Recently, an interesting article was published online which reiterates the 2 common sayings when it comes to property: “Location, Location, Location” and “Time The Market”.
In retrospect, it is easy to point out that if one could time the market well, he or she will definitely reap the biggest profits. Of course, everybody wants to enter at the lowest possible price and exit at the highest price. However, this is just an ideal scenario in a perfect world. Hence, this leads to the main question of whether timing is key?
What does it mean to “Time The Market”?
Timing the market simply means that if you managed to enter the market at a “right” time, you would have made more money than someone who entered the market at a “wrong” time. We cannot predict future market prices and if we could, only then would we be able to determine whether you entered the market at a “right” or “wrong” time.
There were two case studies that were brought up in the article:
The first case study focused on a buyer that purchased a property in the Bugis area for S$416,000 back in 1999 and managed to sell it at S$1.65 mil recently. This translated to a profit of about S$1.23 mil over a period of 22 years.
The second case study was centred around a buyer who purchased a freehold property in District 9 in 2013 for S$13.78 mil and sold it for S$7.19 mil recently. The result was a net loss of S$6.6 mil.
Based on this comparison, would you think the first person was much better at timing the market but the second person was not? The learning takeaway from both scenarios is to understand that rather than trying to find the “right” timing, we can never time the market accurately due to the many unknown factors at play.
Every time you try to time the market, it will result in you having less time in the market.
Markets are unpredictable and we will never know if or when a current high will go higher or even drop lower. No one could predict a black swan event, such as the COVID-19, would happen and affect the global economy. Despite the pandemic wrecking economies and industries around the world, property prices have surprisingly gone up. With that, we need to understand the 2 key factors of:
- Time in the market > Timing the market
- Right Buy > Right Time
There is no such thing as a “bad” property; only the wrong entry price. Usually, a wrong buy is tagged to a wrong price point. Hence, it is not about timing the market. It is about finding the right buy.
If you happen to be in a position where you have entered a property at a bad price, a good thing in the property market is that as long as you can take on leverage and rent out your property, at the worst, you will still end up with a fully paid property.
In Singapore, interest rates are generally very low. HDB loan interest rates have remained at 2.6% for a very long time. Although there are moments where interest rates were high, bank loans have not gone beyond 2.6% for home mortgages based on recent history.
Hence, if your property can fetch a rental yield of 2% to 3% with an interest rate of 1-2%, your end outcome will be a fully paid property. However, do note that there might be negative cash flow, but as long as your rental covers Interest + Maintenance + Property Tax, you are ultimately still making a slight profit through rent.
One important thing to remember is to enter based on mass-market affordability. By entering a premium or luxury project that costs over S$10 mil, your natural pool of buyers when you want to exit will be much smaller. Therefore, it might be difficult to off-load the property at a good price unless you are lucky enough to find that one buyer who is willing to pay a premium for your unit. Going back to the case study, a property with an extremely high price tag of S$13.78 mil is undoubtedly a “make” or “break” situation.
As of today, the median household income is around S$9.2k. Based on total debt servicing ratio (TDSR) calculations, the general population in Singapore is likely able to afford a property with a price tag of around S$1.60 mil and below. Hence, if your property purchase is around or below this price range, it would be hard for things to go wrong.
The new launch market has been on the uptrend recently and making headlines every now and then. Before committing to any new launch properties, always do your research on the surrounding comparables, both in terms of psf and quantum. This includes other new launch projects as well as the resale market.
Although interest rates are very low as of today, entering into new launch projects may not allow you to fully utilise this opportunity. This is due to the progressive payment structure, where the developer will only draw down on the loan based on how much they have built. Hence, the resale market may present more opportunities instead.
Referencing another online article on property consultants’ optimism towards the Singapore office market in the later half of 2021, suggests their expectations of an increase in price and activities in the commercial segment, in particular the office market.
In 2020, the commercial market, specifically the Grade A offices, suffered heavily due to the new norm of working from home. Companies have begun to realise that they do not need office spaces in prime areas. As such, many offices exited out from the Central Business District (CBD) area and downsized their offices.
With that being said, the rental demand in the industrial segment is still very strong and healthy. This is because the rental rates for industrial properties are around S$1 to S$2 psf, as compared to CBD offices which are commanding S$10 to S$15 psf. Naturally, industrial properties can easily uphold their rent.
However, there are indeed still opportunities in the office space. For example, if the property owner had bought the unit at S$4.0 mil and did not have the means to hold on to the property through the pandemic, they may be willing to let go of the unit at a loss, say S$3.0 mil. The reality is that if there is a market boom, the price will ultimately recover back to $4m. Hence, there is a potential upside of S$1.0 mil in profit from capital appreciation. However, the question then is, will you be able to hold the property the whole way, until capital appreciation occurs?
If you are considering taking advantage of these undervalued deals for office spaces in the CBD area, do set aside a safety net of a minimum of two years. This means having two years’ worth of mortgage set aside to at least tide through tough times. This is because of the high possibility of no rental or very low rent within the next two years. If you could set aside this sum of money, then it could possibly be a game plan for you.
However, if you are looking at a Grade A CBD office, there are better alternatives such as a commercial shophouses. You would be able to own a freehold property at almost the same price, or maybe sometimes even cheaper than CBD offices. A 3% rental yield for a shophouse unit is possible to achieve, which is comparable to any offices out there.
Furthermore, the built-up area for shophouses is usually much higher than offices in the CBD area; hence, the possibility of renting out is much higher as well. Otherwise, one could always opt to go for a fail-safe industrial property. However, do keep in mind our 5 criteria when it comes to investing in industrial properties. Do educate yourself and refresh your knowledge by watching our YouTube videos.
Time in the market is one of the most important factors when it comes to investing. Property is a unique investment class that can possibly be rented out and become income-generating. With an income-generating asset coupled with having the right buy, there is no need to time the market.