To be clear, property is a long term investment, in which we shouldn’t have too much of an episodic view; it’s likely that home buyers today will realise their gains long after Covid-19.
Properties that saw their values drop during the last Global Financial Crisis, for instance, quickly saw them recover and reach new heights by 2013.
However, it’s not totally unreasonable to be cautious, given the large investment that property represents. As such, we should also take note of features that will help our properties maintain rentability, yields, and appreciate in value; even through downturns like the one we are currently in.
Here’s how we can spot such assets:
Traits of recession resistant properties
- Properties that attract families rather than singles
- Developments that are not too large
- Lack of nearby competition for tenants / buyers
- Units that are close to schools of all kinds
- Freehold properties, which have more time to ride out downturns
Finally, I will look at an important consideration that goes beyond the actual property: your financial situation, which also determines how well your property assets can ride out a downturn.
- Properties that attract families rather than singles
This means larger properties like three-bedder condos, or certain landed properties, if they’re within your budget.
There are two reasons for this:
First, if you’re a landlord, tenants who are family units are more “sticky”. They have often established a routine for their lifestyle – their children are in nearby schools or preschools, and it’s logistically harder for them to move.
On the other hand, tenants who are singles are often happier to move; all they need to do is find a cheaper unit across the street, or a few blocks away.
In fact, tenants like these often also sign shorter leases, for the exact same reason (when the situation is bad and rental rates are falling, they expect to renegotiate or find a cheaper place in six months).
Between the two, you can see that families are a more stable source of rental income during rough times.
This is not to say that families won’t also push for lower rent – some might. But they’re less likely to pack up and move if you hold your ground.
Another consideration is the potential buyer pool
During a downturn, it’s especially important to have a wide pool of prospective buyers. The more interest there is in your property, the more likely you are to get a good price.
With regard to this, we need to consider that the bulk of home buyers are (1) still mainly Singaporeans (in fact for Q1 of this year, the amount of foreign buyers fell by over 26 per cent), and (2) will mostly come from HDB upgraders. At the recent launch of The Penrose, for instance, around 80 per cent of the purchasers were upgrading from HDB flats.
Typically, home buyers who are upgrading from HDB flats, tend to be families, not singles. As such, resale units like shoebox flats will draw less interest from them; you’ll have an easier time getting a good price with larger condo units, or landed properties, that are suitable for families.
2. Developments that are not too large
The term “large development” usually refers to mega-projects, with 1,000+ units; these are developments like Treasure at Tampines, Parc Esta, etc.
To be fair, there are many advantages to such large developments. The common grounds and facilities tend to be more extensive, for example, and monthly maintenance costs can be lower when split among so many owners.
However, during a downturn, there’s a chance that some unit owners may have to sell and downgrade. The bigger the number of units in your development, the more of these situations you’re likely to have “next door” – as a high volume of urgent sales will quickly bring down your overall condo value.
As such, you may want to consider mid-sized developments in a comfortable range of 600 to 700 units.
(Note: You may also want to avoid boutique style developments that are too small, such as those with just 20 or 30 units. The lower volume of transactions already makes their prices more volatile; a recession could cause an unexpectedly steeper plunge in value).
3. Lack of nearby competition for tenants / buyers
This is somewhat similar to point 2, but involves the amount of residential units surrounding your development.
A good example of this is Geylang. Many property buyers have a negative view of this area, as parts of it (not all of it) are close to a vice area. But did you know that Geylang is famous for maintaining high occupancy rates, despite the ups and downs of the economy?
This is partly due to simple scarcity. In 2015, a massive (14-hectare) stretch of Geylang was no longer zoned for any residential property. This means whatever property you see in that area represents the sum total of available units – anyone who wishes to rent or buy in the area has no other choices.
I’m not saying you need to buy a property in Geylang in order to be recession-resistant of course. Simply that you should consider areas where there are (1) few or no further residential developments planned, and (2) areas with a low Gross Plot Ratio (GPR), to keep supply limited.
An example of this would be a condo like Meyer Mansion, which is situated in a low-density private housing enclave, or one of the landed properties in the areas of Siglap and Bukit Timah.
4. Units that are close to schools of all kinds
This is also related to what I said about families, in point 1. Families are less likely to move as tenants, if their children attend schools nearby.
However, there are two other advantages to note.
The first is the possibility of switching to student tenants, when times turn bad. In general, students will stay on to finish their studies, regardless of whether there’s a recession. If they need two more years before graduating, then they’ll stay for two more years (and few are willing to move far from their University, even if other landlords are dropping rent).
The same can’t be said of an entrepreneur who came here to run a start-up, or an expatriate who gets sent home by her company as a cost-cutting measure.
The second is the nature of school registration. Your children’s chances of getting into a school are much higher, if they’re within one kilometre. As most parents believe a good school is a worthwhile investment, they may be willing to offer a good price on units nearby; this helps to keep the price afloat during a downturn.
5. Freehold properties have more time to ride out downturns
Freehold properties are more expensive than their leasehold counterparts; the price difference can be as high as 10 per cent or 20 per cent. Due to this premium, leasehold properties may appear to perform better in the short run.
However, once the property is past 20 or 30 years, freehold properties can hold their value better. You have a better chance of riding out events like the Global Financial Crisis or Covid-19, as there’s no “99-year clock” running down.
Finally, the best way to make your property “recession resistant” is to have holding power.
This means you should have saved up at least six months of your expenses, including the mortgage. Ideally, you should also stick to home loans that don’t take up more than a third of your monthly income.
This is to ensure that, even if you don’t have tenants or you have income difficulties, you can continue to service the mortgage. At the very worst, six months still buy your agent enough time to properly market the property; you won’t be forced to sell at a loss, and may even still recognise gains.
This is a very general outline of what to look for. You can shortlist some potential properties with this; but after that it’s best to get help for a more in-depth look. Drop me a message on Facebook, and I can help you to work out if your purchase is the right one for the current volatile climate.
You can also follow me on Ron Chong.net, for updates and an informed view of changes to Singapore’s real estate market.