Residential Property For Capital Appreciation

In our previous series we talked about rental play in the residential property market. But at the same time we also saw that there are limitations, especially if one is not rich enough to get a second house nor have a small enough family size. Then the only other way accessible to most people is via capital appreciation. Again, points like checking out the city planning agency’s zoning plans and stuff have already been covered, so I will not repeat that here. This article zooms out such that it can apply to people everywhere, rather than just focusing on the Singapore’s context. We will mainly be talking about condominium units, because this is what the average commoners can afford.

Landed Property
Landed properties in Singapore are expensive, with prices for a decent one at about $3 million. While landed properties are generally freehold, there are some which are leasehold and which we have to avoid. The value of a landed property is not in the building itself, but on the land. Unlike a freehold condominium which is subject to wear and tear, and at the end of it unlikely to be torn-down and rebuilt due to the cost, the landed property is much easier to renew. Even if you own a unit in a freehold condominium development, it does not mean you can do anything beyond that little cage of your unit. It just means that theoretically your unit will last forever, and practically your unit will last until the last possible livable state before its total collapse.

Land is different. With land that is truly yours, you can do whatever you want, within the laws of course. You are not sharing a portion of a vertical space with many others. If you have the money, buy a landed property. Of course, if you are in countries like New Zealand where land is abundant, then you will need to consider other factors as well to see if it is worthwhile for a land investment. But even then, it is not uncommon for people to sell off their land and give away the house built on it for free.

Good Location
Whether you are buying a landed property or a condominium unit, or even a HDB (public housing) unit, location is very important for future capital appreciation. Looking at zoning plans and buying a unit in a location with future developments is a good move. But buying in a central ‘unshakable’ location is also a good move. The former may be more suitable if you have a budget to consider, and the latter will be better if you can squeeze out more money.

Residential property investments aiming for significant capital appreciation usually can only take place in one type of place – cities. Houses in rural areas are cheap, and unless there are development plans, their prices usually do not rise as fast as those in the cities. In the worst case scenario, even after inflation, prices of houses in rural areas may still drop (we will come back to this point later). Even within the cities, there are those core areas, suburbs and the outskirts. Naturally, buying in the core areas is better.

In countries with many states / provinces and cities, it is recommended to buy in the capital (political centre) or the financial centre of the country. It is in the government’s interest to ensure prosperity in these 2 cities as they reflect the strength of the country, and so it is only logical that we align our interests with the government’s. Never go against the government. That is not to say that the prices of properties in these areas will not drop, but that they will be the first to recover after a recession and the ones to rise up the most (in absolute amounts, not necessarily in percentage). They will always be the priority. For countries such as China, each province have their own ‘provincial centre’ which acts as a mini-capital of the province, which one may consider if there is simply not enough budget to get a unit in the main capital or the main financial centre.

As for choosing the more specific locations once you have decided on a city, we have covered that in previous articles so I will not repeat here.

Why do cities’ property prices go up and rural regions’ property prices go down? The main reason is population. As society advances, people moved out from the rural areas to the cities, where there are more job and income opportunities. The government will also set policies to move people to the cities. That is because with consolidation, there is economies of scale.

Take for example China. China currently has a series of policies (which I will not go into details) to drive capable people to the cities. Supposed there are 10,000 people in a particular region in the city. There is only the need for 1 of each facility to serve the people, such as supermarket, school, car repair workshop, library etc. The rest of the people can engage in higher-order economic activities. That is why cities have tall fanciful skyscrapers and offices. New Zealand on the other hand, has people spread out all over the country. Supposed that in the same area size in New Zealand, there are only 500 people living in the area. You will still need the same facilities such a supermarket to support the population. But because they are so spread out, New Zealand now needs 20 supermarkets to serve the same 10,000 people. In our example, 20x more resources are needed to serve the same population. In each area there is nobody left to be employed in higher-order economic activities.

Hence, governments will attract the very best and capable of people to the capital and financial centres, locals and foreigners alike. An influx of population into the major cities and a drain of people from the rural areas will mean only one thing – prices of properties will be affected by demand and supply. A capable population in the major cities will also mean they command a higher salary, resulting in a higher spending power, which gives the potential for capital appreciation of our properties a boost.

Government Policy
As mentioned earlier, we do not go against the government. Hence it is important to know what are the policies the government are making. Knowing the housing policies is a must. But what about the non-housing policies which may impact housing? Immigration for example. The US and Singapore are immigration countries. These 2 countries actively source for talent from all over the world and are much more lenient in terms of immigration policies compared to Japan and Europe. When the government attracts people into the country, these people need a place to stay. Short stayers or the bottom workers will rent, while longer stayers who aim to make the country their future home will buy in the end. Either way this will drive up demand for housing, and it is likely that prices will rise.

Security, ie law and order, is also another policy we should be aware of. Only when there is law and order, will people be willing to set up shop in the country or city, to come and work, to invest and to make the place their home. In short, the country’s or city’s law enforcement gives people the confidence that their lives and possessions are protected by the system. Nobody will invest in a country where corruption is rampant and the women get raped without consequences. On the other hand, people will also be worried if the country executes every petty criminal and where every little thing is an offence. Take Singapore for example, while on the stricter side, has a generally more balanced approach when enforcing law and order. Women can run around at 0200h in the morning with little risks. Corruption is taken seriously. This gives not only the locals, but also the foreigners the confidence that this place is suitable to invest and put my money in. This will attract foreign funds and retain local money, and combined with its immigration policy, makes property investment a logical choice.

Other policies we can also consider will be its foreign affairs policies (how many friends or enemies it has), the national strength (rising up, declining or stagnant), the taxes (eg on capital gains) etc.

We have gone through the slightly more macro-views above. What about to those who has no choice but to buy a unit in their particular country and city? What are the more micro-views which they should consider?

Old Or New Unit
When buying houses, people often like to get a new unit. Nobody likes to use a second-hand item.

The pros for going after a new unit may be an early bird discount as the developer is still constructing the condominium development. If you are able to wait, the few years of construction also gives you the time to raise enough capital to make the final purchase. This method will also allow you to reserve the unit for a small deposit in anticipation for a future capital appreciation. However, it is important to choose a reliable developer. In China, we have seen many cases of developer declaring bankrupt and stopped the construction halfway, leaving pitiful home-buyers with an outstanding bank loan without a house.

The pros of buying an old unit is ‘what-you-see-is-what-you-get’. You view the house, you are satisfied, you get it. No worries about the developer running away. At times you may even get desperate sellers wanting to release the unit even at a loss. New developments have a ‘bottom-line’ in which the developers would rather hold on to the unit than to sell it off because there is a certain margin they need to achieve. In fact, one can even say the early bird discounts were already factored into their final selling price. The leeway for a bargain is small for new units. But with old units, how good a deal you can achieve depends on your ability to research and hunt for such opportunities.

If I were to give my opinion, I would say if you have no money right now, go for a new development. If you have the money, go house hunting among all the old units up for sale.

View Of The Unit
The view of your unit also plays a significant role in determining the price. Some views are just more sustainable than the others. If your view is inward facing other blocks, especially in land scarce Singapore where each block is very near each other, then your view will be blocked and privacy compromised. All things remaining constant, you cannot command a premium over other units in the same area simply because your view is bad. Even the good views are also separated into tiers. If you have an empty plot of field in front, it may look nice now with the wind blowing and the expanse out in front of you, but that plot of field could be turned into a construction site for a new development any time. Similarly, a small piece of forest can be cut down. Ideally, the plot in front would be a beach or a water-body, such as a mini-lake or mini-reservoir. It cost a lot more money and time to drain out a water-body or to fill it up, wait for the ground to stabilise before beginning a construction. A park as a view will also be a good choice as it is less likely that a government amenity will be taken down to make way for a private development.

Side tip: If your condominium view is facing the swimming pool, be prepared for the reflection of the sunlight into your house. And noise from the children playing below.

Facilities are what separate a condominium unit from a public housing. Swimming pool, gym, tennis and basketball courts, conference and function rooms etc are all things that make a condominium attractive. Whether you usually use it often or not does not matter. Just like people often pay for functions in a mobile phone or a car which they do not need, it is in our nature to want everything we can, regardless of us actually using it or not. If your condominium has more facilities, it will sell better in the future. Do take note that with more facilities comes more cost of maintenance, so you have to balance it out with the number of units in the development in order to average down the cost.

Good Estate Management
Condominiums have an estate management running it. They ensure that facilities are running, that the place is clean and everything looks nice. Those who do not do their job properly will see a run-down development which turns off potential investors, while those which do their job properly will still have a decent look and functionality despite the development getting old. A good estate management also affects your daily living. So do take note and do your research on this lesser known aspect.

Just like how we should research into a particular stock or unit trust in the financial markets, we should also do so for the properties we buy. Buying for personal living is one thing, but if one is to buy with the intention of profit, then much homework needs to be done. The more homework you do, the less risk you will be taking for a bigger profit margin. Look at things from a macro down to the micro view. Google is your friend. Read up on the experience of others, ask around in your circle of friends, go down to the actual site to see what is going on etc. Doing all these does not necessarily mean it will be a 100% bullseye, but it will certainly eliminate some unnecessary risks and preventable unhappiness. The above is a general guide, and of course investors should customise their own decisions based on the unique circumstances of each individual and country.

Most important of all, buy within your means. You do not want to end up in a state where you have to sell off your house at a loss, ending up with an outstanding loan and no house.

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