Recently, Channelnewsasia covered a topic asking whether Singapore's private housing market is in a bubble. In it, a certain property firm’s "expert" was interviewed. One fact which made me interested is how annual rental yields of Condominiums in Singapore are now between 2.8% - 3.2%.
Having been in the real estate and investing on my own, my perception is that these figures do not reflect the reality for investors buying a private property to rent out for investment purposes. In my opinion, it seems 3 significant expenses may have been forgotten/ignored by property investors when computing the rental yield:
1. Property Tax
This is the biggest factor which many seem to have forgotten. In Singapore, the property tax is determined by the annual value of your property and for properties renting out, it is based on the annual rental income of the rented property. The base tax rate is 10% and moves up to a max tier of 20%. E.g., if your monthly rental to a tenant is $3,000, the annual value of your home is $36,000 and will incur a tax expense of $3,720. You can find the link to property tax here.
Cost relative to monthly rental income: 1.20 - 1.40 months (Variable cost)
2. Monthly Fees for Maintenance
Unlike HDB flats where our town council helps maintain the amenities, Condominiums have their own MCST that is in charge of maintaining the condo’s compound and amenities. Each owner pays a monthly fee (proportional to their housing unit’s size). For many, the monthly fee to the MCST is about $250-$300.
Cost relative to monthly rental income: Approx 1.10 -1.25 months (Fixed Cost)
3. Commission to Agent
Commission is about 0.5 months per rental year of lease.
Cost relative to monthly rental income: 0.5 months
With these 3 main factors and small items such as Insurance etc., a landlord (owner) will incur a cost equivalent to 3 months’ rental income for every 1 year of rent secured. And this is under the assumption that the condo is always rented out (in fact, our country is now facing a 10+% vacancy rate).
To summarize, if a Condo is touted to give a 3% yield, its true yield to the owner is about 2.25% (factoring the above mentioned costs).
This got me wondering if people investing in private properties now are fully aware of how low the yields they are getting and the financial perils associated with such a low yield.
It is true current interest rates for a private housing loan is low, ranging from 1.6% -2.0%. But a simple hike in interest rates of 0.75% (3 rate hikes equivalent in the federal reserve context) will mean the housing loan interest rate exceeds that of the condo’s yield. 10 years ago, Singapore’s housing loan interest was in the region of 4% p.a and if we were to look further into history, the rates were higher than 4%. A reversion to the mean of about 4% p.a is a likely scenario based on history.
It may end up a situation where investing in a private property eats into your cash flow or that instead of becoming an investment for retirement, it becomes a liability to you; serving only the bank's bottom line or as taxes contributing to the nation building of Singapore.