Last week several local newspapers published a report by DBS researchers that a second residential property yielded low return for the past decade given the property curbs, smaller property size, smaller families, ageing population and property price rise consistently higher that salary increment making it unsustainable. For a long time, I have a feeling somewhat that the good returns in property investments is likely to taper off as a country matures and when affordability for even the first property starts to become challenging. However, I do not have figures to support my thoughts. And, certainly do not know where the pain-point would be. The newspaper reports made reference to the DBS report seemed to resonate with my thoughts.
The news published in the various newspaper sources brought out a few interesting points:
(a) The returns from the 2nd property is comparatively low compare to other investments like investing in S&P 500 and REITs. While I somewhat agree of the positions in terms of relative return, I am not sure if I agree with the figures mentioned by the quoted by the newspapers. The report seemed to skewed the figures to a higher side. From the figures, it seemed to suggest that a first and second private properties and would have yielded four times and two times respectively. While this may happen for some peculiar cases, it appeared to me that they are on a high side. The compound return would have been 7.2% even for the 2nd property does not make sense to me. In fact, to a certain extent, the report contradicted itself as it mentioned that compound return for the past decade between 2011 and 2021 was only 1.1%.
On the other hand, if one were to use leverage to obtain the calculated return, then the comparison with investments REITs and buying the S&P 500 would not be fair, as in all likelihood, these investments were invested without the need for leveraging.
Furthermore, by sampling using different time periods, the results may turn out to be quite different. For example, Q1 2009 was an extremely low point for US stocks while it may not be the lowest point for properties.
(b) The rate of property prices increase has been tapering. In the last 10 years, the compound return was about 1.1, while the last 20 years, the rate of compounding was about 5.9%. If we stretch the time period further back into the 70s to 90s, the compound return was likely to be even more significant. It is not unusual to hear of owners selling properties bought in the 70s at the price of $60k-$70k and selling the property recently at $10m. Based on the findings, if one were to purchase a property in the last 10 years, it is unlikely that he can get a good compound return as the yield had tapered to a great extent.
In fact, based on the various transactions published by several property platforms recently, the compound returns appeared to be around 2%-3%. It is no doubt that the absolute profit quantum have been significant due to the huge amount of funds involved, but the rate of return appeared to be low in relative terms given the risk involved. In fact, the returns in the recent years seemed to be even lower than buying an endowment plan that roughly provides a return of 2.0% to 2.5%. This means that if we had put the same amount of money into an 30-year endowment plan, the return may even surpass that of a private property bought within the last 10 years and sold recently. Throw in the risks due to its illiquidity, risk concentration, the need for huge loan quantum, opportunity costs and the series of property curbs along the way, and the management and maintenance of the property, the attractiveness of direct property investments, certainly, pales compare with other investments classes.
(c) It is found that people of age 35 to 54 have the least propensity to invest.
Today also reported that 42% of Singaporeans assets were locked up in property compare to about 30% – 35% in the United States. Comparatively, stocks and securities only made up 9% of household assets. In another article, that I had come across, Hong Kong has a higher percentage of about 13%-14% tied up in stocks and securities even though property prices in Hong Kong are very much higher compare to that of Singapore. Today newspaper further mentioned that people of age 35 to 54 had the lowest propensity to invest. It may somehow points to the fact that their funds have been tied up in their properties, which resulted in a very low propensity to invest. This, to me, is an unfortunate thing. Generally, this life-stage is when we have the best shot in life to gather sufficient earning power to propel oneself into financial freedom. Once a person is not able to take advantage of this life-stage to fire himself into financial freedom, he may find it extremely difficult going forward as he draws nearer to his retirement.
So overall, can we say that property is a good investment in Singapore? Unless we can take advantage of the leveraging and timing extremely well, investing in properties may not yield the best returns. In fact, given its illiquidity and risk concentration, it should be the last asset class to be in after we have satisfactorily built up other asset classes for our investment needs.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.