock II have been sold by Guthrie GTS. The 50 units sold in Havelock II made up half of the 100 office and retail units released by Guthrie to revamp HR buildings acquired earlier in March 2013. Of the 245 units in that project, 151 are retail units and the remaining are office spaces. Michael Leong from Guthrie said that the total debt servicing ratio framework has slowed sales. Office units, ranging from 312 square feet to 2,357 square feet have been sold for an average price of $2,228 per square feet. On the other hand, retail units from 150 square feet to 1,335 square feet have been sold for an average of $4,657 per square feet. All retail units are provided with water points and discharge outlets. Selected units will also be provided with independent air-conditioning systems. Last year, Guthrie had paid $282.88 million to acquire the eight-storey building. (Source: Business Times) DTZ: 1m sqft office space to be available in 2015 According to DTZ, about one million square feet of office space will be available in 2015 when current tenants move out of existing buildings to new offices. Not only so, there will be another 133,000 square feet of shadow spaces released next year. This will add on to the current 550,000 square feet of shadow office space. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 14 Back to Contents These spaces are made available for subletting or reassignment by tenants. Thus, there will be a net increase of 159,000 square feet in office supply in 2015, said DTZ. While office rents have been projected to grow by 15 per cent by the end of this year, Lee Lay Keng from DTZ believes that rental growth in the CBD area will increase by a slower rate in 2015. The average gross monthly rental for offices in Raffles Place has increased 2.7 per cent to $10.55 per square foot from Q2 to Q3 this year. Not only so, DTZ said that occupancy rates were higher in Q3 across the island. This is because no new office space was released in that quarter. Occupancy rates have rose by 0.8 percent to 95.8 percent in Q3 2014. (Source: Business Times) Tuas and Tampines industrial site on sale Two sites at Tuas South and one at Tampines North have been put on sale. All three sites have been zoned for Business-2 development. The site at Tampines is 2.7 ha. It is the largest site that has been launched in H2 2014, under the industrial government land sales confirmed list. It has a gross plot ratio of 2.5 and has a lease of 30 years. Nicholas Mak from SLP International predicts that there will be four to seven bids for the Tampines site. Also, he expects the top bid to be around $70 to $82 per square foot per plot ratio. On the other hand, Ong Kah Seng from RST Research said that the winning bid would be around $90 to $105 per square foot per plot ratio. Market experts expect the Tuas site to attract lower bid prices. SINGAPORE PROPERTY WEEKLY Issue 176 Page | 15 Back to Contents The site at Tuas South Street 9, which has a 20 year 8 month lease and a gross plot ratio of 1.0, is expected to draw bids as high as $65 per square foot per plot ratio, said Mak. The other site at Tuas South Street 6 will be released under the reserved list. It also has a gross plot ratio of 1.0. However it has a 20 year and 4 month lease. Analysts believe that that site will be sold for about $60 to $75 per square foot per plot ratio. (Source: Business Times) SINGAPORE PROPERTY WEEKLY Issue 176 Page | 16 Back to Contents Non-Landed Residential Resale Property Transactions for the Week of Sep 17 Sep 23 Postal District Project Name Area (sqft) Transacted Price ($) Price ($ psf) Tenure 3 HARVEST MANSIONS 947 1,250,000 1,320 99 3 TANGLIN VIEW 1,141 1,450,000 1,271 99 4 THE AZURE 2,271 4,030,000 1,774 99 4 THE INTERLACE 1,001 1,330,000 1,329 99 5 THE PARC CONDOMINIUM 1,421 1,880,000 1,323 FH 5 VARSITY PARK CONDOMINIUM 1,453 1,720,000 1,184 99 5 DOVER PARKVIEW 1,249 1,430,000 1,145 99 5 DOVER PARKVIEW 1,249 1,325,000 1,061 99 5 VARSITY PARK CONDOMINIUM 1,636 1,680,000 1,027 99 5 WEST BAY CONDOMINIUM 1,216 1,100,000 904 99 5 VARSITY PARK CONDOMINIUM 2,250 2,025,000 900 99 7 BURLINGTON SQUARE 1,302 1,460,000 1,121 99 8 CITY SQUARE RESIDENCES 1,195 1,650,000 1,381 FH 9 RIVERSIDE 48 904 1,990,000 2,201 FH 9 RESIDENCES AT EMERALD HILL 2,282 4,950,000 2,169 FH 9 VIDA 883 1,725,000 1,954 FH 9 SKYLINE 360 @ SAINT THOMAS WALK 22,238 35,000,000 1,574 FH 10 ARDMORE PARK 2,885 7,840,000 2,718 FH 10 BELMOND GREEN 1,281 2,241,750 1,750 FH 10 VALLEY PARK 1,808 2,712,000 1,500 999 10 SOMMERVILLE PARK 1,948 2,750,000 1,411 FH 10 DORMER PARK 2,540 3,400,000 1,338 FH 10 SIGNATURE AT LEWIS 6,534 7,000,000 1,071 FH Postal District Project Name Area (sqft) Transacted Price ($) Price ($ psf) Tenure 11 NEWTON 18 614 1,050,000 1,711 FH 11 PARK INFINIA AT WEE NAM 3,315 4,500,000 1,357 FH 11 LA MAISON 1,292 1,720,000 1,332 FH 12 THE MEZZO 840 1,270,000 1,513 FH 14 LE CRESCENDO 947 1,080,000 1,140 FH 15 DE CENTURION 775 1,120,000 1,445 FH 15 PRESTIGE LOFT 388 545,000 1,406 FH 15 THE ESTA 1,313 1,755,000 1,336 FH 15 FINLAND GARDENS 1,324 1,600,000 1,208 FH 15 AMBER RESIDENCES 2,217 2,600,000 1,173 FH 15 DUNMAN PLACE 1,442 1,680,000 1,165 FH 15 PARK EAST 1,345 1,535,000 1,141 FH 15 CHAPEL COURT 807 770,000 954 FH 15 BLU CORAL 1,948 1,530,000 785 FH 16 BAYSHORE PARK 936 968,000 1,034 99 16 SUNHAVEN 2,099 1,538,000 733 FH 17 EDELWEISS PARK CONDOMINIUM 1,281 1,180,000 921 FH 19 AMARANDA GARDENS 1,464 1,868,000 1,276 FH 19 KOVAN RESIDENCES 1,270 1,410,000 1,110 99 19 CHUAN PARK 1,173 1,145,000 976 99 19 RIO VISTA 1,378 1,235,000 896 99 19 RIO VISTA 1,249 1,100,000 881 99 19 CHUAN PARK 1,528 1,280,000 837 99 SINGAPORE PROPERTY WEEKLY Issue 176 Page | 17 Back to Contents NOTE: This data only covers non-landed residential resale property transactions with caveats lodged with the Singapore Land Authority. Typically, caveats are lodged at least 2-3 weeks after a purchaser signs an OTP, hence the lagged nature of the data. Postal District Project Name Area (sqft) Transacted Price ($) Price ($ psf) Tenure 20 FAR HORIZON GARDENS 1,238 920,000 743 99 21 TERRENE AT BUKIT TIMAH 624 940,000 1,506 999 21 GARDENVISTA 861 1,200,000 1,394 99 22 CASPIAN 1,001 1,100,000 1,099 99 22 THE CENTRIS 1,302 1,320,000 1,013 99 22 PARC OASIS 1,076 1,010,000 938 99 23 THE DAIRY FARM 1,281 1,410,000 1,101 FH 23 TREE HOUSE 1,249 1,330,000 1,065 99 23 THE WARREN 1,313 1,050,000 800 99 23 REGENT GROVE 1,163 875,000 753 99 25 WOODGROVE CONDOMINIUM 2,142 1,340,000 626 99 27 YISHUN SAPPHIRE 1,206 860,000 713 99 28 SERENITY PARK 1,313 1,290,000 982 FH