Should Singapore property investor buy more expensive properties?
Over time, the Singapore government has made credit easy. Now, you only need 5% cash and 5% in Cpf funds in order to pay the downpayment for a condominium. This means that you can get a 90% loan for your Singapore property loans.
Earlier, we said that a condominium has a land component and a building component. This means that a place with cheap land will result in building taking up the bulk of the value of your condominium. And buildings depreciate faster than land as most buildings become in a bad shape after 20 to 30 years.
Therefore, your property depreciates faster.
If you buy a condominium where the land is much more expensive, and the building itself is a smaller percentage of the total value of the condominium, the property can depreciate at a slower rate.
If Singapore property investors buy a condominium that sits on free hold or 999 lease hold land, the land holds it’s value while the building depreciate.
Buying a property is a personal choice as much as it is a matter of affordability. If you can afford a more expensive property, there may be more value.
For Example, if we look at other places where the land could be $1000 psf ppr (Free Hold) and we add a luxuriously fitted building at $500 psf ppr. The building is only 33% of the total value. The total psf ppr price would then be $1500.
Assume that with a mark up, you buy it at $2000 psf ppr. In this case, the building value will continue to depreciate, while the Free hold land value tends to increase in line with inflation and/or population growth. You could be paying more, but you are sitting on valuable land which can potentially more than offset any reduction in building prices.
As land in expensive areas are very prime, supply is typically limited. There will be a lot of pressure to re-zone the area for higher plot ratio so as to sell more housing units in the same plot of land. If you buy it with a low plot ratio, you could sit on a potential re-zone benefit. And since the building also depreciate, but it is only a very small component of the entire condominium price, while land potentially appreciate if population expands and income level rises.
Expensive land stays expensive or it could even become more expensive.
Other factors that lead to the expensive becoming even more expensive.
And the more expensive the land, the more incentive it is to build luxuriously and beautifully in order to optimize usage in prime land. With more and more such buildings in any particular area, the vibrancy will increase, leading to better overall facilities and amenities to serve the “rich clientele”. This creates a positive reinforcing cycle which supports the property values. In the case of building cost to land cost ratio, as long as it can be built luxuriously enough with good utility, as a rule of thumb, the lower the ratio, the better it is in keeping the value of the property as a large part in the value is vested in the land itself, while the building itself depreciates.
As the buildings around an area or an estate becomes more and more exclusive, the overall desirability increases for all. Property values around those areas also rise.
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