Investors' outlook remain bleak as dropping yields hit property sector

Total returns may decline by as much as 4% per annum if capital appreciation trends between 1-2% downwards.

Investors who once found a safe haven in Singapore's property market are rethinking their strategies after the surprise cooling measures introduced in July is increasingly weighing on the returns of their real estate assets. 

Although investors have traditionally accepted low net yields on private homes of about 1-2% in the past as they were compensated by stronger capital appreciation of 3-6% to provide total returns of around 4-8% per annum, the outlook on yields is increasingly dimming, according to a report by real estate consultant JLL.

Also read: Real estate sentiment sours in Q3 amidst property curbs

“Going forward, if capital appreciation were to decline to between 1% and 2%, total returns would also decline to around 2% to 4% per annum,” Ong Teck Hui, senior director of research & consultancy at JLL Singapore said.

The challenging environment comes after authorities hiked additional buyer’s stamp duty rates and lowered loan-to-value limits for residential property purchases in July in an attempt to cool the market where home prices have grown by 3.9% and 3.4% in Q1 and Q2 respectively.

Also read: Private home price growth slows to 0.5% in Q3

As a result, investors will also have to brace for residential supply swings which will be further aggravated by leasing demand constrained by policies on foreigner hiring - all of which is poised to affect yield performance.

The residential leasing market is slowly recovering with new private homes estimated at around 21,133 units between 2018 to 2020 which is 62.4% lower than the preceding three years. However, the more recent land sales boom from mid-2016 to mi-2018 will result in a buildup of private home completions in 2021 and 2022.

In response to more challenging market conditions, investors are urged to invest in the early property cycle to avoid losing money and make a bigger bang for their buck, said Ong. 

Also read: Were the government's cooling measures premature?

Early to mid-cycle transactions from Q2 2009 Q3 2013 witnessed a healthy capital appreciation of 33% until Q2 2018, JLL analysis show. On the other hand, nearly a fifth (19%) of the late-cycle transactions over the same period suffered capital depreciation whilst 48% had low capital appreciation between 0% and 1% per annum.

“Past property cycles were more forgiving of mistimed entries and exits, but when capital appreciation narrows as in the current market, this principle becomes more critical,” added Ong.

Despite the higher depreciation risk, late cycle transactions accounted for the lions share of transactions in the four-year period at 60% whilst early to mid cycle transactions represented the remaining 40%.

However, investment returns in Singapore real estate are still poised to remain higher than the global average for 2018-2022, according to a report by UBS Asset Management. In fact, Singapore trails only behind Australia and Hong Kong as hotspots where investors can still cash in on various investment in property thanks to its strong market fundamentals and capital flows.