Issue 178

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CONTENTS
p2 Property Valuation Math Using NPV and
MIRR to Identify Good Deals
p9 Singapore Property News This Week
p15 Resale Property Transactions
(October 1 October 7 )
Welcome to the 178
th
edition of the
Singapore Property Weekly.
Hope you like it!
Mr. Propwise
FROM THE
EDITOR
SINGAPORE PROPERTY WEEKLY Issue 178
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By Gerald Tay (guest contributor)
For todays post, well cover two other
important aspects of the Time Value of Money
(TVM): 1. Net Present Value (NPV) and 2.
Modified Internal Rate of Return (MIRR).
Heres a question: A property is priced at $1.4
million and is expected to generate a yearly
net cash flow of $41,200. Assuming no
leverage, would an investor with a Desired
Rate of Return of 8% be wise to invest at the
current price and sell @ $1.4 million (for
simplicity) 5 years later with selling costs of
1% of the sales price?
Property Valuation Math Using NPV and MIRR to
Identify Good Deals
SINGAPORE PROPERTY WEEKLY Issue 178
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Answer:
$1.4M is overpriced since return does not
meet Desired Rate of Return of 8%.
The Net Present Value (NPV) is -$292,212
and therefore not a wise investment.
Even though the Net Rental Yield is 2.9%, it is
a wealth decreasing investment hence I
should not invest in such project.
The property will not meet my expected rate
of return of 8% and I should look for other
options where I can get more than 8% returns
or I should reduce my expected rate of return.
The 6 toughest buying decisions faced by
home buyers and investors
Consider the 6 toughest buying decisions
encountered by investors and home buyers:
1. If I buy when prices are falling, am I
catching a falling knife?
2. If I buy when prices are rising, am I
overpaying?
3. When is a good time to buy, sell or rent?
4. How do I know if I will achieve my desired
Return On Investment?
5. How do I gauge asking prices from sellers?
6. How do I know a good deal from a bad
one?
Tip: Price prediction is futile. Despite this,
investors hope or believe that they can
predict the future, or that someone else can.
Net Present Value (NPV) Defined
The NPV is a metric that can determine
whether or not an investment opportunity is a
smart financial decision.
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NPV is the present value (PV) of all cash
flows (with inflows being positive cash flows
and outflows being negative).
Tip: The Net Present Value method means
that money now is more valuable than money
later on.
Confused? Heres a simpler explanation: you
can use money to make more money! You
could run a business, or buy something now
and sell it later for more, or simply put the
money in the bank to earn interest.
Example 1:
A friend needs $1,000 now, and will pay you
back $1,140 in a year. Is that a good
investment when you can get 10% returns
elsewhere? (Hypothetical example, since we
know lending money to friends is never a
good investment!)
Money Out - $1,000 today:
You invested $1,000 today, so Present Value
(PV) = -$1,000
Money In - $1,140 next year (Future Value or
FV):
Present value (PV) of $1,000 at 10% interest
rate = -$1,036.36
Net amount is:
Net Present Value (NPV) = $1,036.36 -
$1,000 = $36.36
So, at 10%, the investment is worth $36.36.
In other words, it is $36.36 better than a 10%
investment, in terms of today's money.
Your choice of interest rate can change too.
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Example 2:
Same investment, but now you demand a
15% Rate of Return.
Money Out -$1,000 today:
You invested $1,000 today, so Present Value
(PV) = -$1,000
Money In -$1,140 next year (Future Value or
FV):
Present value (PV) of $1,000 at 15% interest
rate = -$991.30
Net amount is:
Net Present Value (NPV) = $991.30 - $1,000
= -$8.70
So, at 15%, the investment is worth -$8.70
It is a bad investment. But only because you
are demanding returns of 15% (maybe you
can get 15% somewhere else at similar risk).
Tip: NPV > 0 = Positive Investment. NPV < 0
= Negative Investment. NPV = 0 = No Loss,
No Gain.
Future Value of Uneven Cash Flows
Now suppose that we wanted to find out the
future value of cash flows instead of their
present value. Take, for example, 5 years of
uneven property income.
Instead of using huge complex numbers, Ive
simplified the numbers for ease of
understanding.
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Suppose that you are offered an investment
which will pay the following cash flows at the
end of each of the next five years:
How much would you be willing to pay for this
investment if your required rate of return is
12% per year? Suppose that you were
offered the investment at a cost of $800.
What is the NPV?
Answer: NPV is $200.18.
Since the NPV > 0, the value of this
investment at $800 is a good investment as it
meets your Required Rate of Return of 12%.
Suppose that you were offered the
investment at a cost of $800. What is the
IRR?
Answer: IRR is 19.54%
The Internal Rate of Return 19.54% >
Required Rate of Return 12%
Therefore, the value of this investment at
$800 is a good investment.
Putting It All Together and the Modified
Internal Rate of Return (MIRR)
The Internal Rate of Return (IRR) has been a
popular metric for evaluating investments for
many years primarily due to the simplicity
with which it can be interpreted. However, the
IRR suffers from a couple of flaws.
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The most important flaw is that it implicitly
assumes that the cash flows will be
reinvested for the life of the investment at a
rate that equals the IRR.
The Modified Rate of Return (MIRR) and Net
Present Value (NPV) solve this problem by
using an explicit reinvestment rate (i.e. bank
deposits).
From the above table, suppose that you were
offered the investment at a cost of $800.
What is the MIRR if the reinvestment rate is
10% per year?
Answer: MIRR is 16.48%
So, weve determined that our investment
valued at a cost of $800 is acceptable.
It has a positive NPV, the IRR is greater than
our 12% required return, and the MIRR is
also greater than our 12% required return.
Reinvestment Rate
The reinvestment rate refers to the annual
yield at which cash flows from an investment
can be reinvested.
For example: Ryan owns one rental property.
After the payment of all expenses and debt
service, Ryan has cash flows of $1,000 per
month, which is a 15 percent return on his
money.
The Internal Rate of Return (IRR) for this
property assumes that Ryan will take his
entire $1,000 worth of cash flows per month
and reinvest that money in something else at
the same 15 percent rate he is earning on the
property. This reinvestment rate of 15% is
highly unlikely and unrealistic for the average
investor.
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A more realistic scenario: Ryan puts the
$1,000 per month in a savings account
earning 0.25% interest, or uses it to pay off
personal expenses, such that his
reinvestment rate is 0.25%.
Two realistic reinvestment rates for the
average property Investor would be Bank
Deposits at prevailing rates or CPF Ordinary
account at prevailing 2.5% interest.
Concluding Comments
To conclude, all this property math we have
learnt so far Cap Rates, Cash-on-Cash
Return, IRR, NPV and MIRR are used
mutually to: 1. Assess the performance of
ones property (value) and desired ROI; 2.
Rank and choose between different
properties; 3. Rank and choose between
different investments. All smart investors will
do their sums before putting their hard-earned
money to work.
By guest contributor Gerald Tay, who is the
founder and coach at CREI Academy Group
Pte Ltd, an organization dedicated to
empowering retail property investors with
smarter investing philosophy and strategies.
He is a full-time investor with over 13 years of
solid experience in building his wealth
through Property Investment and is financially
wealthy today.
SINGAPORE PROPERTY WEEKLY Issue 178
Singapore Property This Week
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Residential
SRX: resale condo sales increase
According to SRX, there was a 15.3 percent
increase in the number of non-landed private
homes sold in September versus August, with
468 units transacted in September. Market
experts believe that resale prices might be
stabilising. The overall median transaction
over X-value (TOX), which indicates how
much buyers pay over past comparable units,
was negative $2,000 in September. This is
less than the negative $10,000 that was
recorded by SRX in August this year.
Nonetheless, the non-landed private
residential resale price index fell 0.3 percent
month-on-month from August to September,
according to SRX flash estimates. This was
4.6 percent lower than in 2013. Eugene Lim
from ERA Realty said that property sellers are
not pressured to cut prices due to favourable
economic conditions. Mohd Ismail from
PropNex added that he believes transaction
volumes will continue to increase as the
market stabilises. While that may be so, the
rental index for non-landed private homes has
fallen by 0.2 percent month-on-month in
September. According to SRX, only the rents
of private property in the core central region
have increased by 0.3 per cent from August
to September. Nicholas Mak, from SLP
International, believes that rentals in the
outside central region may be the weakest
due to an increase in supply of rental spaces
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in that region. Mak added that he believes
that property demand will remain flat in the
coming year if cooling measures are not
lifted.
(Source: Business Times)
More condos sold below $1.25 million in
2014
71.7 percent of private apartments and
condos sold in H1 this year are priced below
$1.2 million. Last year, 63.6 percent of private
properties were sold below that price.
Desmond Sim from CBRE said that most
properties were priced between $750,000 and
$1 million during the first half of this year. Sim
believes that the total debt servicing ratio
framework could have pushed prices low.
HDB upgraders, singles and new couples
may be less able to finance new non-landed
private residential units due to the cooling
measures. Ong Choon Fah from DTZ said
that a large portion of HDB dwellers are
buying private homes for owner occupation.
Ong added that more condo projects are
including smaller units to attract cash-tight
home buyers.
(Source: Business Times)
Lake Life EC receives record high number
of e-applications
Lake Life, an executive condominium (EC)
that is located at the Jurong Lake District, has
received more than 1,848 applications. About
65 per cent of these applications are second
time applicants and the average age of the
applicants is about 42 years old, according to
the Business Times. The condominium
project, which only has 546 units available, is
at least three times subscribed. On Nov 5, the
unit pricing will be released.
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Bookings for Lake Life will be launched on
Nov 8. Lake Life is the second EC to be
launched in Jurong in the last 17 years. It has
a 99-year leasehold tenure and has 129,135
square feet in total.
(Source: Business Times)
Q3 developer sales hits new low
Developer sales in Q3 have fallen by 40 per
cent from the previous quarter. This resulted
in a new low since the global financial crisis in
Q4, 2008. A total of 1,596 units were sold in
Q3. About 648 private homes were sold by
developers in September. This was 48 per
cent higher than August, which coincided with
the Hungry Ghost festival. However,
Septembers developer sales was almost half
that of the number of units transacted in
September 2013. According to Ong Teck Hui
from JLL, the low developer sales volume
reflects weak demand in the primary market.
A total of 6,005 private homes were sold by
developers from January to September this
year. Market experts expect the full year tally
to be between 7,000 and 9,000 units, down
from the 10,000 to 14,500 range that was
estimated in January this year. Eugene Lim
from ERA Realty believes that the effect of
the total debt servicing ratio framework has
fully kicked in. He believes there will be
reduced demand in the next year, if the
government does not lift loan curbs and other
cooling measures. Ong added that demand is
also affected by a slowing economy. URAs
data also showed that in September,
developers have sold 59 EC units, which is
marginally higher than the 58 units sold in
August. A total of 471 EC units were
transacted by developers in the first nine
months of this year.
(Source: Business Times)
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Condo at Prince Charles Crescent re-
launched
The Crest, which is located at Prince Charles
Crescent, was re-launched at a discount of 5
to 10 per cent. Market experts believe that
this was likely to be due to slow sales in June.
According to the Urban Redevelopment
Authority (URA), out of the 469 units
available, 50 were sold at a median price that
was about $1,800 per square feet. A one
bedroom unit at The Crest ranges from 614
square foot to 775 square foot. The one-
bedder is priced from $980,000, a two
bedroom unit costs $1.28 million, a three
bedroom unit costs about $2 million while a
four bedroom unit is priced at $2.5 million and
a five bedroom would cost about $3 million.
The 99-year leasehold condo project is 450
meters away from Redhill MRT station and is
located in the Jervois precinct. It was
acquired by Wing Tai Asia, Metro Australia
Holdings and UE E&C in 2012, for $960.28
per square foot per plot ratio. Nicholas Mak
from SLP International said that the additional
buyers stamp duty might have weakened
demand in the property market. Ong Kah
Seng from RST Research added that buyers
may still be cautious of making purchases,
despite the discounts given.
(Source: Business Times)
Median prices of private residences fall
According to RST Research, 12 out of 20
private residential projects that were sampled
have median prices that were 0.4 per cent to
14 percent lower than the prices between
June and September. On the other hand, six
projects saw an increase in median prices.
Ong Kah Seng from RST Research said that
price changes from June to September may
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be due to differences in types of units sold in
each month. Rivertrees Residences in Seng
Kang experienced a 13.6 percent drop in
median prices and Bartley Ridge in Mount
Vernon Road also experienced an 11.1 per
cent fall. Yet, Goodwood Residences in Bukit
Timah and Eight Riversuites in Whampoa
saw a 4 percent increase in median prices.
According to RST, the fall in median prices in
the four-month period is expected due to the
implementation of the total debt servicing
ratio framework. Ong believes that
developers will continue to cut prices so as to
attract more buyers in the rest of the year.
(Source: Business Times)
Unit size of condos shrinking
In H1 this year, the size of new private
apartments and condos sold have shrank by
41.5 percent from 2007. According to the
Business Times, developers have built
smaller units in recent years to increase the
affordability of their units. The median size of
new apartments sold has decreased by 10
percent to 743 square feet in H1 this year as
compared to 829 square feet in 2013. On the
other hand, median sizes of resale
transactions have been consistent at 1,200
square feet in the last 7.5 years, said CBRE.
CBRE said that the H1 2014 median
transaction price quantum for resale deals
show that resale buyers are willing to pay
more in absolute price quantum to enjoy more
space. Ku Swee Yong from Century 21
estimates that there are about 8,000
completed units that are less than 500 square
feet each, out of the 230,000 non-landed
private homes available. He believes that
owners of smaller units will find it more
difficult to find new buyers.
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On the other hand, Ong Choon Fah from DTZ
said that buyers may find the smaller units
more affordable.
(Source: Business Times)
Commercial
Reits acquisitions increases real estate
investments
According to a report by DTZ, acquisitions by
Reits have increased real estate investments
in Q3 this year by 15.4 per cent, quarter-on-
quarter to $5.5 billion. Reits acquired a total
of $2.9 billion in properties in the commercial,
industrial and hospitality sector. This makes it
the largest buyer of properties in Q3. Listed
and non-listed property companies have
acquired $2 billion in investments in Q3. This
was lower than the average $3.1 billion that
was achieved in Q1 and Q2 this year. Lee
Lay Keng from DTZ said that property
companies have made fewer acquisitions in
Q3 as firms have increased overseas
acquisitions. She estimates that close to
US$4.1 billion of acquistions were made
overseas, by Singapore-based property
companies by the end of Q3 this year. Not
only so, listed and non-listed property
companies have divested $2.9 billion in Q3,
which makes them net sellers in that quarter.
(Source: Business Times)
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Non-Landed Residential Resale Property Transactions for the Week of Oct 1 Oct 7
NOTE: This data only covers non-landed residential resale property
transactions with caveats lodged with the Singapore Land Authority.
Typically, caveats are lodged at least 2-3 weeks after a purchaser
signs an OTP, hence the lagged nature of the data.
Postal
District
Project Name
Area
(sqft)
Transacted
Price ($)
Price
($ psf)
Tenure
1 THE SAIL @ MARINA BAY 592 1,200,000 2,027 99
1 ONE SHENTON 6,028 12,056,000 2,000 99
1 THE SAIL @ MARINA BAY 667 1,288,000 1,930 99
3 REGENCY SUITES 980 1,700,000 1,736 FH
4 REFLECTIONS AT KEPPEL BAY 3,391 10,800,000 3,185 99
4 HARBOURLIGHTS 1,163 1,550,000 1,333 FH
5 THE ROCHESTER 2,540 3,950,000 1,555 99
5 CARABELLE 1,399 1,780,000 1,272 956
5 THE PARC CONDOMINIUM 1,292 1,600,000 1,239 FH
5 THE PARC CONDOMINIUM 1,292 1,580,000 1,223 FH
5 ISLAND VIEW 3,358 3,900,000 1,161 FH
5 VARSITY PARK CONDOMINIUM 2,013 1,900,000 944 99
5 FABER CREST 1,776 1,650,000 929 99
8 KENTISH GREEN 1,076 1,050,000 975 99
9 WATERMARK ROBERTSON QUAY 926 1,790,000 1,934 FH
9 ASPEN HEIGHTS 1,119 1,650,000 1,474 999
9 OLEANAS RESIDENCE 1,668 2,355,000 1,412 FH
10 FOUR SEASONS PARK 2,874 7,208,000 2,508 FH
10 THE EQUATORIAL 1,507 2,500,000 1,659 FH
10 WILLYN VILLE 861 1,382,888 1,606 FH
12 THE MEZZO 840 1,220,000 1,453 FH
12 8 RAJA 2,024 2,528,750 1,250 FH
12 NADIA MANSIONS 2,282 2,080,000 911 FH
14 ATRIUM RESIDENCES 1,625 1,100,000 677 FH
15 THE SHORE RESIDENCES 872 1,390,000 1,594 103
Postal
District
Project Name
Area
(sqft)
Transacted
Price ($)
Price
($ psf)
Tenure
15 LAGOON VIEW 1,647 1,220,000 741 101
16 COSTA DEL SOL 1,561 2,155,000 1,381 99
16 RIVIERA RESIDENCES 1,421 1,688,888 1,189 FH
16 BAYSHORE PARK 936 972,000 1,038 99
16 LAGUNA GREEN 1,098 1,120,000 1,020 99
17 ESTELLA GARDENS 1,324 1,060,000 801 FH
17 BLUWATERS 2,734 1,680,000 614 946
19 KENSINGTON PARK CONDOMINIUM 2,153 2,100,000 975 999
19 RIVERVALE CREST 1,195 938,000 785 99
20 FLAME TREE PARK 1,593 1,610,000 1,011 FH
20 LAKEVIEW ESTATE 1,615 1,330,000 824 99
21 CLEMENTI PARK 2,691 2,850,000 1,059 FH
21 SHERWOOD TOWER 1,539 900,000 585 99
22 LAKEHOLMZ 1,238 1,150,000 929 99
23 THE MADEIRA 1,324 1,118,000 844 99
25 WOODGROVE CONDOMINIUM 2,400 1,470,000 612 99