The Weekly Horse: Should you sell your Jurong Property?

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Source: Freemalaysiatoday

All Financial Horse does in his free time during the week is read financial news. With this new initiative, hopefully some good can come out of it. During the week, I post articles that I enjoyed on the Facebook Group (do join if you want a sneak peak), and every Sunday I will collate the links for readers. I also take the opportunity to address queries from readers, or share any thoughts that I have for the week. If you enjoyed this post, do share your thoughts in the comments below!

Should you sell your Jurong Property?

A reader recently reached out to me with the following question:

“Hi FH, what are your thoughts on the HSR cancellation? Should I sell my property?”

Now I’ve been following the Kuala Lumpur–Singapore high-speed rail (HSR) project with much interest ever since it was conceived. I felt it was a great boon for both countries, as increasing the speed and volume of human traffic between KL and Singapore had the potential to fundamentally revolutise the dynamics for both cities (similar to the Eurostar for London and Paris).

I’ve lived in London for several years myself, and took the Eurostar many times, so I’ve experienced first-hand the speed and convenience a HSR can bring when connecting two major financial centres (and the impact on property prices in the vicinity of the terminus). So I’ve always been a huge fan of the HSR, and while I expected some unexpected obstacles along the way, its cancellation truly caught me off guard.

I have my own thoughts on why it was cancelled, and whether it will stay cancelled, but I shall refrain from sharing them here, as Financial Horse is a finance blog. What I instead wanted to examine, was the potential impact of the HSR cancellation on Jurong residential property prices.

Impact on Jurong Property Prices

The Jurong Lake District is being touted as the second CBD for Singapore. New investments include:

  1. 90-hectare Jurong Lake Gardens
  2. Existing North-South and East-West MRT, the new Jurong Region Line and the Cross Island Line
  3. Construction of BTOs at Tengah new town
  4. HSR (until it was cancelled)
Source: URA

Personally, my thinking is that the impact of the HSR cancellation cannot be understated. Had it gone through, it would have reduced travel time to KL from the current 4 hours to 1.5 hours. This would have boosted the manpower situation in Jurong East (by tapping on Malaysian labour), and the retail and commercial situation (new customers from Malaysia, fellow Singaporeans travelling from other parts of Singapore to Jurong etc). Private section perception of this future development would also have led to new investments in Jurong, and this increased vibrancy in Jurong could have fed off itself to truly cement Jurong’s position as the second CBD.

Unfortunately, this HSR project has now been cancelled, which does alter the bull case for Jurong somewhat. My gut feel, is that in the short term, investment buyers may stay away as they wait for further clarity on the long term plan for Jurong, while genuine home-buyers may also adopt a wait and see attitude towards pricing. Buyers that do commit are going to expect a reduced price, and this may result in a gradual downtrend, at least in the short term.

However, in the long term, prices are ultimately dependent on the execution of the plans for the second CBD. My suspicion is that prices may not rise as fast as the situation had the HSR been around (although we will never know), but they will still go up in the long term. The government seems fairly committed to Jurong as the second CBD, and my thinking is that these investments will still proceed without the HSR. Perhaps in the longer term, an alternative to the HSR (or a renegotiated HSR) may be found that can replicate the effects of the original. Given the massive benefits to both cities from such an initiative, I would not be surprised if this were the case.

What should investors do?

What investors should do, will depend on the reason you purchased a property in Jurong. As always, I will run through what I would do in such a situation, and readers can assess the soundness of my decision making.

Residential

If I had bought for residential purposes, then the HSR cancellation really doesn’t matter all that much. Sure, the HSR would have driven property prices up in the short term, but as a residential home, I was never going to sell anyway. In the longer term, property prices will still trend up, so I should be fairly safe. I will continue to live in the property, and adopt a wait and see approach.

Investors

The situation is trickier for investors. Seller stamp duty (SSD) can range anywhere from 16% to 4%, so if I had bought the property recently, it makes no sense to sell and absorb the seller’s stamp duty.

Assuming I were out of the SSD period however, I probably still would not sell, unless I needed the cash urgently.

However, if I had urgent need for the cash, I would try and sell soon. There are always first mover advantages to exiting an investment (eg. if you had sold immediately after Lehman, you would have had a smaller loss than those that sold later), so if one were going to sell anyway, it makes sense to sell now rather than wait for prices to trend lower before exiting. One problem with this though, is that property is highly illiquid. It’s easy to think about selling a property in abstract much like you would sell a stock, but much depends on the location and the state and condition of the property. Some properties may be getting flooded with bids even after the HSR cancellation, while others may not get a bid even with the HSR in place. Every property is unique, and has to be assessed on its own merits.

If I don’t need the cash urgently, then the decision is very simple. Because I think that long run prices will trend upwards given the second CBD, I will continue to hold. If the short term slump in prices comes to fruition, it really doesn’t matter because I will not be selling. When the investments for the second CBD start bearing fruit 10 to 20 years later, only then would I think about disposing of the property.

The problem with selling in this market is that assuming you sell a property at a 3% yield, and are left with S$1million net proceeds, what would you do with the S$1million? Stocks are looking quite richly valued now and fixed deposit rates are still terrible. REITs are a possible alternative, but not many people are comfortable putting S$1 million in REITs, and don’t forget that REITs are prone to large drawdowns during a recession. With a house, there is the sense of ownership, and being able to “check on” your investment, so the temptation to sell into a recession is lower (as long as you can pay the mortgage).

Top Weekly Links

https://researchwise.dbsvresearch.com/ResearchManager/DownloadResearch.aspx?E=dgiaekfdhjg

I don’t always agree with everything that DBS research says, but I found this quarterly update a refreshing take on REITs. So many people are bearish on REITs due to rising interest rates, but when you take a step back and look at historical valuations, you find that REITs are quite fairly priced for the stage of the economic cycle we are in.

If you are a long term, multi decade investor, this may be a good opportunity to accumulate, as long as you are prepared to ride out the volatility.

https://seekingalpha.com/article/4177590?source=ansh

Going to flout my one post a day rule to share this great article. Everybody knows that in the long run a pure stock portfolio outperforms one with bonds. But how many people can sit by and watch their net worth fall 50 percent without selling out?

“This means that theoretically the perfect solution for anyone with an investment horizon of 20+ years is to be 100% in stocks all the time and ride out any crashes. However, there is a big difference between a perfect world and the one we actually live in. The ideal theoretical investment strategy is useless for anyone who doesn’t have the stomach to wait out a potentially gut-wrenching bear market.”

http://jasonzweig.com/fat-tails-thin-ice-2/

It’s a long read, but there are lots of gems in here. The fact that this speech was written in 2001 but remains highly relevant today really goes to show how human nature never really changes.

Trying to predict the future is more often than not, a fool’s errand. In the long run, there is no substitute for diversification.

http://thereformedbroker.com/2018/05/18/three-uncelebrated-edges/

Jeff Bezos and Warren Buffett had been friends for awhile and, according to Bezos, one day they got to talking about Buffett’s strategy. “You are the second richest man in the world and yet you have the simplest investment thesis. How come others didn’t follow this?” the Amazon founder asked.

Buffett replies “because no one wants to get rich slowly.”

https://www.zerohedge.com/news/2018-05-29/global-markets-descend-contagious-panic-italy-implodes

Not sure if you guys are following the Italian political situation, but a lot of interesting financial movement coming out of Europe today.

Is this the start of something bigger?

[Note: This is an important lesson to never make forecasts, because a couple days after posting this the new Italian government was constituted]


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