Mass-market private condominiums and executive condos are perceived as two classes of properties with different investment returns. After all, new private condos carry a higher price tag than ECs. However, is that really true? Looking at the first batch of ECs that were launched in 1996 and 1997 and private condos of comparable age in their vicinity, the investment returns are almost the same.

Table 1 shows the annual compounded price appreciation of selected ECs versus the URA Non-landed Property Price Index.

 

From their launch dates until end-2015, in terms of price, the performance of ECs has trumped that of general non-landed properties in Singapore. Moving forward, we believe that the long-term price performance of ECs will be further sealed with the government’s focus on raising productivity to sustain income growth. If, say, Singapore’s long-term productivity growth manages to reach 2.5% per annum, wages will likely grow at that rate too. This works its way down to keep annual private property price increases growing probably at the same rate. For private condos, a 2.5% annual price growth is an exceptional return because it trumps the historical returns, as seen in Table 1.

For those who are qualified to purchase an EC, they stand to gain a windfall because, for a start, ECs are priced at a discount to private condos. For this study, we have selected an EC that is still being marketed in one of the newer housing estates in Singapore. The price difference between this EC and a sample of new private condos within a 2km radius is a steep 27% (see chart).

 

Chart

 

For the selected EC development, which is equipped and furnished to modern condo specifications and selling at a 27% discount to new private condo prices, once the minimum occupation period (MOP) ends (say, 4Q2022), it is not illogical to assume that the price of the EC should head towards private condo prices. Table 2 shows that if the EC does trade at prices similar to those of private condos, the average compounded annual price increase is 7.2%. The question now is whether the EC will trade on a par with its private counterparts when all the sale restrictions are lifted.

 

 

This is an optimistic scenario because micro-locational differences among the comparables can cause values to differ. Also, for the first batch of ECs that were offered for sale in 1996and 1997, we found that they are now trading at an average discount of 8% to private condos of the same genre and location. Therefore, even if the EC prices do not head towards the $1,290 psf level by 4Q2022, but instead trade at a discount to private condo prices, the average compounded annual price increases are still attractive.

Assuming that the price discount for ECs to private condos is 10% and 20% by the end of MOP in 4Q2022, the average compounded annual price increase is still a very healthy 5.6% and3.8%, respectively.

So, are ECs a good investment? The answer is ECs perform quite in line with the performance of private condos. There are a few reasons why ECs enjoy greater capital appreciation from the start to the end of MOP. Firstly, the upfront steep discount for ECs to private condos is to compensate for the illiquidity during MOP. Secondly, because ECs are strictly for owner occupation, the opportunity of rental income is almost zero for five years. Thirdly, at the first launch, the pool of buyers for ECs is restricted to Singaporeans. Consequently, some form of extra return has to be in store to compensate for the three conditions. This comes in the form of greater capital appreciation once these restrictions are partially lifted.

What about the returns from private condos? For this class of property, as the owner is not restricted in any way in renting out his/her unit, we have to factor in the potential income. Assuming a 3% net yield at completion, with rents increasing2.5% thereafter for each two-year lease renewal and prices rising at 2.5% per annum, the internal rate of return for this class of property rises to about 4.3% per annum. This is within the 3.8%-to-5.6% range of annual price increases for ECs.

What could potentially boost the outperformance of EC prices (as well as private condos) further are the following:

• Smart-home automation services

• Practical layout and design that take into consideration what the buyer would want when he/she moves in. For example, the developer could expand the living room and bedroom walls to accommodate a widescreen TV (the dimensions of some private condos may only meet minimal planning dimensions).

 

Conclusion

With the slate of cooling measures and the total debt servicing ratio framework in place, for those who qualify, the decision as to whether to buy an EC or not is becoming obvious. With the current batch of ECs offering facilities and services that are comparable to those of private condos and, in some cases, equipped with smart-home automation and selling prices that are affordable, the case for value investing here has never been more clearly presented. It now remains for buyers to realise that this is one of the rare occasions where good deals do exist and in large enough numbers for many to invest in. This price arbitrage opportunity is simply too great to be ignored for too long.

 

With the current batch of ECs offering facilities and services that are comparable to those of private condos,
and affordable selling prices, the case for ECs as a value investment has become stronger

 

 

Alan Cheong is head of research and consultancy at Savills Singapore. He can be reached at alan.cheong@savills.com.sg.

 

This article appeared in the Edge Property Pullout, Issue 722 (April 4, 2016) of The Edge Singapore.