Potential Property Bull Run? – How Can Investors Best Position Themselves For A Quick Win

I was having breakfast at Toa Payoh when I overheard a conversation between a real estate agent and a bank relationship manager.

The real estate agent spoke excitedly about a “hot” property rental market, citing a client who paid top dollars to secure a rental home without even viewing it. Although I could sense some disbelief in her tone, this sentiment is congruent to what I’ve heard from other real estate agents.

The residential market is booming and crowds are gathering at new launches.

URA’s data reported that the number of private residential new sales in 2Q2020 was 1,679. It wasn’t a high number compared to previous quarters. But it’s still pretty impressive, considering Covid-19 and the two months of Circuit Breaker we had in Q2.

If our kids looked at this chart 10 years from now, they probably wouldn’t realise that it coincides with one of the worst pandemics in history has happened, nor that it was during one of the worst recessions in Singapore’s history.

You may be scratching your head, wondering why this is happening.

Why are buyers so optimistic amidst a deep recession?

I cannot prove the causes of this behaviour, but I can suggest some possibilities in case you need to resolve this in your head.

1. Money is too cheap to ignore

Interest rates have hit a fresh low with SIBOR (3 months) down to 0.44% at the end of Jul 2020, compared to about 1.6% prior to the pandemic. That’s almost 4x lower!

Home loans for private property are linked to the movements of SIBOR. These have also came down to about 1.29% for private properties.

Why are loans important?

Because properties are capital intensive and it’s hardly possible for someone to fork out millions to pay for one. Hence, people borrow substantially in order to afford it.

Low interest rates have at least two effects to drive demand for properties.

1. First, it lowers the monthly mortgage repayment and it becomes ‘affordable’ for those who were previously priced out slightly.
2. Second, investors can reap a larger rental margin and potentially realise a more profitable sale in the future due to cheap debt.

The thought process may be like this, “banks are practically giving out money, just borrow and buy properties!”

I would, of course, err on the safe side and warn people not to overstretch their finances in such cases. We cannot assume that the situation will remain status quo in the future. Hence, having some buffer is to hedge against some scenarios that may turn out worse – loss of income, illnesses, rising interest rates, lack of tenants, etc.

But I also do not want to be a wet blanket.

Go for it if you have done your sums and if you are confident that you would do fine regardless of what may happen next.

2. WFH

Covid-19 has forced those who can work remotely to work from home. You may see this as a privilege or a curse (depending on if you have kids running around).

Regardless, this has surfaced an economic divide that was previously inconspicuous; it is often the white-collar workers who are able to work remotely. The blue-collar worker usually needs to be on-site to operate a machine or to serve a customer.

Below is a poll conducted in Massachusetts. It showed that 75% of those with income more than $150k were working remotely compared to just 44% for those paid below $50k. I don’t have numbers for Singapore but I believe the disparity should be similar.

This also suggests that the home environment is becoming an even more important factor for these white-collar workers as they eat, sleep, play and now, work at the same place.

Hence, it might make sense to upgrade their property – “having a bigger space to accommodate a home office and taking the opportunity to spruce up the environment” sounds like a pretty good idea when money is “cheap”.

White-collar workers also happen to be in the income bracket that are more likely to be able to afford a house, or have high enough salary to qualify for a loan.

Hence, Covid-19 might have been an unexpected driver for private residential home sales.

How to benefit from a property bull run without buying a property

It was interesting to note that the Singapore government has not relaxed the property cooling measures even after Covid-19 has destroyed the economy. This means that the authorities are cautious and their data probably shows that the property market was resilient.

Personally, based on what I have shared in earlier sections, I believe the property market is heating up again and ready to continue the bull run.

I know that buying a property can be out of reach for some people. Plus, it could be too big a bet to take since property values can take a big chunk of your net worth. I don’t advise you to do that especially if it means overstretching your financial abilities.

But not all is lost.

The stock market can be a proxy play to a booming stock market – you can invest in:

• real estate agencies or,
• property developers

I will cover real estate agencies in this post and dedicate a separate one for the developers (because there are too many of them).

There are two real estate agencies listed on SGX – APAC Realty (SGX:CLN) and PropNex (SGX:OYY).

PropNex was the first to release exceptional 1H2020 results – revenue and profits rose 45% and 151% respectively when compared to 1H2019. It came as a surprise since most didn’t expect people are in the mood to buy properties when others are dying.

Revenue increased by approximately S$75.2 million or 45.2%, from S$166.3 million in 1H2019 to S$241.5 million in 1H2020. This was mainly due to the increase in commission income from project marketing services of approximately S$75.1 million driven by higher number of transactions completed in 1H2020

From PropNex 1H2020 results

The good set of results further proved that the property interest is very strong and that momentum hasn’t abated – it made Covid-19 and Circuit Breaker seem like non-events. PropNex’s share price has also jumped on the good results and is now 13% higher than where it was at the start of 2020.

PropNex with a PE ratio of 8 and a dividend yield of close to 5% do not look expensive to me.

APAC Realty might not ring a bell but ERA definitely would. The former is the listed holding company for the ERA agency.

It is a direct competitor to PropNex and has also reported good 1H2020 results – Revenue and profits rose 6% and 53% respectively compared to 1H2019.

APAC Realty lost out on its revenue of $173m, which was lower than $242m for PropNex. But it is still early to tell who’s going to be the number one market leader yet. It could be a case whereby PropNex had more projects to sell in 2Q2020.

APAC Realty share price was bumped up by the good results but the current share price of $0.38 is still lower than $0.53 at start of the year. Hence, it does look relatively cheaper compared to PropNex. But it could also be an indication that PropNex is gaining market share and/or that APAC Realty has tenancy risk after they acquired a commercial building in Toa Payoh.

The PE ratio of 10 and a dividend yield of 5.3% for APAC Realty also suggest that the stock isn’t expensive at all.

These real estate agencies should see better performances in the next few quarters, barring any adverse changes such as additional cooling measures imposed by the government.

Disclosure: I have a tiny position in APAC Realty.

Beliefs die hard

To say that “Singaporeans love properties”, is an understatement.

Instead, I think the importance of real estate is etched in our culture and passed down through the generations – it is not just a desire but a default option for security and wealth. One must always have a roof over your head and buying properties are the best way to be rich.

Despite Covid-19 causing one of the worst economic recessions in Singapore since her independence, buyers bought 1,679 new private residential properties in 2Q2020. We explored that low-interest rates and the WFH model could be possible drivers for this behaviour.

It is important to be prudent if you are buying a property because it is a big-ticket item and any mistake would be costly. You can consider buying real estate agency or property developer stocks if you want to ride this wave. That is, if you believe the property market is indeed on an uptrend in the first place.

Stay tuned! I’ll be covering property developers stocks in another article. There’re so many of them, you’ll probably find an interesting counter to look into.

P.S. If you have the capital and want to own multiple properties that could allow you to retire comfortably, Jeff will be sharing how he has grown his property portfolio even during the pandemic.

Update: VTL could lead to benefit some of these stocks, here’s why.