Prospective buyer

Tell me Sam, what is the point of investing in a condo, going through all the hassles, taking all the risks, and earning so little in interest? I might as well put the money in the fixed deposit and earns the same interest.

Agent

Sir, I think you have missed some very important points here. Yes, the equity dividend rate looks pathetic at first glance (Referring to the Bayshore Park case study). But sir, you must understand that the 4.15% yield is after you have paid off ALL the costs in property ownership, including property tax, total maintenance fees, and agent’s commission.

In fact, property investment is always better and safer than putting the money in the banks – which are only given the government’s ‘no risk’ guarantee a few weeks ago. Has anyone explained to you how property investment can work to your advantages in the long term? May I have the privilege of explaining it to you, sir?

Prospective buyer

Why not? Tell me how such a risky investment like buying into a old condo beats putting money in the Fixed Deposit Savings, which is totally ‘risk free’?

Agent

Sir, real estate investments offer, among other things, one benefit that no savings plan can beat, that is, you will become the proud owner of an property that provides passive income to you everyday.

Prospective buyer

What is ‘passive income’?

Agent

You and I are earning ‘active income’ right now. If we stop work, our income stops. When a landlord stops work, his income continues to flow from the rents he collects from his property investment. This is called ‘passive income’, which means you don’t have to work actively for it. The property works for you.

But sir, I must remind you that only properties bought cheaply during ‘bad times’ will be able to provide good ‘passive income’. If you buy the property during the bull-run market (or over-pay for the property), you expose yourself to some investment risks. Do you like to know more about the difference between a leverage investment and risk-free savings?

Prospective buyer

Why not? Tell me more about it.

Agent

When you put $250,000 in the Fixed Deposit savings, the money does not grow, except by the small percentage that the interest rate gives you. But for property investment, the capital value of the property will grow over time due to economic growth, inflation, and the specific demand and supply situation in the market.
So as you reduce your debts every month on the one hand, your equity in the investment property increases on the other hand. Do you realise that Fixed Deposit Savings cannot do this for you?
Moreover, if you have purchased the property at a low time, such as now, the capital value can only appreciate when the economy picks up its pace again, and in a short period of time, the property will create enormous wealth for you.
And the best part in this ‘wealth creation process’ is that, you do not have to come out with anymore fresh capital, your tenant is actually paying for you. Don’t you think this is better than the risk-free savings plan?

Prospective buyer

Yes, but you also admitted earlier that there is some risks involved. How do I know that the property prices or the rent won’t fall?

Agent

Yes, you are right sir. Risk is an important aspect of investment. In every investment, there are bound to be calculated risks, and nobody can guarantee you that you won’t be the unlucky one that gets hit by bad timing or bad luck.
The best way to protect against yourself from ‘risks’ is to buy the property during market lull (which happens every three to five years), or a recession (which happens every ten to twelve years).
This is because we won’t know when the market will hit the bottom, neither will we know when the market will hit the peak; so the best guide is to sell during bull-run and buy during a recession.

Prospective buyer

But nowadays, investors are shifting money to the safety of guaranteed bank deposit, do you think that a leveraged investment in property is still valid today?

Agent

Why not sir? The shift in investor’s emphasis today will not change the fundamental of real estate investment as the best vehicle to create and preserve wealth for generations.
I assure you that once the economic activities come back, the money that you have prudently put into a property will produce more value per dollar than any bank deposit.

Prospective buyer

I will never buy a 99-year leasehold property. A freehold condo is always a better investment

Agent

[Referring to the working of investment yield of Bullion Park condo and Orchid Park condo]
Sir, if you are referring to landed properties, I would totally agree with you because you can hand down the land to the next generation; and the freehold land will continue to create wealth for generations. But the same cannot be said for investment in condominiums. Can you imagine yourself living in a 50-year old condo, with all the outdated fixtures?

Prospective buyer

But, when I want to sell it later on, the freehold status will attract higher price.

Agent

That is not true, sir. During the market bull-run in 2006/07 period, a leasehold project called Grangeford Apartment was sold en bloc for $800 million while its neighbour, a freehold project called Horizon Towers were only sold for $500 million.
Likewise, Scotts Square in Scotts Road, which is a freehold project, have done relatively poorer in sales than Orchard Residences in Orchard Road, which is a leasehold project.
Mr Buyer sir, at the end of the day, when it comes to investment in condo, freehold status counts for very little.

Prospective buyer

What if I live in the condo myself? Wouldn’t a freehold condo provide more assurance of easier sale, if I have to?

Agent

I have just said that nobody will want to live in a 50-year old condo, if they have a choice.  As such, a 50-year old freehold condo won’t be easier to sell than a 5-year old leasehold property if the freehold condo is in a lousy location; and the leasehold property is in the best location.
Whether a property is easy to sell or not depends on many attributes, chiefly of which its location – which determines the rental value (also called investment value).
Freehold status, as I have said many times, counts for very little.
Likewise, tenants will not rent a very old apartment if they have the choice. And because the value of any real estate comes from the rents it collects, at the end of the day, whether a condo project sells well or not depends on the investment yield it can offer investors. May I show you a comparative study I have just done on two nearby condos to ascertain their investment value?

Prospective buyer

Okay, interest me.

Agent

[Referring to the comparative study of the Freehold Bullion Park and leasehold Orchid Park condos].
As you can see clearly in the comparison of the two condos, the net yield of the three sample units at the Freehold Bullion Park condo is between 3.72% and 4.34% respectively. They are a shade lower than the net yield of between 3.97% and 4.5% produced by the three sample units at the nearby 99-leasehold Orchid Park condo.

But if the owners of Units J and K in the case study have leveraged their investments on a mortgage, they will be experiencing negative returns on, which means that they have to fork out cash every month to repay their mortgagees.

Prospective buyer

Why is the freehold condo unable to attract a higher rent?

Agent

While the landlords believe that their freehold units in Bullion Park are worth a ‘premium’ (e.g. units in Bullion Park cost $120 to $150 psf more than comparable units in Orchid Park), the tenants do not believe the project is worth a ‘rental premium’.
This is because on practical terms, the tenants of both the two nearby condos use the same MRT station, travel the same bus route, and/or pay quite similar taxi fares everyday. Why should the tenants pay higher rents?

Prospective buyer

So, what is the moral of the story?

Agent

Oh, I appreciate the ‘point blank’ question. Let me answer it ‘point blank’ as well. Freehold status alone does not bring better investment value, as can be seen from the above comparison between Bullion Park and Orchid Park condominiums.

The additional premium of $120 to $150 psf the Bullion Park owners paid for the freehold status of the project did not bring them any additional financial incentives.

Both the condos are attracting median rents within the same narrow range of $2.20 to $2.50 psf per month. In other words, by holding a more expensive unit with no added financial incentives (such as higher rents), the owners of any freehold properties are actually ‘under-utilising’ their own resources (i.e. money), and at the same time, exposing themselves to unnecessary risks.