But long-term investment still profitable
The act of buying properties and subsequently selling them after a short holding period is known as ‘flipping’. In an upmarket, flipping properties can generate substantial profit for the flippers. In 2011, 98% of private non-landed homes flipped within two years of purchase were profitable, with the gains averaging $259,000 or 23%. In 2013, a majority 61% of such transactions were still profitable although the average profit fell to $151,000 or 16%.
This trend was reversed in 2014 and 2015 (Figure 1). Firstly, there were 30 non-landed homes sold in 2014 and 2015 with a holding period of two years or less. In comparison, there were more than 2,000 caveats of such transactions seen in 2011. Of the 30 caveats, only five (17%) were profitable. The remaining 25 transactions (83%) were in the red with losses averaging $373,000 or 21%.
The biggest loss accrued to a luxury unit at Four Seasons Park. The seller had purchased the unit in April 2013 at $11,000,000 ($2,879 psf). It changed hands in February this year for a consideration of $9,500,000 ($2,486 psf). The SSD payable was more than $1 million.
Figure 1: Percentage of profitable transactions for units flipped within two years of purchase
The study matched resale and subsale caveats of private non-landed homes (excluding executive condominiums, shoebox units and enbloc) with their previous transactions. Profit and loss was computed based on the difference in selling and purchase prices, taking into account the prevailing SSD rate. The computation excludes other costs such as stamp duty and interest rates.
Interestingly though, four of the five profitable units were purchased in 2013 at peak prices and the gain was more than decent, averaging $217,000 or 15%. Some of them were bought at undervalued prices. For example, a unit at Kemaman Point was purchased at $697 psf in 2013, a price unseen since 2008 and 2009. It was later resold in March 2014 for $1,006 psf (Table 1). Another unit at Santa Fe Mansions was purchased in 2013 for $1,032 psf, below the average price of $1,204 psf seen in the year. It was later resold in 2014 for $1,247 psf. It shows that investment opportunities can be found anytime even in peak prices for those who look hard enough.
Separately, one of the five profitable units was flipped within just six months purchase. The seller had pocketed $210,000 or 20% profit. This was for a large low floor unit at Mayfair Gardens in Bukit Timah. It was first purchased in February 2014 for $1.05 million ($554 psf) and subsequently resold for $1.5 million ($792 psf) in August 2014. Again, the $554 psf purchase price was significantly below the project’s average prices which was at least $850 psf.
Table 1: Top gains and losses for units flipped in 2014 & 2015 within two years of purchase
The number of subsale transactions has continued to fall. Only 80 subsale caveats were lodged with the URA in 1Q2015, down from an average of 272 and 140 caveats per quarter in 2013 and 2014 respectively. Subsale refers to transactions in the secondary market where the units have yet to receive the Certificate of Statutory Completion. Hence, subsale volume is often used as a barometer of speculative activities in the market.
Majority of transactions still profitable
Overall, a majority 94% of non-landed home transactions in 2014 and 2015, for which their previous caveats could be traced, were still profitable. The average profit was $455,000 or 42% and sellers held on to their properties for an average of 7.7 years.
As anticipated, the proportion of unprofitable deals has crept up from 2% between 2011 and 2013 to 6% in 2014 and 2015, indicating rising mortgagee sales in the market. Notwithstanding, they are still the minority group among sellers and should not impact prices too much, barring any new shocks to the economy. Among the unprofitable deals in 2014 and 2015, the average loss was $345,000 or 13%. Holding period was shorter compared to the profitable deals, averaging 4.6 years.
Purchase timing contributed to higher profits. In terms of percentage gain, the largest profit of more than 90% and up to 102% accrued to units bought between 2003 and 2005 (Table 2). These were a period marked by a series of negative events such as the dot.com crash, 911 terrorism attack, SARS and Iraq War resulting in a prolonged slump in property prices.
Similarly, sellers who purchased their units in 1998, post-Asian Financial Crisis, also netted a hefty gain averaging 92% or more than half a million. According to the URA, prices of non-landed homes plunged 41% peak to trough between 2Q1996 and 4Q1998.
It is always tempting to wait for such perfect timing to purchase a property. However, one might also recall that those years were marked by high unemployment and job uncertainties, where rock-bottom prices failed to lure buyers. It prompted the government to raise the Loan-to-Value limit to 90% and reduce the cash downpayment to 5%.
Table 2: Gains and losses for units sold in 2014 & 2015 and their previous year of purchase
The biggest loss involved units that were bought in 2006, averaging $1.46 million or 20%. This was surprising considering 2014 and 2015 prices were above those in 2006. Further analysis showed that the $1.46 million average loss was due to just nine units. Four of the nine units were from St. Regis Residences and another two from Cairnhill Crest. The remaining units were from other projects in the Core Central Region – another testament that the luxury segment has borne the biggest brunt of the cooling measures.
Table 3: Top five gains and losses for units sold in 2014 & 2015
This article appeared in The Edge Property Pullout of Issue 679 (June 1) of The Edge Singapore.