Considerations For Residential Property Investment In Singapore
Singapore, a global city with its strong accolade as an important financial and trading hub, is under the radar for many investors from around the world. The country’s solid fundamentals in physical infrastructure and workforce, the clear rule of law, ease of doing business, quality education and excellent living standards have created a highly conducive environment for enterprises, foreign talent and the high-net-worth community to invest here. Widely perceived as a safe haven, Singapore is one of the destinations of choice for many potential property investors.
Coupled with high population density, healthy utilisation of real estate and stable price movements, Singapore’s private residential property is a highly-watched asset class amongst the locals and foreign buyers. Notwithstanding the prevailing property cooling measures, the steady annual transaction volume of over 20,000 private home units in 2017 and 2018 reflects healthy liquidity in the private residential market, which supports prospects of capital appreciation and investment appeal.
To begin the journey of owning a private residential property in Singapore, an investor must consider two essential factors:
1. Establish Purchase Objectives
The intention to purchase a private residential property – for owner-occupation, investment or asset portfolio diversification, is a crucial driver to determine the selection process of the choice property. The prime objective of owner-occupation would require an assessment that is predominantly buyer-centric, whereby the location and project attributes must fulfil the residence needs of the buyer. In comparison, selecting a residential property for investment purpose would firstly entail a comprehensive review of the location prospects, for instance, if there are current and future demand drivers that would enhance the rentability of the property. Asset portfolio diversification would require a specialised approach in the selection of a new residential property purchase that would achieve overall performance objectives for the investor’s asset portfolio, in terms of holding period and target returns. Establishing a clear purpose would aid the investor in the selection process of a choice residential property in the myriad of various options in Singapore.
2. Estimate Costs and Financing of Property Purchase
a) Stamp Duties
The cost of acquiring a private residential property extends beyond the price of the property and fitting out costs in Singapore. Stamp duties form an essential component, and the existing framework of stamp duties (comprising standard Buyer Stamp Duty and Additional Buyer’s Stamp Duty) in Singapore is a prime consideration for both local and foreign investors.
With effect from 6 July 2018, a Singapore citizen who is acquiring a second property would have to pay an Additional Buyer’s Stamp Duty (ABSD) of 12% of the property price*, while a Singapore permanent resident is required to pay an ABSD of 5% for any first residential property purchase. Foreigners are required to pay an ABSD of 20% for buying any residential property.
All entities will be subject to the prevailing ABSD rate of 25%. In addition, housing developers are subject to an additional non-remittable ABSD rate of 5% upon stamping, i.e. aggregate ABSD rate of 30%.
b) Loan Limits
Financial institutions in Singapore are required to adhere to loan-to-value (LTV) limits for all housing loans granted to residential property purchasers to ensure they maintain a stable leverage position. With effect from 6 July 2018, the government adjusted the LTV limits, which do not apply to loans granted by the Housing and Development Board, the master builder of public housing in Singapore.
The LTV limits for loan applications is also subjected to the Total Debt Servicing ratio calculation to be assessed for the borrower.
c) Total Debt Servicing Ratio Framework
Since 28 June 2013, the government has implemented the Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions (FIs) to individuals. The TDSR requires FIs to take into consideration borrowers’ other outstanding debt obligations when granting property loans.
In computing the total debt obligations of the borrower, all monthly repayment for the property loan that the borrower is applying for, plus the monthly repayments on all other outstanding property and non-property debt obligations of the borrower, will be taken into account. A specified medium-term interest rate or the prevailing market interest rate, whichever is higher, is also to be applied to the property loan that the borrower is applying for when calculating the TDSR. In addition, a haircut of at least 30% to all variable income (e.g. bonuses) and rental income, and haircuts to and amortisation of the value of any eligible financial assets are to be applied in assessing the borrower’s debt servicing ability.
Any property loan extended by the FI must not exceed a TDSR threshold of 60% for the borrower.