The case for ECs as value investment has never been more solid with the latest ECs having services and equipped with facilities similar to private condos but at more affordable prices.
For most investors, New ECs and mass-market New Launch Condo fall under two different categories, each with their own returns on investment. This perception is mainly due to the fact that private condos come at a higher cost than executive condos. However, a closer look at some historical data tells a different story.
A comparison between the first batch of ECs launched in 1996 to 1997 and private condos from the same time period reveals almost the same investment returns. See Table 1 for select EC’s compounded annual price rise and compare this with the URA Non-landed Property Price Index.
In terms of price appreciation, executive condos have performed better than non-landed properties from launch date until the end of 2015. As the Singapore government leans toward sustaining income growth by increasing productivity, this positive price performance of ECs will continue in the foreseeable future. Assuming that the country’s long term productivity growth is at 2.5% annually, it is likely that wages will be at that rate as well, with the same trend going for price increases of private properties. However, this 2.5% growth rate would be at the exceptional end for private condos when based on historical returns as reflected in Table 1.
As ECs are at a discounted price versus private condos, those who are qualified to purchase one are poised for favourable ROIs. In this study, we have selected an EC currently being marketed in one of Singapore’s newer housing estates. As the chart illustrates, there is a 27% price difference between the selected EC and private condominiums that are located within a 2km radius.
Once the minimum occupation period or MOP ends (for example, in 4th quarter of 2022), it is a fair assumption that the said Executive Condo – equipped and furnished according to modern condo specifications and selling at 27% discount when compared to private condos – will be at the same price level as the private condos. In table 2, it is shown that if an EC trades at the same level as private condos, there would be a 7.2% average compounded annual price increase. That said, if sale restrictions are lifted, will the EC trade on the same level as a private condo?
This scenario is an optimistic one even as slight differences in location can result in different figures. In addition, the ECs being sold in 1996 to 1997 are currently trading at an 8% average discount versus similarly located private condos. Thus, the resulting average compounded annual price growth rate will still be favorable even if EC prices are at a discount to private condos by the 4th quarter of 2022 and not at the desired $1,290 psf.
If at the end of MOP in the 4th quarter of 2022, ECs are at a price discount of 10% and 20% versus private condos, this will still yield a favorable average compounded annual price rise of 5.6% and 3.8% respectively.
Are ECs a worthwhile investment then? Figures show that the performance of ECs over a certain period is in line with those of private condos. Several factors point to the capital appreciation of ECs from beginning to end of the MOP. First, the price discount versus private condos that the ECs have upfront is compensation for inconvertibility during the MOP. Second, rental income opportunity is essentially zero for the first five years as ECs are intended for owner occupation. Third, only Singapore citizens are allowed to buy ECs during the first launch. As a consequence of these three factors or restrictions, some kind of additional return lies dormant during the MOP as compensation. In this case, this additional return is in the form of high capital appreciation even upon partial lifting of these factors or restrictions.
How do returns from private condos compare? As there is no restriction in terms of renting out the unit, this potential rental income has to be factored in. With the assumptions of 3% net yield during completion and a 2.5% rent increase every two years at lease renewal, as well as the 2.5% annual price increase, we’re looking at a 4.3% internal rate of return per annum for private condos. This figure is still within the EC annual price increase range of 3.8% to 5.6%.
Here are some other factors that can potentially improve on this performance of both EC and private prices:
– Services providing smart home automation
– Design and layout that anticipates a buyer’s practical needs upon moving in. A common example for this is expandable living room or bedroom walls for widescreen TVs that a number of developers are now factoring in. Some private condos only meet the minimum planning dimensions.
For those who qualify, the decision of whether to buy an EC or not is obvious due to the total debt servicing ratio (TDSR) framework and cooling measures currently in place. The latest batches of New Launch ECs already offer facilities that are at par with those of private condos. Some even come equipped with smart home automation like The Visionaire EC & iNz Residence EC. With these features at comparatively affordable prices, value investing in this case has never been more apparent. Buyers must realize that at the present, there are good deals in the Executive Condo market, and at quantities where a lot of people can participate.