Singapore is a highly prosperous island state that serves as a business hub for South East Asia and is one of the world’s most important ports – but why is it a great place to invest in real estate? Here are some of the key highlights:
Summary
- Singapore’s economy is resilient amidst global uncertainties (viz Brexit, trade war, Trump, Hong Kong). Inequality is tackled head-on through HDB (home ownership)
- In a world of negative interest rate, Singapore’s risk-free rate is still attractive (highest AAA rated)
- Singapore dollar is still very strong (govt in net surplus position – savings and investment contribute more than GST); very good foreign reserves, SGD is a strong reserve currency when there is a flight to quality, in fact MAS has to keep currency down)
- Rental yields are attractive and above the cost of borrowing (so you’re paying down principle + capital gains)
- Cooling measures can be unwound (as a buffer – drypowder) – e.g. Additional Buyer Stamp Duty (ABSD) on PR or foreigners. Foreigners are still buying in spite of 20% ABSD (Jack Ma; James Dyson, read more here).
- High immigration demand – more households required for new migrants coming to work in Singapore.
One of the most politically stable countries in the world
Singapore is South East Asia’s most politically stable countries. The ruling People’s Action Party (PAP) has been dominant since 1959 and holds over 90% of the elected seats in Singapore’s single chamber Parliament.
According to the World Bank, Singapore ranks as amongst the most politically stable countries in the world. This data was as at 2017 – if you consider the new headlines today that is dominated by the Hong Kong Protests, UK Brexit, and US presidential situation – the political outlook for Singapore remains relatively stronger.
Well run government
Singapore’s government is known one of the best paid in the world. This was an intentional decision by Singapore’s founding father – Lee Kuan Yew, who believed that higher pay will attract a talented team so the country can prosper.
50+ years from its independence, here is what the government has achieved (notable government agencies contributing to this are put in brackets)
- Home ownership: In spite of one of the highest home prices, homes are still relatively affordable and home ownership, at c.90%, is among the highest in the world. How does Singapore do this in one of the world’s most expensive property markets? i) Regulating land usage to prevent land banking (Govt Land Sales and URA regulations) ii) Balancing
wealth inequality by transferring value from the wealthy to the less wealthy (e.g. ABSD and HDB subsidies), and iii) An automatic savings plan and grants (CPF) that allows most Singaporeans get their first step up the property ladder through public housing (HDB) - Strong balance sheet: Unlike most other governments who run on fiscal deficits, Singapore has an enviable financial position, its enormous reserves result in an annual Net Investment Returns Contribution (“NIRC”) to bolster government income. In financial year 2019, the budgeted NIRC is $17.2bn, a staggering amount that covers 28% of operating expenditure, and contributes more than any other revenue source such as corporate income tax ($16.7bn), personal income tax ($11.8bn) and GST ($11.7bn). This means that the government is able to keep taxes low to bolster the economy, and still afford to invest in defence, education and health (top 3 expenditure items)
- Manageable ageing population: By 2030, the number of Singapore residents aged 65 and above is expected to more than double to 900,000 (13.4% of total population), from 440,000 in 2019 (7.7%). While this sounds pretty dire, it is a relatively low compared to other countries (e.g. the UK has been hovering at 15-20% since the 1980s). Singapore has a unique edge in managing the ageing population issue it is able to rely on a foreign workforce, representing c.30-35% of the population. Yet, unlike countries like countries like Australia, New Zealand and Canada, the burden of looking after the foreign worker when they grow old do not fall on Singapore. Approximately 80% of the foreigners are lower to mid-skilled workers holding work permits and S passes and after working in Singapore for a few years, they are able to return to their own countries to retire.
United Nations data show Singapore’s 65+ population as 11.5%. After considering foreign workers, it is actually only 7.7% (blue X on chart).
Strong Singapore Dollar and stable interest rates
Most countries in the world use interest rates to keep inflation and the economy in check. Interest rates are lowered when the economy is weak, generally resulting in a weaker currency which increases the competitiveness of exports and boosts the economy.
Unlike the rest of the world, Singapore uses an exchange rate based monetary policy (read more here). We are in the unique position to be able to do this because a lot of our domestic consumption is imported. By maintaining a gradual appreciation of the SGD, inflation is kept in check while interest rates are much more stable compared to other countries. This means that the SGD is going to be more stable and interest rates on your mortgages will be kept low – the best of both worlds!
Safe haven for the rich
Given it’s unique positioning, it is not surprising that Singapore is a safe haven for the rich. The High Net Worth Individuals (HNWI) population in Singapore is 124,970 in 2018 and this number has grown at a staggering 7.4% CAGR since 2008. The total inventory of private residential properties in Singapore (non-HDBs) is 370k, this means that if each HNWI only owns one private property, there are only 245k properties remaining for Singapore’s remaining 1.2m resident households
Property is relatively affordable
While Singapore property is one of the most expensive globally in absolute terms, it is relatively affordable when compared to other capital cities, and even more so after taking into account incomes. That is why Singapore still has 90% home ownership. The government plays an active role in keeping property prices from going out of control, such as cooling measures (e.g. ABSD), controlling land supply, and preventing land banking (e.g. extension charge, ABSD on residential developer if they are unable to complete/sell all units within 5yrs). The cooling measures implemented has kept the prices rising at a stable rate, and in the event if prices fall, cooling measures can be unwound to bring prices up.
Among resident employed households, median monthly household income has grown more than 50% in the past 10 years from $6,100 (in 2008) to $9,293 (in 2018). Home prices are still relatively affordable based on this income trend.
For example, if we assume a monthly household income of $9,000 and monthly cash savings of $500, after 2 years of working, the household will be able to afford a $500K HDB with a HDB loan. After 9 years of working, the household would have enough CPF/cash savings for their $1mil condo. Singapore home buyers also have strong holding power – on average, sellers have an average holding period of 9 years. There are very few distressed sellers in the market.
