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Despite High ABSD, Long Term Property Returns Looks Decent

In the past 10 years, the government has stepped up ABSD 3 times to halt the demand for property purchase.

A history of Singapore Property Cooling Measures
A history of Singapore Property Cooling Measures

This kinda threw some of my peers into disarray. After you got your career going, have surplus free cash flow, you would like to build wealth for your retirement.

These ABSD serves as a deterrent for some to purchase. For others, they would still go ahead and purchase because they have no alternative, or believe that property investment is good long term.

I decide to build on last week’s post on the short term and long term returns of a 24-year-old private condo purchase with a look at how that property would do if ABSD was levied at different rates.

The long story short: If you are in it for longer-term, the ABSD seem to matter less.

The Additional Buyer Stamp Duty (ABSD)

Singapore Citizens, Permanent Residents, and Foreigners thinking of buying residential property in Singapore may have to pay an additional buyer stamp duty (ABSD). This is on top of the buyer stamp duty (BSD) that they have to pay.

For Singapore Citizens:

  1. They do not have to pay ABSD on the first property
  2. ABSD is 12% currently for the second property
  3. ABSD is 15% for third and subsequent property

For Permanent Residents:

  1. ABSD is 5% currently for the first property
  2. ABSD is 15% for second and subsequent property

For Foreigners:

  1. ABSD is 20%

For Developers, entities, trustee:

  1. ABSD is 25%

The ABSD was lowered in the past. They could range from 3% to 10%.

A high ABSD is impeding people from buying these properties.

The reasoning is that, with low returns, they are not sure if paying the extra ABSD will be worth it. Many prospective investors, homeowners are very reluctant to make a bet using their money.

And the government is perfectly fine with this.

But the question on my mind is… how badly does this affect your property investment?

What if ABSD was levied in 1995?

My last post broke down the long term returns we will get if we invest in a private leasehold condo Astoria Park during 1995.

The property value gain 73% from 1995 to 2019. This is an annualized gain of 2.31% a year. Not super fantastic.

XIRR of owning Astoria Park if you held it for different time frames.

However, if we include the rental expense that you save if you were to invest in stocks and bonds, the return ranges from an XIRR of negative to 8% to 5%, depending on how long you hold on to it.

What I could simulate is how the returns would be, if we have ABSD levied on our property in 1995.

How ABSD Affects Your Property’s Returns.

If there is ABSD levied back then, it should psychologically impede investors from investing in private condos just like now.

The range of ABSD can be between 3% to as high as 25%.

If I need to pay a 5% ABSD on Astoria Park in 1995, the returns will range like this:

How an ABSD of 5% affected the Overall Compounded Total Return a Year of Astoria Park
How an ABSD of 5% affected the Overall Compounded Total Return a Year of Astoria Park

Your returns do go down.

You would pay $37,500 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 25%.

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR was 6.92% in 2008.

The stabilized XIRR is still around 5.58% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

This means that if you held the private condo long enough, the effect of a 5% ABSD is not felt.

What if the ABSD is like 12% Today?

This is the kicker that turned many away.

You would pay $90,000 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 60%.

Your compounded total return curve would look like this:

How an ABSD of 12% affected the Overall Compounded Total Return a Year of Astoria Park
How an ABSD of 12% affected the Overall Compounded Total Return a Year of Astoria Park

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR is 5.71% in 2012.

The stabilized XIRR goes down to around 5.12% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

What we observe is that the XIRR curve becomes smoother and smoother between the peak XIRR and the stabilized XIRR.

What the ABSD Does to Investors

Here is the Range of Returns if a different level of ABSD from 0% to 21% is applied:

Your Total Returns with a Different Range of ABSD

There are a few things you might notice:

  1. The Peak XIRR goes down. No surprises there.
  2. You needed more initial cash outlay. No surprises there. It restricts additional property purchases to those who could.
  3. The Peak Year goes down. The maximum that you could extract from your property gets delayed longer and longer.
  4. The Stabilized XIRR goes down but in terms of percentage not as much
  5. In the grand scheme of things, this affects the absolute gain if you sold off at year 40, but not by a lot
  6. The Peak XIRR approaches close to the Stabilized XIRR with greater ABSD

And I guess this is how the ABSD lever work. It delays your return and make investors wait longer. Unless there is a short term price spike (that is speculation)

For foreigners, if they wish to extract value, they could still do it. Same for locals and PR. They just have got to sit on this long.

If you are long term into a residential property like this, the benefits that you could extract from your property can be much more than these short term measures.

This can be rental income, can be rent saved so that you do not have to rent another place or price appreciation.

The unique thing about the Astoria Park example is that many commenters expressed that this is not a good example because it is at a peak in the 1990s.

If you asked me, this is probably the best example since, if it is so challenging, and it does decent, then what about times when it is less challenging?

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Kyith

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stockkid81

Saturday 7th of December 2019

Hi keith ,

I think we both agree that when u live inside the property the return not so good..

Now we try if we were to rent out the property if including rental income will it be much better as such .

can you advice the following assumption in getting the figure for IRR.

Present value of the property ? cost + stamp duty Fv of the property ? Earnings - Agent Fee PMT - rental per month assuming the following eg rental for 11 months minus interest expenses for 12 months minus property tax per month minus agent commission per month minus maintenance fee per month . * 0.82 to 0.84 (taxable income on rental income ) N = number of years. I wanted to try to use the TVM to calculate the IRR.

I think the rental income of 10 months is very optimistic in your previous article as it does not cover the following.

1) interest expenses if one were to use leverage (we have to use the average of sibor + spread usually at 3-5% average during that period ) 2) monthly maintenance fee 3) agent Fee usually a 2 year contract we will have to pay 1 month agent fee 4) vacancy rate usually we use 1 month per year 5) property tax per month on a rental property 6) lastly income taxable on your rental income.

depreciation excluded as we already have a future value which is the sales price.

There is also some consideration when buying a newly build unit.

When u buy the unit your cash flow is negative for the first 3 years plus incurred some interest expenses when the building start to construct.

So assuming u pay a down of say 25% on a building worth 750k today . ur initial outlay is 187500 + stamp duty 17100 (this is not ABSD rather just normal stamp duty )

u take delivery 3 years later your initial capital should be - 210912 + stamp duty = 230147.17

your PV should be 230147.17 assuming a 4% return of Special Account. instead of the starting figure of 187500

I wanted to use the hurdle of RFR to try to calculate the return ..

For discussion sake i will use 4% on the SA as one can shift their OA into SA to juice that extra return .

so if my capital is 204600 (include stamp duty not absd ) 25 years later this amount will grow to 545k so this should be the RFR. The above have no gearing .

If i were to use leverage of 4X whats my additional gain.

i think a cap rate of below 4% does not make much sense reason being one can choose to contribute voluntary into SA every year using the cash flow to earn a 4% return + got a income tax rebate base on your income tax bracket assuming u are a high bracket of 18%. the total return is actual 4% *1.18 = 4.72% P.A on subsequent per month contribution.

Kyith

Tuesday 24th of December 2019

i dont factor in the cpf discussion. my computation factors in all the expenses you talked about.

Isaac

Saturday 7th of December 2019

Hi Kyith,

From your article, do you think that leasehold and freehold value seems to be about the same before 20 years old and thereafter difference start to widen in after 20 years on the condo?

Kyith

Sunday 8th of December 2019

HI isaac, before 20 years not much difference. The decay starts happening more after that. when it is 60 years left it starts going down smoothly, when its 30 years left it starts accelerating.

stockkid81

Saturday 7th of December 2019

Hi Kyith, i kinda of disagree with your outlook. The past high return is due to a few factors which might or might not recur

1) From the 1980 to the maybe 2010 era the growth is still pretty high. GDP growth expected to be lower going forward than in the past as our country have grown from an emerging to a developed economy.

2) home prices depend a lot at GDP growth , (look at japan last 30 years. ) when the country has a very low growth rate home prices are stagnant or declining at best.

3) ultimately a home should be treated as a consumption rather than an investment, even if one has a free hold unit ultimately your building cannot last more than 60 years with no maintenance. My gross yield for a condo that is free hold is 4%. after minus away the following. 1) increase in property tax 2) maintenance Fee 3) vacancy rate 4) agent commission 5) bank interest my net net is about 6k pear year on a 240k down payment . If i were to factor in the increase in monthly maintenance fee (sinking fund etc repainting etc... ) when the condo gets older i think maybe end up i make 2-3 k per year on a 240k down..

it is a lousy deal considering i have leverage 4 X i rather leverage1.2* in a stock that can pay me close to 5% per year .. if one were to buy vicom just 10 years ago that money would have been easily 10M... plus u got a ROI of more than 25% on your initial investment..

Stockkid81

Saturday 7th of December 2019

If I hold any assets for 24 years everything will appreciate as well. Gold will do well as well, this is due to inflation. When u buy property u need to pay 4 percent stamp duty which is about 15 percent of your initial down payment . If you sell within 4 years u kana seller stamp duty. With this type of odds how can it be a decent return . One can shift their OA into SA if they are not buying property to enjoy a 4 percent of “risk free return“ . The reason the return looks okay, is because of the leverage factor on an uptrend environment .

Kyith

Saturday 7th of December 2019

Hi Stockkid81, my example here is a bit specific because it happens to be a period when property is not doing too well. I think 24 years is a long enough time. This dude who buys this place only recovered 15 years later. It is not a great deal, but despite that the numbers are pretty decent.

If you buy it as an investment, perhaps we should treat it as an investment. i don't think many would considered the second property they purchased as a home to live in.

I got probably the same figures as your free hold calculation so i am not disputing that. i think if someone gets a 5-7% a year over so long it is rather decent.

the return of your property is not just in the rent but in its appreciation.

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