Property investment and stock investment are often inter-linked. If you are a stock investor, you need to pay attention to the impact of the latest property cooling measures.
Following the rebound in residential prices of some 9% from the bottom in 2Q2017, the Singapore government has decided to wade in to cool down the recent exuberance.
The new Property cooling measures are in three areas:
- Higher ABSD
- Lower LTVs
- Taxing En-Bloc transactions
How do these measures affect your stock portfolio? I will give you my analysis in this article.
What are the past property cooling measures?
Unlike what happened in the US, Singaporean’s real enthusiasm for property investment came after the global financial crisis. The loss of confidence in banks, insurance companies and finance industry forced Singaporeans to put their faith to “real estate”. Many people felt that they “missed the train” and they gave all the justifications to themselves to put their life savings into a property.
The property market shot up rapidly since 2009 and the government had to use 7 rounds of property cooling measures to put a stop to the rise.
If you followed my blog, you know I am not a big fan of property investment in Singapore, simply because it made little sense. I wrote several articles from 2012 to 2014 to warn people to be cautious. For example, I talked about the irrationality of HDB Cash Over Valuation (2012 Jan) and how it ended up badly (2013 Dec).
What are the latest property cooling measures?
This time, the government used strong words. MAS chief Ravi Menon urges developers, individual buyers and banks to “be sober, balanced and exercise good judgement” amid the “euphoria” in property market recovery.
Starting from 6 July 2018
- The Additional Buyer Stamp Duty (ABSD) is increased by 5% for foreigners and 2nd property onwards for Singapore Citizens and PR
- Loan-to-Value is decreased by 5% for all private properties (HDB excluded). It means your down-payment is now 25%
- NEW ABSD of 5% on En-Bloc purchases for redevelopment for developers
How do the property cooling measures affect the stock investments?
The property cooling measure added additional pressure to the already sluggish Singapore stock market. There are three sectors you need to pay attention.
With demand expected to slow-down as a result, risks are now higher for developers with land-bank that need to be cleared at record prices. According to TheEdge:
Companies with no landbank in Singapore are
- Wheelock Properties
Companies with the largest absolute number of units ready for launch are
- City Developments
- Oxley Holdings
- Qingjian Reality
- UOL Group
If people stop buying properties (willingly or unwillingly), their profits will be hurt. The chart below shows the market share of these companies (by the number of units to be launched).
Of course, the markets always know, City Development’s stock had a gap down immediately after the cooling measure was announced (no chance for retail investors to escape).
Now, let’s look at the largest property developer in Singapore, CapitaLand. This company has the smallest portion of Singapore residential property in its asset base, and its P/E ratio is at an attractive level now.
If you are interested in property investment, I encourage you to read “The Wanda Way: The Managerial Philosophy and Values Of One Of China’s Largest Companies”. You will find the similar business philosophy of CapitaLand.
CapitaLand has “resisted the temptation” to “jump in” to the Singapore’s residential market. Why should you? If you think about it, since 2002, CapitaLand already had the foresight to divest their investments into commercial properties by launching the first Real Estate Investment Trust (REITs) in Singapore and ventured outside Singapore.
The property measures affect predominantly residential properties. It should have a very little impact on Real Estate Investment Trusts (REITs) which focus on commercial, industrial, shopping malls.
True enough, REITs have been very resilient against the 5 to 15% drop in property developers. In the short term, the stock investors may rotate their investment from property developers into REITs, which could potentially benefit the REITs sector.
Many people say the new measures will result in slower loan-growth within banking sectors. Indeed, DBS, OCBC and UOB have 42% to 50% of their loan portfolio exposed to the property sector, including housing loans.
But I don’t see much a problem. Thanks to the Singapore government’s prudent measure with the Total Debt Service Ratio (TDSR) capped at 60%, the mortgage default rate should be quite manageable.
At the same time, don’t overlook the rapidly increasing interest rate has just boosted the loan margin for the bank. Last year, I highlighted the 4 impacts of rising interest rate risks. The predictions have all come true now
- The depreciation of the Singapore dollar against USD
- Tightening of loan credit
- Lousy return of bond investments
- Bad economy, retrenchment
Having said that, the bank’s future earnings are likely to be faded in a slow economy like now. Thus, I am neutral to this sector.
I have always told people this: many Singaporeans’ wealth is an illusion built on rising property prices. When you buy a house, you may feel rich, but your net worth stays exactly the same.
In fact, most people’s net worth will decrease along the years due to the expenses associated with the property.
Just like what I talked about in my newly launched book “F.I.R.E Your Retirement”, you should pay attention to your cash-flows and the sustainability of active and passive income, not the value of your assets.
Do not hesitate to adjust your wealth allocation when the financial environment changes. Be merciless and no string attached to your investments.
I hope this article gives you some clarity of today’s property and the stock market. If you have any question, feel free to leave your comment.
p.s. As a licensed adviser, I offer an investment management service. If you want me to help you review your investment portfolio, please submit your request using the form below.