A very good example of a very bad property investment in Singapore

/A very good example of a very bad property investment in Singapore

A very good example of a very bad property investment in Singapore

The property market is in a state of euphoria currently. The thing about a positive property market is that buyers may be rushed into making a bad investment decision. What may seem like a good investment currently may not turn out to be so in a couple of years. I have always maintained that in a good property market, buyers make bad decisions. It is not just property but in all other asset classes as well. In the stock market, most tend to lose money because they went in close to the peak, only to see their investments plummet when the market corrects. For stocks, if you are diversified, you can mitigate such corrections. For properties, buyers tend to have limited cash and thus it is difficult to diversify a property portfolio the way an investor would diversify his portfolio of stocks.

Let us remember what happened approximately five to six years back. The Singapore residential market was rather tepid as buyers were still waiting on the sidelines as the Total Debt Servicing Ratio (TDSR) had just come into effect. One of the segments which saw rather good demand was the commercial segment. Developers built many commercial spaces throughout Singapore. A popular concept at that point in time was to build mixed developments. Retail malls with residential units above. In theory, this was an extremely good form of investment as the residential units would have access to amenities below and the retail shops would have a natural catchment of customers. The reality was that most of these developments are located in places which do not have a large catchment area of customers. They are located within the landed property areas or are not close to an MRT station or town centre. Moreover, because these developments were individual strata units, it was left to the owners to find their own tenants. There was no plan for an anchor tenant to draw crowds and after many months, many of these strata owned retail units were still vacant. In fact, many such developments can be found strewn across Singapore. Places like Kensington Square along Upper Paya Lebar and Promenade @ Pelikat are just a few examples.

In fact, even pure retail malls in seemingly good location can work out to be very bad investments. Places like Alexandra Central Mall along Alexandra Road would seem like a good investment as it is located close to high rise residential buildings as well as offices and industrial areas. However, if you were to go into Alexandra Central Mall to take a look, there are still many vacant units. Some have never been rented out since it was completed. In fact, the developers sold the units bare to the investors. They did not come with glass frontages and buyers or tenants had to install their own flooring and glass panels. A retail mall requires a certain level of expertise to be run successfully. If a retail mall were wholely strata-owned, there will be little incentive for anyone to draw an anchor tenant. To draw an anchor tenant, you would have to make an attractive offer for the anchor tenant to move into the mall and no particular owner would have an incentive to do that to his own unit for the benefit of all other owners. This is one of the main reason why certain malls do better than others and why when certain big groups like CapitalLand step in to run a retail space, things do see a marked improvement as compared to before. Case in point would be Bugis Plus which was formerly Illuma.

Alexandra Central Mall is a very good example of euphoria that offered little. Back in 2013, investors snapped up almost all units on the launch day at prices ranging from $4,000 to $8,000 per square foot. Few years on, Alexandra Central Mall is still littered with vacant units. Many of the 31 food and beverage and 85 retail units see little foot traffic on a daily basis and correspondingly, many are vacant. The idea of locating a mall close to areas with traditionally high levels of human traffic may seem like a good one, however, the reality is that it takes a lot more than just prime location to make a retail mall work. People who come to the area generally are there to visit Ikea for furnishing or Queensway Shopping Centre for sports apparel. Land prices in places like Alexandra may be high and thus correspondingly prices of a development like Alexandra Central Mall have to sell for a relatively high price as well.

Let us focus this discussion on an area which I am familiar with because I believe this can show how what was initially perceived as a good investment can turn into a bad one very quickly. The East Coast area is an area with a strong expatriate crowd and generally, the people who live in the area are from the upper middle class with good disposable income. On weekends especially, the row of shophouses opposite  i12 Katong is usually packed with diners patronising the various restaurants. The theory was that because this area was crowded, a new development on the opposite, The Flow should attract a strong crowd. What buyers did not see coming was the rise of e-commerce and thus a drop in demand for commercial spaces. Moreover, this was a mall whereby all units were strata owned. The people who bought The Flow were also perhaps not knowledgeable about the business around the Katong area. Retail is not doing as well as eateries in the area. Moreover, the assumption was that rents should be correspondingly higher than that in neighbouring Roxy Square. The reality was that businesses are profit-driven enterprises and they are not going to pay a higher rent to move over from Roxy Square. Moreover, some of these businesses are already established and their customers are familiar with them being in their usual location. Also, when additional supply comes onto the market and there is no corresponding increase in demand, rents should fall. Thus taking Roxy Square’s rental and adding on a premium to that may have been a very large miscalculation for most investors of The Flow.

The point I am trying to make was that it was not too distant a time when buyers were flocking to these launches to purchase commercial properties. In fact, sales were relatively brisk as buyers were attracted to commercial properties as they did not have to pay Additional Buyer’s Stamp Duties (ABSD), unlike residential properties. The yields that were promised to these buyers never materialised. The truth is that many of these buyers felt that these properties were good investments at the time of purchase as they were lured by the promise of excellent rental returns. Property investment is not a “sure win” gamble and many buyers only limited resources to purchase properties. Thus every mistake is a large drag on an individual’s investment portfolio. Investors who made money through property investment tend to be a lot more vocal than investors who are lost money through property investment. Due to human nature, some of these investors will not make the admission that they are trapped in a bad property investment and would instead mention that they have the holding power.

Investors need to remember that property investment is never a sure-win gamble, even in land-scarce cities like Singapore. Yes, in the long run, property prices will increase but this is a saying that is too overused. Why not just do a little bit more homework, run through more conservative numbers and seek a more neutral advice rather than just walking blindly into a showflat with a fear-of-missing-out mentality?

 

Yours Sincerely,
Daryl Lum

2018-06-14T20:10:28+00:00 June 13th, 2018|Property|
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