How to bottom fish for property deals

As property prices continue to chart a downward trajectory, Warren Buffett’s investment mantra — be greedy when others are fearful — has been cited recklessly to seduce investors to part with their money. Given that prices of private non-landed homes have fallen some 8% from their last peak in 3Q2013, now is definitely a better time to enter the market compared with 2013. But now is not necessarily a better time than next year.
New headwinds from China and the eurozone’s unconvincing economic recovery are cues that the property market has yet to bottom. Separately, vacancy rates of non-landed homes could hit a historical high in 2016. At best, the current pace of price decline of around 1% per quarter will continue into 2016.
Against this backdrop, bottom fishing for beaten-down assets is a more accurate exposition of value investing than picking any asset simply because its price is not toppish.
Automating the search process
Bottom fishing is simple in principle, but challenging in execution. For the man on the street, the search for value deals typically begins with flipping through the classifieds or combing property portals and shortlisting deals based on a hunch. He must then gather market information to estimate the market value of the property and establish if there is indeed a discount. Third, he must assess whether the discount is sufficient or he should just wait for general prices to decline further.
Today, technology can streamline the search process. can pick out undervalued listings by comparing the property’s asking price against its fair value. In addition, the map search tool, which was rolled out recently, allows users to identify undervalued listings within a preset radius of a certain landmark.
A property listing will be flagged as undervalued when the asking price falls below the Edge Fair Value — a valuation tool developed in collaboration with licensed valuers. The fair value methodology takes into account factors such as comparable transactions, floor level, size and outliers.
However, technology comes with limitations and investors must continue to exercise judgement and conduct due diligence. A lack of recent comparable transactions, for example, increases the fair value’s margin of error, which in turn, changes the discount margin of the so-called undervalued listing. Ground-floor units with a large patio or private enclosed space may also be flagged as undervalued as their large floor area would mark down the per square foot asking price.
Budget poses another constraint for investors seeking value deals. In the resale or completed properties segment, the majority of undervalued deals were in the city fringe and high-end segments and the average price was over $2 million. Our past study also shows that large units of more than 1,500 sq ft accounted for 41% of the total unprofitable transactions in 3Q2015. This is hardly surprising as properties with a larger price quantum are bearing the brunt of a tighter credit environment and interest rate hikes.
District 15 (Marine Parade, Katong, Joo Chiat, East Coast) topped the list of areas with the highest number of undervalued deals in the resale or completed properties segment, followed by District 20 (Thomson, Ang Mo Kio, Bishan, Braddel) and District 10 (Tanglin, Farrer, Holland, Bukit Timah and Ardmore).
Look under the hammer
According to property consultancy DTZ, a total of 21 properties were put up for mortgagee sale in 3Q2015. Excluding the landed homes, these properties averaged 1,527 sq ft in size.
The rising number of mortgagee sales has turned property auctions into a hunting ground for investors as such properties tend to be sold at a bargain. In September, a 1,690 sq ft low-floor unit at Amber Point that was put up for mortgagee sale found a buyer at $2 million, or $1,183 psf. Other 1,690 sq ft units changed hands at between $1,272 and $1,450 psf in 2014 and 2015, albeit on high floors.
In August, a mid-floor shoebox unit at Prestige Heights on Bales tier Road went under the hammer for $500,000, or $1,452 psf. Comparable units in the project were transacted at between $1,597 and $1,751 psf in 2014 and 2015.
Selected mortgagee sales in 3Q2015: Properties put up for mortgagee sale tend to be sold at a discount
Sold in
Area (sq ft)
Floor level
Price ($psf)
Comparable transactions ($psf)
Amber Road
1,272 to 1,450*
Balestier Road
1,597 to 1,751
Jurong East Street 13
891 to 925

*High floors. No comparable transaction on low floors.

Source: DTZ, URA, The Edge Property

Is conservative the way to go?
Another famed investor, Walter Schloss, preferred buying assets at a discount rather than to buy earnings. Earnings, he said, can change dramatically in a short time and an investor must know much more about a company if he buys earnings.
Real estate investors who seek to buy earnings or rental returns should stick to the timeless adage of picking properties with strong location attributes. While this may seem like common sense, there are studies that claim projects near MRT stations do not necessarily command the highest rental yields — and such studies have made headlines.
This may be true for gross yields. Net rental yields, on the other hand, must take into account the vacancy rates of the project and, unfortunately, such data is not readily available.
Our past studies have also proven that high vacancy rates may not necessarily manifest in lower rents. Hence, it is erroneous to assume that the average rental value and gross yield of a project have factored in vacancy rates. Meanwhile, conventional wisdom tells us that well- located properties would be easier to let, leading to a shorter down time in between tenants.
Click here to start fishing for property deals.
This article appeared in The Edge Property Pullout, Issue 706 (December 7, 2015) of The Edge Singapore.