Is now the right time to buy a private property?

 October 22, 2010 

While prices of some private residential properties may have reached record highs, there are still opportunities for homebuyers and investors who hope to benefit from capital appreciation and long-term investment.

However, potential buyers should carefully evaluate the prevailing and expected market conditions and any project-specific opportunities before going ahead with a private home purchase.

A shrewd investor should listen to as many advisers as possible to get a broad range of views before making up his or her mind. Having set the broader base, investors can look out for properties with capital or rental appreciation potential. Meanwhile, ascertaining the demand base for a property, be it resale demand or tenant demand, is fundamental to conclude if the home can realise your dreams.

Broader market conditions

The current home buying mood is cautious and the majority of the new launches have seen a slowdown in buying interest. Only selected projects have received encouraging buying response, with the majority either getting decent visitorship but minimal sales or experiencing limited viewings.

The mixed response shows that potential homebuyers are still adjusting to the Government’s cooling measures announced late in August. A number of homebuyers are still interested in making a purchase but are evaluating their options, given the restrictions in reselling. Homebuyers who appreciate the flexibility to resell need not necessarily be speculators – they can be those who are buying for owner occupation and investment who know that the flexibility to resell will be useful for liquidity purposes.

Although buyers are aware of the rewards of being a contrarian – to purchase when there is limited interest and when prices are low – many will find it safe to buy only when initial signs of a turnaround are visible.

The situation now is that many potential home buyers are hoping prices will fall. But it seems unlikely that there will be major downward repricing since the economy is fundamentally stable.

Potential homebuyers may hence find it safe and be encouraged to purchase when interest starts to revive, which could be as early as next year.

The earliest that sales activity is from the first quarter of next year, as a number of homebuyers would by then have adjusted to the cooling measures. Meanwhile, prices should be relatively stable in the fourth quarter of this year, putting an end to ever-rising prices and calming fears that an asset bubble may develop.

The fear of an asset bubble leading to severe price falls right after the purchase of the home is something many potential buyers are apprehensive about.

So, which projects will shine?

Against the backdrop of the overall moderation in buying sentiment, it will be developments with project-specific micro-market strengths and opportunities that will shine. These may include proximity to new infrastructure developments or plans to revitalise the neighbourhood. A visible plan to rejuvenate an area or new transport nodes like upcoming MRT stations will radically enhance property prices.

Since buyers are unlikely to enjoy short-term gains through speculation, many are now interested in the long-term benefits the property can offer, reflecting the maturity in the home buying intention.

The quieter market now may also be a window of opportunity for a number of homebuyers to identify areas with specific micro-market potential for capital growth and purchase when a suitable project is launched.

Ascertaining the demand base

For those looking purely to invest, understanding the underlying tenant demand base is crucial. Generally, tenant demand can be divided into local young professionals and expatriates.

Local young professionals are likely to value a central location as a signature of success but are indifferent to size – a smaller but centrally located apartment may fit his or her requirements so long as he or she has a good address to flaunt.

Expatriates, especially those senior in rank, may require larger units to accommodate family members or as a symbol of prestige, reflecting the generosity of his company in the housing allowance.

An investor must understand that the unit cannot have the best of all worlds with respect to the prospective tenant base but must be confident enough of the availability of the tenants for the property type that he or she is buying.

Those looking at purely owner occupation can be nonchalant about investment potential, although capital appreciation should still underpin the buying decision. Capital appreciation can safeguard the buyer, should he or she run into financial difficulty.

Investing in overseas properties?

The moderation in sentiment in the domestic market may not necessitate a shift of interest from local properties to overseas properties. Those looking to buy overseas properties have a different set of criteria from general homebuyers.

Buying a foreign property for investment may be very different from other investments like stocks. The typical buyer is likely to be interested because he or she finds familiarity and appeal in the foreign environment. The investor will venture into the purchase only when he or she sees a long-term possibility to settle in the foreign country, even if the home is meant for investment.

It is also easier to manage investments where one has the advantage of proximity to act upon contingencies, although one can easily outsource the lease-management aspects to professionals.

Buyers looking at overseas properties must first understand the country’s property fundamentals, market cycles and the drivers including economic behaviour, which underpins tenant demand and potential for capital appreciation. It is also critical to understand the physical property and the surroundings, including any major plans which can affect or benefit the growth potential of the property.

Buyers looking to invest overseas should also understand the legislative framework affecting property ownership. The effect of government initiatives and policies on property prices, especially for mature markets or cities such as Shanghai, which attract buyers from all over the globe, must also be taken into consideration.

By Ong Kah Seng, Senior Manager at Cushman & Wakefield Research.