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Investing in a second private property in Singapore yielded relatively low returns over past decade: DBS report

SINGAPORE — Buying a second private residential property may have been seen as the best way for Singaporeans to accumulate wealth and notch up hefty investment returns. However, a DBS report released on Tuesday (Oct 12) has turned this conventional wisdom on its head.

Investing in a second private property in Singapore yielded relatively low returns over past decade: DBS report

Research by DBS bank showed that from 2009 to 2021, buying a second property yielded the lowest growth among a range of different investment options.

  • DBS researchers compared the returns on buying a second private property in Singapore with various other investments 
  • The study covered the period from 2009 to 2021
  • They found that a second property yielded the lowest returns among the eight asset classes studied
  • High taxes applying to second properties was one factor that reduced the returns
  • The researchers said people need to diversify their investments more

 

SINGAPORE — Buying a second private residential property may have been seen as the best way for Singaporeans to accumulate wealth and notch up hefty investment returns. However, a DBS report released on Tuesday (Oct 12) has turned this conventional wisdom on its head.

Researchers at the Singapore bank found that over the past decade or so, buying a second property yielded the lowest growth among a range of different investment options.

They compared the performance of eight different asset classes from the first quarter of 2009 to the same period in 2021 and found that returns from investing in the S&P 500 — a stock market index in the United States that tracks 500 large listed companies — yielded the best returns at S$635 for every S$100 invested.

This was followed by Singapore real estate investment trusts (Reits), which provided S$486 in returns, and then an individual’s first private property at S$399. Reits invest in a portfolio of properties and make regular payments to investors, similar to dividends.

In fourth spot was a person’s first Housing and Development Board (HDB) flat with a S$339 return.

Returns from a person’s second private property ranked last with a return of a S$209 for every S$100 invested over that period.

“Our findings show that properties become less compelling as an asset class beyond one’s first home. If you are looking to grow your nest egg for retirement, investing in an additional property may not be the wisest choice,” the DBS report stated.

Prevailing property cooling measures also mean that investors looking to get their second private property have to incur high costs due to the various taxes that have to be paid, such as the Additional Buyer’s Stamp Duty (ABSD).

For example, an investor buying a S$1.5 million second property would have to pay about 15 per cent of property costs in taxes.

In a media briefing on Tuesday, DBS property analyst Derek Tan said: “The key question to ask is: If you were to take a similar mindset and if you buy a stock and you know tomorrow it will be down 15 per cent, would you buy today or tomorrow? I think most people will say they will wait for a few days.

“So I think that many people are not taking a rational view but just following the golden rule that property in Singapore is always a winner.”

Besides the lower yields, DBS also cautioned buyers, before investing in property, to consider that there would be less room to diversify one’s portfolio due to the high capital required, that it is less liquid compared to other assets. More time and effort is needed as well to manage tenants and maintain the place.

Compared with other asset classes, the report also said that property prices tend to decline more sharply during economic downturns, with the exception of the Covid-19 pandemic, especially when residential unemployment rates exceed 4 per cent. And it is during these economic downturns when liquidity matters the most.

LOWER RETURNS

Although property has been generally a stable asset class with lesser volatility, the returns from investing in one, whether in a private condominium or an HDB flat, have declined due to a slower rate of price increase in recent years compared to the early 1990s.

Price indices from the authorities showed that the compounded annual growth rate for the Singapore property market as a whole was 5.9 per cent between 1991 and 2011, before slowing to 1.1 per cent in the last decade.

“With more modest price growth in recent decades, it is unclear if the investment strategy that had previously worked for our parents would remain sufficient for us going forward,” the DBS report read.

The slowdown in property price increases can be partly attributed to the introduction of several cooling measures over the years, such as the Seller’s Stamp Duty, loan-to-value limits, as well as the ABSD.

With low birth rates and an ageing population, the report also said that Singapore’s population will start shrinking from 2030, which would eventually lead to a decline in future housing demand and weigh on property prices in the long term.

NEED FOR DIVERSIFICATION

While 42 per cent of assets among Singaporean households are locked in property, based on data from the Department of Statistics, Mr Tan said that the equivalent figure is about 30 to 35 per cent for more developed markets such as the United States.

Shares and securities make up only 9 per cent of household assets in Singapore, which the DBS report said is at “significantly low levels”.

It found that people aged 35 to 54 had the lowest propensity to invest.

This corresponds with another data point that those aged 30 to 49 had higher mortgage-to-income ratios, indicating that many are setting aside their savings to meet their mortgage liabilities instead of channeling the money into retirement and investment.

“As our findings have shown, simply relying on property assets may no longer be sufficient for attaining our financial goals. It is imperative to seek diversified sources of returns across other asset classes such as equities, Reits and more to build a solid nest egg,” the bank advised.

Mr Tan said that even though equities are more volatile, the returns are more significant and they tend to track closely to how the economy performs.

“Over time, if one were to take the same mindset as investing in property and take a long-term view, one can also get superior returns rather than property itself,” he added.

Mr Nicholas Mak, head of research and consultancy at property agency ERA, said that the findings in the DBS report are fair.

However, he said that property investment is still possible for people who can do so within their means and still have enough investable assets for other types of investments.

“One should not overstretch their household income just to invest in a second property. But having said that, there are also grounds for those who can afford. They can still buy a second property because it’s a more stable (asset class).” 

Related topics

property housing investment DBS HDB

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