Stage 1: Prime Central City Always Recovers First, Year 1 - 3 From Trough
The pattern of recovery is the same which ever city you go to. When the property market hits the trough, the prime central area will always shoot up first. Rental yields usually plummets because rents cannot catch up. This happened in 2009. After 2 - 3 years of recovery, price appreciation slows down. This happened in 2014. This is because fewer and fewer people can afford to buy Prime Central London, or Orchard Road, Districts 1, 2, 3, 4, 10 and 11, or Manhattan New York. Sure, there will be occasional cash buyers by the Malaysian Datuks, Russian Oligarchs, Chinese tycoons. They don't need any mortgages. But there will also be pure investors who are keen to leverage to increase their IRR. I believe the make up of Prime Central London investors are as follows:
1. 40% foreign investors who don't need mortgages.
2. 20% foreign investors who need mortgages.
3. 25% Local investors cash buyers.
4. 15% Local investors who need mortgages
Since the gross yields are less than 3%, well below borrowing costs, it becomes more feasible to rent than to buy. Bare in mind that 35% of buyers will need mortgages and will find it difficult to get bank approvals. a 35% drop in demand without a corresponding fall in supply will almost certainly lead to a drop in prices.
At this point, the inner and outer suburbs, such as zones 2 and 3 in London, Brooklyn and Queens of NYC, Rest of Central Region like Geylang, Newton, Novena, Balestier, Tiong Bahru will not move much. This is because the domestic economy is still recovering. Employment is still falling, hence few have the budget to upsize their homes.
Smart investors will start to target the outer and inner suburbs in anticipation of faster growth and the higher yields. While the outer/inner suburbs may not allow tenants / dwellers to walk to work, it is usually just a 10 - 30 minute commute via train / bus / drive away. Inner suburbs are usually 1 - 7km from the CBD. Outer suburbs usually 8 - 14 km away. Gross yields in inner suburbs will usually 5% and outer suburbs 6%. Cashflow is usually positive with leverage.
Dublin, Madrid, Barcelona, Miami, Houston, Phoenix, Las Vegas, San Francisco, Seattle, Birmingham and Brisbane are in this phase.
Stage 2: Inner and Outer Suburbs Start to Recover Years 4 - 6
From 2013, Zone 2 and 3 London began to stir. Singapore's RCR region stirred in 2010, a little earlier. Brooklyn and Queens hit the trough at around 2013.... Domestic economy starts to recover. Banks start to loosen their mortgage lending standards, fuelling widespread price rises.
People who need to work in the CBD, who work long hours, usually from the Finance, Oil & Gas trading sectors need to get to work in the wee hours of 0730hrs. they cannot commute from more than 15km away, especially if the public transport is not efficient. They will be forced to rent in Prime Central / Inner / Outer suburbs. The corporate leasing sector will revive and boost rentals in central region.
Those who just entered the workforce will also choose to rent in the central/inner/outer as well, because it will mean a more "happening" place to be, lots of drinking holes and nice restaurants in the city, and a quick stumble home with a babe in arms after a titzy, alcohol fuelled Friday night out.
Families who are climbing up the financial ladder may try to move close to the CBD, and buy a home in the inner/outer suburbs nearer good schools. The make up of inner / outer suburb buyers are usually:
1. 20% foreign investors cash buyers.
2. 20% foreign investors with mortgages.
3. 20% local investors cash buyers.
4. 40% local investors with mortgages.
New supply is beginning to be completed. Housing starts reach all time high. There will be signs of oversupply in certain areas. In London, it could be in the Eastern suburbs. In Singapore, it could be Tampines, Woodlands and Jurong. In Malaysia, it could be Mont Kiara.... But overall, vacancy rates are still very tight.
Oh and most governments, post GFC will start to implement anti speculative measures to prevent another property bubble wreaking havoc. You can count on it. It's too fresh in the policy makers' memories.
Rents for CBD will start to creep up quickly due to corporate lets increasing. Yields will start to rise from 2% back up to 3%. Inner suburbs will see yields drop to 4% and outer suburbs 5%. Cashflow for inner/outer suburbs will either be neutral or slightly negative, a danger signal of a market peak coming in 3 - 4 years.
I would say that London has entered phase 2. Melbourne is definitely well into phase 2. Sydney is in early phase 2. New York as well...
Stage 3: Spill Over to Regional Areas, Cries of Bubbles... Years 7 - 9
By year 7, governments will implement increasingly punitive measures. CBD will see yields of around 3% still. Although there is increased rental demand, supply has also increased as all the off plan properties are finally completed from year 7 of the cycle. Prices in the CBD could start to rise again and investors again find the negative cashflow more tolerable, as the job market improves. But this is merely a flash in the pan. In this phase, interest rates and borrowing costs are usually extremely high as the economy enters the late stage of the cycle.
Inner/outer suburbs have become unaffordable for most locals. Pockets of oversupply have spread to larger areas. Rumours of huge drops in rentals as contracts are renewed. Vacancy rates rise rapidly, void periods increase. Rumours of bankruptcies and owners who cannot afford to keep up with mortgage payments surface.
Singapore, KL, Iskandar, Manila, Beijing, Shanghai, Guanzhou, most Asian cities have entered this dangerous phase.
Investors should decide whether to take profit if they entered in stages 1 and 2, and are sitting huge profits. My advice is this: If the fundamentals of your suburb is right, e.g. infrastructure like good schools, shopping, food, train stations nearby, you should hold it and remortgage to get equity cash out. Most astute property investors hold their properties for over 10 years, or 2 cycles.
Gross yields in inner/outer suburbs will be around 3% / 4%, and definitely negative cashflow. Most families will sell up their apartments as their families grow with more kids, and move to the regional areas for more space.
The only time you should sell or take profit is when:
1. Massive oversupply still coming on stream. This is usually due to poor planning by the local government. E.g. Iskandar. It will bring your rents further down and make it difficult to service your mortgage. The oversupply could exaggerate the decline and prolong the downturn. Take for example properties in Newham and Tower Hamlets. They fell by over 30% since 2006 vs Prime Central London which fell by 15%. Since Prime Central London recovered in 2010, they were in the doldrums until 2013!
2. Infrastructure is in decline or about to be removed. This is rare as most schools, train stations will remain for decades to come.
3. Crime rate increasing, unemployment in the area rising. This is a sign of urban decay, as the local council mismanages the borough. Generally, this doesn't exist in Singapore. But it is prevalent in other cities, notably KL, Iskandar, NYC etc.
I usually don't recommend selling off your properties unless the fundamentals have changed. As Warren Buffett said, the best time to hold your stock is forever.
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| Panoramic views from a penthouse overlooking Central Park, Manhattan New York, US. Do You Have US$10m to Spare Sir/Madam? |
The pattern of recovery is the same which ever city you go to. When the property market hits the trough, the prime central area will always shoot up first. Rental yields usually plummets because rents cannot catch up. This happened in 2009. After 2 - 3 years of recovery, price appreciation slows down. This happened in 2014. This is because fewer and fewer people can afford to buy Prime Central London, or Orchard Road, Districts 1, 2, 3, 4, 10 and 11, or Manhattan New York. Sure, there will be occasional cash buyers by the Malaysian Datuks, Russian Oligarchs, Chinese tycoons. They don't need any mortgages. But there will also be pure investors who are keen to leverage to increase their IRR. I believe the make up of Prime Central London investors are as follows:
1. 40% foreign investors who don't need mortgages.
2. 20% foreign investors who need mortgages.
3. 25% Local investors cash buyers.
4. 15% Local investors who need mortgages
Since the gross yields are less than 3%, well below borrowing costs, it becomes more feasible to rent than to buy. Bare in mind that 35% of buyers will need mortgages and will find it difficult to get bank approvals. a 35% drop in demand without a corresponding fall in supply will almost certainly lead to a drop in prices.
At this point, the inner and outer suburbs, such as zones 2 and 3 in London, Brooklyn and Queens of NYC, Rest of Central Region like Geylang, Newton, Novena, Balestier, Tiong Bahru will not move much. This is because the domestic economy is still recovering. Employment is still falling, hence few have the budget to upsize their homes.
Smart investors will start to target the outer and inner suburbs in anticipation of faster growth and the higher yields. While the outer/inner suburbs may not allow tenants / dwellers to walk to work, it is usually just a 10 - 30 minute commute via train / bus / drive away. Inner suburbs are usually 1 - 7km from the CBD. Outer suburbs usually 8 - 14 km away. Gross yields in inner suburbs will usually 5% and outer suburbs 6%. Cashflow is usually positive with leverage.
Dublin, Madrid, Barcelona, Miami, Houston, Phoenix, Las Vegas, San Francisco, Seattle, Birmingham and Brisbane are in this phase.
Stage 2: Inner and Outer Suburbs Start to Recover Years 4 - 6
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| "Character Homes" in London Suburbs. They May Be Over 80 Years Old But Have Share of Freehold. Definitely Worth Over GBP500k or SGD 1m! Just 10 - 30 Minutes of Commute To CBD or Work Place |
From 2013, Zone 2 and 3 London began to stir. Singapore's RCR region stirred in 2010, a little earlier. Brooklyn and Queens hit the trough at around 2013.... Domestic economy starts to recover. Banks start to loosen their mortgage lending standards, fuelling widespread price rises.
People who need to work in the CBD, who work long hours, usually from the Finance, Oil & Gas trading sectors need to get to work in the wee hours of 0730hrs. they cannot commute from more than 15km away, especially if the public transport is not efficient. They will be forced to rent in Prime Central / Inner / Outer suburbs. The corporate leasing sector will revive and boost rentals in central region.
Those who just entered the workforce will also choose to rent in the central/inner/outer as well, because it will mean a more "happening" place to be, lots of drinking holes and nice restaurants in the city, and a quick stumble home with a babe in arms after a titzy, alcohol fuelled Friday night out.
Families who are climbing up the financial ladder may try to move close to the CBD, and buy a home in the inner/outer suburbs nearer good schools. The make up of inner / outer suburb buyers are usually:
1. 20% foreign investors cash buyers.
2. 20% foreign investors with mortgages.
3. 20% local investors cash buyers.
4. 40% local investors with mortgages.
New supply is beginning to be completed. Housing starts reach all time high. There will be signs of oversupply in certain areas. In London, it could be in the Eastern suburbs. In Singapore, it could be Tampines, Woodlands and Jurong. In Malaysia, it could be Mont Kiara.... But overall, vacancy rates are still very tight.
Oh and most governments, post GFC will start to implement anti speculative measures to prevent another property bubble wreaking havoc. You can count on it. It's too fresh in the policy makers' memories.
Rents for CBD will start to creep up quickly due to corporate lets increasing. Yields will start to rise from 2% back up to 3%. Inner suburbs will see yields drop to 4% and outer suburbs 5%. Cashflow for inner/outer suburbs will either be neutral or slightly negative, a danger signal of a market peak coming in 3 - 4 years.
I would say that London has entered phase 2. Melbourne is definitely well into phase 2. Sydney is in early phase 2. New York as well...
Stage 3: Spill Over to Regional Areas, Cries of Bubbles... Years 7 - 9
 |
| 15 km From CBD, Usually With No Public Transport System. You May Take Over One Hour Of Journey Commuting To Work Daily. Good Regional Areas Are Near Good Schools But Shopping and Dining Choices Are Usually Limited. Mainly Owner Occupiers Who Are Families... |
By year 7, governments will implement increasingly punitive measures. CBD will see yields of around 3% still. Although there is increased rental demand, supply has also increased as all the off plan properties are finally completed from year 7 of the cycle. Prices in the CBD could start to rise again and investors again find the negative cashflow more tolerable, as the job market improves. But this is merely a flash in the pan. In this phase, interest rates and borrowing costs are usually extremely high as the economy enters the late stage of the cycle.
Inner/outer suburbs have become unaffordable for most locals. Pockets of oversupply have spread to larger areas. Rumours of huge drops in rentals as contracts are renewed. Vacancy rates rise rapidly, void periods increase. Rumours of bankruptcies and owners who cannot afford to keep up with mortgage payments surface.
Singapore, KL, Iskandar, Manila, Beijing, Shanghai, Guanzhou, most Asian cities have entered this dangerous phase.
Investors should decide whether to take profit if they entered in stages 1 and 2, and are sitting huge profits. My advice is this: If the fundamentals of your suburb is right, e.g. infrastructure like good schools, shopping, food, train stations nearby, you should hold it and remortgage to get equity cash out. Most astute property investors hold their properties for over 10 years, or 2 cycles.
Gross yields in inner/outer suburbs will be around 3% / 4%, and definitely negative cashflow. Most families will sell up their apartments as their families grow with more kids, and move to the regional areas for more space.
The only time you should sell or take profit is when:
1. Massive oversupply still coming on stream. This is usually due to poor planning by the local government. E.g. Iskandar. It will bring your rents further down and make it difficult to service your mortgage. The oversupply could exaggerate the decline and prolong the downturn. Take for example properties in Newham and Tower Hamlets. They fell by over 30% since 2006 vs Prime Central London which fell by 15%. Since Prime Central London recovered in 2010, they were in the doldrums until 2013!
2. Infrastructure is in decline or about to be removed. This is rare as most schools, train stations will remain for decades to come.
3. Crime rate increasing, unemployment in the area rising. This is a sign of urban decay, as the local council mismanages the borough. Generally, this doesn't exist in Singapore. But it is prevalent in other cities, notably KL, Iskandar, NYC etc.
I usually don't recommend selling off your properties unless the fundamentals have changed. As Warren Buffett said, the best time to hold your stock is forever.
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