The answer  is a resounding ‘Yes’ as rental yield is still attractive at gross yield of over 4% per year.

Let’s take three examples from the recently completed 99-year leasehold condo and three examples from an old condo and work out the investment yield. The basic assumption in the workings of the investment yield is “80% leverage at an interest factor of $436 for every $100,000 borrowed”.

The Q3 2008 rents released by the Urban Redevelopment Authority (URA) for both the projects in the case study are as follows:

[A] Working of Rental Yield for Citylights units

Note*

• Item [H] – the 20% outgoings comprise 10% in property tax, between 4% and 10% in maintenance fees, between 4% and 8% in agent’s commission. The outgoings could be higher for older properties due to higher costs in repairs.
  
  
• Item [K] in the above table assumes that the property owner does not leverage at all. The ‘net yield’ is the return on investment, after deducting all costs of property ownership, including property tax, maintenance fees, agent’s commission, assuming the property owner uses 100% of his own capital to pay for the property.
  
  
• Item [L] Equity dividend rate is the return on the amount of investor’s own money, after deducting the above costs of property ownership and the repayments of the housing loan in item [D].

[A.1] Findings of the case study

It is every investor’s dream comes true at Citylights. This is because all the landlords are able to attract high rents, probably due to the following factors:

1. Citylights is a newly completed condo project;
2. It is within a short drive to the Central Business District;
3. It offers nice sea view;
4. It is very near to MRT station.

However, the buyer for Unit C has probably overpaid for the top-floor unit.

[B] Working of Rental Yield for Bayshore Park units

[B.1] Findings of the case study

• Bayshore Park units too expensive

As it is, at the current price level, Bayshore Park units are too expensive due to the very low equity dividend rate (Item L above). In other words, Bayshore Park is not suitable for highly-leveraged investment at this point in time.

The rampant speculation six months back about a possible collective sale for the project had definitely inflated the sale prices beyond reasons. Therefore, those who had bought into the old project may have gone in with the hope for the collective sale windfall.

As such, some of them may be adopting a strategy of holding out until the project is eventually sold collectively in the next boom cycle.

• Other unfavourable factors for highly-leveraged investment

1. Bayshore Park is right smack at a densely populated neighbourhood with competitive rents;
2. Bayshore Park is more than 30 year old and the interior fixtures may not suit the requirements and liking of younger tenants.

• The need for a different investment strategy

From the case study, it is ascertained that the investment strategy for aged 99-year leasehold property in general, and Bayshore Park in particular, must be different from investing in a ‘newly-TOP’ leasehold project, such as Citylights, where buyers can adopt a highly-geared strategy and enjoy regular cash flow.

For an old leasehold project, such as Bayshore Park, the investors must adopt either of the two approaches:

1. sit out the lull period without using any financial leverage and go for the end-game, i.e. capital gain through disposition (and in this case, collective sale); or
   
   
2. buy at extremely low prices – low enough to factor in future declining rents which may occur due to physical deterioration of the property, or due to competitions coming from newer projects.
   

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