Monday, June 1, 2009

For Extra Value, Focus On Yield

Source : The Sunday Times, May 31, 2009

When buying a property for investment, the rental income it could attract is a key consideration

As a value investor, I am naturally attracted to investments that produce decent yields. This is because these investments tend to be more stable and less likely to give one a heart attack.

Other more gung-ho investors may prefer investing purely for capital gains, even if they are to get little or no yield.

My interest was therefore piqued when The Straits Trading Company last month offered for sale 10 units of its Gallop Gables condominium at Farrer Road by dangling a big carrot in the form of a guaranteed rental yield of 7 per cent for two years.

For those who are unfamiliar with the term, yield is the recurring annual income you get divided by the amount you paid for an investment. In properties, yield is derived from rental income. In stocks and shares, it is based on dividends that companies pay.

With savings in banks drawing a paltry annual interest of half a per cent or less these days, Straits Trading's offer was understandably snapped up by eager buyers.

Seasoned property investors will tell you that it's rare to get rental yields as high as 7 per cent, not unless you convert your property illegally into a workers' dormitory. For residential properties, a yield of 2.5 per cent to 4 per cent is the norm.

As an investment class, real estate generally provides a lower yield compared to investing in corporate bonds and equities. This is an acceptable trade-off as the risks of investing in physical properties are lower than those for stocks and shares.

The focus on yield, however, is only half the picture.

Another pertinent question an investor should ask is whether the current yield of a property is real or sustainable.

According to the Urban Redevelopment Authority, rents for private homes in the first quarter fell by 8.5 per cent. They had dropped by 5.3 per cent in the fourth quarter of last year.

In a prolonged economic downturn such as the one we are probably experiencing, there is further room for rents to fall. This is notwithstanding the recent revival in the residential property market.

On the demand side, numerous companies have slashed or are reducing head counts. Some have stopped operations altogether while many more have cut the pay of their staff. There is less discretionary income all around.

On the supply side, vacancy rates are likely to rise as more new homes are completed while some older developments that were earmarked for demolition have been put back into the rental market as their redevelopment plans get frozen.

Rising capital prices combined with falling rents spell bad news for yields, something property investors should be mindful of.

Equity investors tend to be more savvy when it comes to matters of investment yields and their sustainability.

Which is why the stock market today is littered with numerous instances of shares that seemed to be going for a song when measured against their historical yield. Stock investors are not buying these high yielding stocks because they suspect they will not repeat the high dividend payouts of the previous year.

To be sure, there are people who see real estate investing purely as a capital gain game. In the bull run from 2005 to 2007, many home owners were content to leave their units unoccupied while waiting for the right opportunity to resell them for a big profit.

Such windfalls are harder to come by in the current climate and a prudent investor cannot afford to look through the prism of 2007 and hope for a repeat of these fabulous gains any time soon.

For investors who acquire properties with the help of a bank loan, rental yield takes on added significance.

Mortgage rates currently vary from as low as 1.5 per cent to 3.75 per cent or more. As an investment, income from renting out a property should preferably be able to cover the monthly bank interest charges plus a portion of the principal repayment.

For those lucky enough to obtain a low rate such as Standard Chartered Bank's 1.5 per cent promotional offer for the first year, the bar for rental income is low.

But for those who are locked in to significantly higher rates, their rental income should at least match the interest they are paying for their mortgages if they don't want to end up working for the bank for free.

Don't forget, mortgage rates tend to rise over time as initial teaser rates give way to prevailing ones. One way for a borrower to maintain a low mortgage rate is through the regular refinancing of his home loan. But this assumes that the current low interest rate environment will remain benign.

Refinancing may not be feasible if the property's valuation has fallen sharply or if the refinancing bank decides to offer a lower loan quantum.

Unlike stocks and shares, yields on property investment are also more easily manipulated. A crafty seller can sometimes entice a buyer to overpay for a property by promising an abnormally high rental yield. To achieve this, the seller will sell his property and execute a leaseback agreement with the buyer.

In such a deal, the seller will guarantee the buyer for a limited period - typically not exceeding two years - a monthly rental income that will meet the promised yield.

The seller then sub-leases out the unit to a genuine tenant at the prevailing market rate. If the rent is below the guaranteed amount - as is likely to be the case for an overvalued property - the seller will top up the rental shortfall. But he does not lose out as he is able to count on the extra profit he had made earlier from selling his property at a higher price. The buyer ends up worse off even though he gets a higher monthly income rental for two years.

An example of how this can be done is illustrated in the accompanying table.

Rental guarantees are not illegal and, in fact, are the de rigueur practice of some developers that simply refuse to lower their selling price of unsold, completed projects during a downturn for tactical reasons.

They are also not necessarily detrimental to buyers.

Getting an attractive rental guarantee in today's market will appeal to investors who believe that home prices will recover by 2011 or 2012, as they will enjoy higher-than-usual returns in the next two years while awaiting the recovery to take place.

In the case of the Gallop Gables apartments, the buyers probably got a good deal.

Apart from getting guaranteed rental yield of 7 per cent for two years, these purchases were done, on average, at prices about 23 per cent below what Straits Trading had asked for last July.

The developer has since raised the price of the remaining few units to $1,400 per square foot (psf) from the $1,188 psf average it had sold at in the past six weeks.

But the cheapest unit still went for a tad above $3 million.

If only I had a few million dollars to spare.

High-End Property Starting To Move

Source : The Sunday Times, May 31, 2009

Analysts say buyers looking for good value slowly trickling back into market

Interest in the top end of the property market appears to be slowly picking up from near non-existent levels.

Several investors have trickled back to the resale property market, taking the chance to pick up posh apartments at prices mostly below $2,000 psf, or way below what was quoted last year.

One unit at the 55-unit The Ladyhill that cost no less than $6.5 million has just been sold. The price for the freehold apartment works out to $1,700 per sq ft - which was the average price of the first 20 units sold at the condo's 2000 launch. -- PHOTO: SCDA ARCHITECTS

One such unit at the 55-unit The Ladyhill that cost no less than $6.5 million has just been sold to a Korean investor.

The price for the freehold apartment works out to $1,700 per sq ft - which was the average price of the first 20 units sold at the condo's 2000 launch.

Prior to this deal, only two caveats had been lodged for the property in the past 12 months. Both were done at higher levels - one was for a bigger unit in July last year at $2,149 psf or $9 million, and the other was for a 3,283 sq ft unit for $2,193 psf or $7.2 million last November.

Consultancy Cushman & Wakefield, which brokered the latest deal, said the volume of top-end deals is not quite there yet but interest is certainly slowly picking up.

Buyers are looking for good value, said property experts.

Resale deals are slowly being done because some sellers are more willing to be flexible and there is limited supply in the market, they said.

Developers are still lying low where top-end launches are concerned, said Savills residential director Phylicia Ang.

Indeed, few developers of high-end developments want to sell at today's prices, said Cushman's managing director Donald Han.

They would rather wait for the right time to launch as going to market now would require them to cut their price levels by a significant amount, he said.

Government data compiled by Cushman & Wakefield shows that six deals - each worth more than $5 million - were done last month, up from three deals in March.

It is a slight improvement from the dismal levels last November (zero deal) and December (one deal). Before the downturn got worse, such deals numbered 21 and 43 in May and June last year.

While high-end prices have not stabilised, there may not be a repeat of some very low price levels registered in recent months, experts said.

'Just about three months ago, you could get an Ardmore II unit at less than $1,800 psf. At that time, you couldn't see the daylight in the market,' Ms Ang said.

Indeed, a mid-floor Ardmore II unit was sold for only $3.375 million or just $1,668 psf in February while a high-floor unit went for $3.6 million, or $1,779 psf in March, according to caveats lodged.

Caveats lodged last month show four deals done from $1,600 psf to $1,917 psf.

At the 2006 launch of Ardmore II, apartments were sold for an average price of about $2,300 psf, or between $4.2 million and $5.5 million per unit.

At the nearby 330-unit Ardmore Park - long associated with posh living - no deals were registered in the first three months of this year.

Caveats lodged show that three deals were done last month at $1,976 to $2,184 psf, below the deals of $2,635 to $2,791 psf in June and July last year.

Come the second half of the year, Mr Han said he expects to see more resale activity in the upper end of the market for deals worth $5 million and above.

Top-end launches, however, may not surface this year.

'If you're talking about the high-end market, as in those priced above $2,000 psf, there won't be any launches until the market improves,' said a consultant who declined to be named.

'If you go above $2,000 psf today, these buyers will disappear.'

Sentosa IR Cutting It A Little Too Close?

Source : The Straits Times, May 30, 2009

Its recruitment tour is cut short and it may face licence issues even as opening date nears

WITH just months to go before it is scheduled to open its doors, Resorts World at Sentosa may be finding itself in a bit of a pickle.

First, its much-publicised world tour to recruit 200 performers for its Universal Studios theme park had to be cut short because of fears over the Influenza A (H1N1) virus.

Second, its holding company, Genting Singapore, has introduced new shareholders into the fold, which may well complicate the process of getting a casino licence for the integrated resort.

When contacted, a spokesman for the resort said it would open its four hotels and Universal Studios as planned by the end of March next year.

Its audition team toured Singapore, Kuala Lumpur, Hong Kong and Manila and had six more cities to go before it returned on May 17. It had aimed to get all performers here in October for rehearsals. Its spokesman said that the team was recalled because of travel health alerts issued in the light of the contagious H1N1 virus. Another factor was 'the large crowds that will gather at the auditions', raising the chances of infection.

A bigger step is obtaining a licence from the Casino Regulatory Authority to operate the casino. It can apply for the licence only when 50 per cent of the resort is completed and 50 per cent of the funds spent.

The Straits Times understands it has yet to apply for a licence. The casino-resort declined to say when it would do so.

Its spokesman said: 'We will apply for the licence only when the criteria are fulfilled.'

The authority can be expected to do what is known as 'probity checks' to ascertain the company's owners, background, accounts and business links to other operations before awarding the licence. However, it has given no indication of how long this will take.

On Wednesday, Genting's Lim family sold its entire 9 per cent stake in Genting Singapore for $615 million. But even after the sale, they will remain in control of Genting Singapore through its Kuala Lumpur-listed parent company, Genting.

The concern is not only over who the new shareholders are but also whether Genting will have links to other individuals and groups which might be beyond the pale.

One theory is that the family pulled out of Genting Singapore so that it could invest in MGM Mirage's Macau casino.

Given that MGM Mirage is connected to the family of gaming magnate Stanley Ho, who is alleged to have links with organised crime, the Singapore Government might not look too kindly at a party with interests in both the Singapore and Macau gaming houses.

Gaming analyst Jonathan Galaviz said the Singapore Government has 'a very significant responsibility to ensure that the owners and executives of the integrated resorts have absolutely no unfavourable linkages'.

It is no surprise that a casino company would have an interest in Macau, he said, as it is 'still a very lucrative strategic play for the next 10 to 20 years'.

Genting is the holding company for the Genting Group, which runs the Genting Highlands Resort, Sentosa's integrated resort and palm oil producer Asiatic Development.

The last time Genting's sister company, Star Cruises - then a partner in the IR - offered to sell Mr Ho a stake in 2007, the company was questioned by the Singapore Government. The possibility of a casino licence being denied was also thrown up then.

Private Home Sellers Raise Asking Prices

Source : The Straits Times, June 01 2009

Recent stock rally may have lifted sentiment, but experts say sellers are too optimistic.

PROPERTY market sentiment appears to have improved fast and furious, judging by the prices being asked by some individual sellers - though observers suggest they are being somewhat optimistic.

LAST WEEK: Some ads offered RiverGate units at prices starting from $1,380 psf -- PHOTO: CAPITALAND.

These sellers may be taking their cue from the stock market, experts said. Asking prices for some properties that have just been completed or are close to completion have jumped significantly in recent months.

The improvement follows strong data for new private home sales, which have crossed the 1,000-unit mark for three months in a row since February, after a period of severe stagnation.

Property experts said the recent strong rally in the stock market has given quite a lift to property market sentiment.

Still, lower prices have also played a part in stronger sales. Some recent launches have done well after developers finally cut their asking prices.

For instance, Parc Centennial in Kampong Java Road is now sold out, after developer EL Development relaunched the 44 remaining units at an average price of $1,175 per sq ft (psf), about 20 per cent lower than last year's average price.

But individual sellers are tending to raise, not lower, prices. For instance, some sellers of high-floor units at Marina Bay Residences are advertising their properties at $2,000 psf or more - regarded by analysts as a key resistance level for many buyers.

Some recent classified advertisements in The Straits Times for Cosmopolitan in River Valley show asking prices of $1,380 psf to $1,395 psf, compared with asking levels of about $1,250 psf earlier in the year.

In late February, an ad for RiverGate units displayed prices of $1,118 psf to $1,399 psf. But last week, some ads for RiverGate, at Robertson Quay by the Singapore River, offered units at prices starting from $1,380 psf, with one ad even offering two three-room units at $1,900 psf.

Some sellers, with an eye to the longer term, are actually withdrawing properties from the market, sensing an uptick in sentiment. 'We are seeing some sellers changing their minds to sell, seeing that the market is rising,' said Savills Residential director Phylicia Ang.

HSR Property Group executive director Eric Cheng said the property market has performed beyond expectations in the past three weeks, but is starting to slow a tad as sellers retreat and wait for better prices.

A 31-year-old house-hunter, who is scouting for his first home, said two out of his three property viewing appointments near East Coast Road a week ago were cancelled almost at the last minute because the sellers decided to withdraw from the market. And over the weekend, his agent failed to get him any viewing appointments in the same area for the same reason.

Ms Ang said individual sellers face fewer risks by testing higher prices in the market. 'If I don't like the price, I can always withdraw,' she said.

Still, market sentiment has moved up very fast. 'It's the 'too good to be true' scenario now,' she said.

But one thing is for sure: There are buyers out there with cash and there is clearly demand for projects that are seen as good value, experts said.

Compared with the situation three months ago, sellers are more willing to negotiate prices today as there are more keen buyers, said Mr Cheng.

Just three days ago, a deal for a 2,150 sq ft UE Square unit in River Valley was closed nearly on the spot at slightly more than $1.8 million, as it worked out to an attractive level of below $850 psf, he said.

In general, even though there are still desperate sellers around, some sellers may be asking for about 5 per cent higher than the prices three months ago, Mr Cheng said. 'You can see more sellers asking for a bigger premium, but no one will buy if you price your property too high. One high-price caveat does not reflect the price of the development,' he added.

Market sentiment has improved, but it is still early days as short-term fundamentals have not exactly corrected, said PropNex chief executive Mohamed Ismail.

'If the sellers start to increase their prices in anticipation of higher levels, they may kill the deal,' he added. 'We saw that in 2007 when prices were rising. Many sellers were not contented with their offers, so many deals did not materialise.'

He said sellers can ask for high prices, but the key is whether the banks are willing to match those asking prices.

'It is no point if your own optimism is not matched by the valuation. That is the valuers' view of the current market, taking into account the better sentiment.'

To sum up, said Mr Cheng, there are still more sellers than buyers.