The Real Returns of Property
Magnates from Donald Trump to Li Ka Shing made their riches through real estate. In fact, four of Singapore’s top ten richest people, including our richest man built their wealth this way. The press is filled with stories of people who’ve bought property at the right time and sold for a high price but tends to ignore those less fortunate.
At Financial Advice SG we recognise the difference between Real Estate and Property in terms of potential returns. The magnates got rich because they are developers. In the Singapore context, we mostly engage in property investments. Most popularly condominium units.
We want to broaden your financial perspectives on Property considering its place among the wide choice of investment opportunities.
- A home, something everyone needs, is an asset that can be passed down the generations, even considering the limitations of 99-year leasehold arrangements often offered here.
- Property can provide a Hedge against inflation, indeed property costs are one of the constituents of the Consumer Price Index
- A leading real estate consultancy, Knight Frank’s Wealth Report 2017 ranks Singapore as the second-most sought after real estate investment destination in the world for Asia’s Ultra High Net Worth Individuals (UHNWIs), second only to the UK. If you’d like to read a comparison of UK property Investment against Pensions, you can click here.
- Prices are likely to increase if you buy at the right time in the right place.
- Rental yields can provide a regular income, although this is of course subject to tax.
1. The value of property only rises
Property is susceptible to cyclical market swings. In 2016 alone 1 in 3 high end condominium units were sold at a loss. One must choose carefully when selecting a property as an investment vehicle as it is difficult to accurately predict a profit sufficient to cover the costs. We consider this in more detail later.
2. Property is more predictable than investments
If you’ve considered yourself an average Joe Tan unwilling to try your untested hand against the finance mavens of Shenton Way and Wall Street without help, you are indeed wise. Yet, just like stocks, property is susceptible to inflated prices caused by speculative investors willing to ‘bet big.’
As with any other investment, when selecting a property as an investment the challenge is finding one with a valuation that will allow the favourable returns needed. In many ways timing, holding, and selling factor in. How different is it then from investing or delving into the stock market? One of the differences is the substantial investment sum and the high costs of buying and selling compared to other types of investments.
3. Calculating Returns = Sales Price – Cost Price
We focus here on condominiums as they are both properties desired by Singaporeans and available to foreign buyers.
a. Condo Maintenance Fees
Depending on the location and grade; this can range from $400 – 1000 per month. As long as your investment unit is occupied this will put a relatively small dent in your finances.
Needed even for new condo units, you should budget anywhere from $15,000 – 45,000.
c. Property Tax
Although Singapore does not levy Capital Gains Tax currently, unlike some countries, it is important to remember Property Tax will be incurred on a yearly basis. It is calculated based on the multiple of two components:
Annual Value X Property Tax Rate = Property Tax Payable
i. Annual Value is calculated based on the monthly market rent of the unit and multiplying it by 12. This rate can be calculated through the URA website; this figure is derived after deducting reasonable rentals for furniture and maintenance fees. Do note that this figure rises if you are not residing in it.
ii. The Property Tax Rate is a banding based on this table.
Owner-Occupier Tax Rates
|Annual Value ($)||Effective 1 Jan 2015||Property Tax Payable|
Table 1 Source: IRAS
Residential Tax Rates
|Annual Value ($)||Effective 1 Jan 2015||Property Tax Payable|
Table 2 Source: IRAS
Mary stays in her condominium from 31st Jan 2016 – 31st Jan 2017. The annual value is $36,000.
Using Table 1; Mary will only need to pay
Annual Value taxable
$36,000 – 8,000 = $28,000
Falling within the 4% tax bracket, she’d pay
$28,000 x 4% = $1,120
Mary rents out her condominium from 31st Jan 2016 – 31st Jan 2017. The annual value is $36,000.
Using Table 2; Mary will need to pay
Annual value taxable for first $30,000 at 10%
Next $6,000 is taxable at 12%
Total tax she will pay is $3,000 + $720 = $3,720
if you use Bank loans to finance your property you will pay interest at 1.3 – 1.5% P.A. For a loan of $800,000 over 25 years this will cost you at least $115,000 – 160,000 in interest payments alone – assuming interest rates never rise!
Putting things into perspective, this is around 20% of the amount you borrow, albeit spread over the course of 25 years. If your property is untenanted this is money you will need to find from your income.
The ideal situation is having a tenant lease your investment home, thus helping you pay the bank loans but with fewer tenants chasing ever increasing numbers of properties you may have long periods with no income.
Don’t forget, the property tax applicable to vacant homes is the same rate as when they are rented out.
f. Buyer’s Stamp Duty (BSD)
When acquiring property in Singapore, a BSD is payable. It is computed based on the purchase price or market value of the property, whichever is higher.
|Purchase Price or Market Value of the Property||BSD Rates|
Table 3 Source: IRAS
For properties costing $1,500,000 and reflective of the market rate, the BSD is:
First $180,000 x 1% = $1800
Next $180,000 x 2% = $3,600
Remaining $1,140,000 = $34,200
BSD = $39,600
g. Additional Buyer’s Stamp Duty (ABSD)
Buyers falling into the following profiles are required to pay an ABSD on top of the BSD.
|Profile of Buyer||BSD Rates||ABSD Rates from 8 Dec 2011 to 11 Jan 2013||ABSD Rates from 12 Jan 2013|
|Singapore Citizens (SC)1 buying first residential property||1% on first $180,000 2% on next $180,000 3% for the remainder||Not applicable||Not applicable|
|SC1 buying second residential property||Not applicable||7%|
|SC1 buying third and subsequent residential property||3%||10%|
|Singapore Permanent Residents (SPR)1 buying first residential property||Not applicable||5%|
|SPR1 buying second and subsequent residential property||3%||10%|
|Foreigners (FR) and entities2buying any residential property||10%||15%|
Table 4 Source: IRAS
1 Whether owned wholly, partially or jointly with others. 2 An Entity means a person who is not an individual. It includes the following:
- An unincorporated association,
- A trustee for a collective investment scheme when acting in that capacity,
- A trustee-manager for a business trust when acting in that capacity
- The partners of the partnership whether or not any of them is an individual, where the property conveyed, transferred or assigned is to be held as partnership property.
3 BSD and ABSD are to be rounded down to the nearest dollar.
h. Seller’s Stamp Duty (SSD) for Residential Properties
An SSD is payable for all residential lands and properties bought on or after Feb 2010 and sold within the holding period.
The computation and requirements, are summarized in the table below:
|Date of Purchase or Date of Change of Zoning / Use||Holding Period||SSD Rate (on the actual price or market value, whichever is higher)|
|Between 20 Feb 2010 and 29 Aug 2010 (all inclusive)||Up to 1 year||1% on first $180,000 2% on next $180,000 3% on remainder|
|More than 1 year||No SSD payable|
|Between 30 Aug 2010 and 13 Jan 2011 (all inclusive)||Up to 1 year||1% on first $180,000 2% on next $180,000 3% on remainder|
|More than 1 year and up to 2 years||0.67% on first $180,000 1.33% on next $180,000 2% on remainder|
|More than 2 years and up to 3 years||0.33% on first $180,000 0.67% on next $180,000 1% on remainder|
|More than 3 years||No SSD payable|
|Between 14 Jan 2011 and 10 Mar 2017 (all inclusive)||Up to 1 year||16%|
|More than 1 year and up to 2 years||12%|
|More than 2 years and up to 3 years||8%|
|More than 3 years and up to 4 years||4%|
|More than 4 years||No SSD payable|
|On and after 11 Mar 2017||Up to 1 year||12%|
|More than 1 year and up to 2 years||8%|
|More than 2 years and up to 3 years||4%|
|More than 3 years||No SSD payable|
Table 5 Source: IRAS
- Where land is sold with existing building, the liability for SSD will be based on the zoning of the land in the Master Plan.
- For non-residential property that is re-zoned or the permitted use is changed to residential, the date of acquisition of the property will be the date of rezoning or the change of use.</i
- SSD payable to be rounded down to the nearest dollar.
i. Agents Fees
Commission for agents are typically 1% of house value for sellers and at least One Month’s rent when a new tenant is found when you rent out your property. You will pay GST in addition to this.
With these additional considerations you may have heard of, what would be useful to understand your returns would be to input some figures. Find out more in Part Two.
Disclaimer: The views expressed in this article are those of the author’s and does not necessarily reflect the views of their current employment/business. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of an investment product before making a commitment to purchase. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.