Introduction to Asset Progression

Asset Progression – You probably have come across countless ads that show up on your Facebook account telling you what you can do with your HDB if you bought it in a particular year. The truth of the matter is not about which year you have bought but more of whether the Minimum Occupancy Period has been met – 5 YEARS FROM THE DAY YOU COLLECTED YOUR KEYS AND OCCUPIED IT FOR 5 YEARS. Take note that is states Minimum Occupancy Period and not ownership. There is a difference. It is only after you have stayed and lived in your HDB for 5 years, then only you can resell it in the open market. I get HDB owners asking me on whether they can upgrade when they just owned and lived in it for just 1-2 years. Do these people actually understand public housing policies and the rules of ownership? Do they even read before signing on the dotted line?

A lot of Singaporeans have been told by friends, parents and their “guru” friends to always start with an HDB BTO. Why? Because “sure make money one!” I’m not too sure about that statement but it is commonly heard. My parents have told me to go and apply for an HDB when I am getting married. So I did but instead of getting a BTO, I bought a resale from the open market in 2006. It was an executive apartment unit on the 2^nd floor in an unknown HDB estate (at that time in 2006, it was unknown). There were a lot of comments about buying such a big unit.

1. The cleaning is going to be tiring!
2. Why 2^nd floor? Next time hard to sell!
3. Why buy in this old estate?
4. Why buy corridor unit?
5. Why you need such a big unit?

The list goes on and on…. Family members and friends commenting non-stop…. 5 years later in 2011, the unit was sold with a decent profit – 100% gain. The comments were different this time. You have good foresight to have bought that HDB and so forth….

I have thus progressed onwards to private properties and have never looked back. It is only through this method that I realised that I could “save” on a systematic and diligent method. I must admit that I am quite a spender as compared to being a saver. Just too many distractions from my grand saving plans. Through this method, I was able to grow my wealth from being a simple HDB dweller to someone who owns a private property without having to stress on my monthly mortgage payments. Someone just helped me on my down payment. If I had not sold my HDB, I would not have been able to realise my profits, it would have been just paper gains. Paper gains are just “feel good” factors that do not make a difference in your life. It is only by selling the HDB, then only I will be able to progress onwards. The prices of that estate have actually ballooned to a higher price now but the rate of growth has slowed down tremendously. Would it have been better if I had sold it later? Not exactly. Let us study the numbers as per below

Table 1

Based on the table, would it have been better if I have held the unit till today to sell it? I leave the choice to you. With the profit that was generated in 2011, I bought a freehold resale unit on the east coast and recently sold it for a decent profit of $250,000. If I have continued to hold the HDB unit, I would have missed out on this other profit because the difference is $200,000 if I have held it till today before selling it away.

So what is asset progression through real estate? It is the example that was being shown above. From having a combined CPF fund with my wife of $200,000, we were able to generate a total of $620,000 profit! This was done over a period of 12 years. Just imagine, we get to stay in the property, we get to enjoy the profits! What more do you need? We are now awaiting our next property to be ready before we start to reap the rewards again. The ultimate objective is to build a retirement nest egg big enough to sustain both our lives in our golden years. Is this possible? The answer is a definite yes if you do your homework carefully and use logic instead of emotions when embarking on this journey. We will discuss more in this e-book.

Why through this asset class – Real Estate?

Singapore is one of the countries in the world with the highest homeownership. Almost about 91% in Singapore (https://www.singstat.gov.sg/find-data/search-by-theme/households/households/latest-data). Almost everyone in Singapore goes through the process of applying for an HDB BTO when the time comes for marriage. There is no need for marriage proposal in Singapore, the usual question is always about “Hey, should go and apply for a BTO?” this is as good as asking to get married. Not so romantic I guess. But this is the typical scenario we see in Singapore. I did the same as well! So what happens after the BTO? Wedding dinner and so forth and have kids and go through the usual in life. Some of this 91 % will progress onwards to private condominiums and some will just move on to Executive Condominiums.

Data from the Department of Statistics in Singapore shows that 15.9% of Singapore property owners are in private property. This shows that there is room for growth and opportunities. Why? Because the number of people in private is much lesser but the number has also grown from 15% in 2017 to 15.9% in 2018. There is definitely something brewing. So what does this 15.9 % know that is different?

Private condos and apartments are usually costlier and the maintenance fees are usually higher as compared to HDB flats. People were always asking: “So what’s the difference?” “HDB also 99 years, the condo also 99 years”. There are differences! In HDB, you don’t get to vote for collective sales as opposed to private condominiums. Selective Enbloc Redevelopment Scheme or better known as SERS is not the SAME as the private condo enbloc! They are totally different. You don’t get to vote on the changes in the development like building a swimming pool?

The prices of private condos tend to appreciate faster and higher as compared to HDB. It is always challenging for HDB prices to reach a new benchmark. Unless you are in a prime location and your HDB is a rarity. Not many as well. Even more so, if it is located in a prime and rarity is the name, better sell it and take the profit and move on. Some HDBs were transacted above the $1m mark in Singapore, having this type of HDB to go to the next high benchmark, will be a challenge.

In recent years, foreigners were seen snapping up prime properties in Singapore. For every 5 private property buyers, 1 is a PR or foreigner What is that they see in Singapore?

1. Political Stability
2. Peace
3. Education System
4. Strong and Stable currency
5. Value in Singapore Properties as compared to other countries
6. Opportunities for foreign talent
7. Stable economic growth

I spoke with a foreign buyer recently, he mentioned that after travelling around the world, he prefers to live in Singapore because there is something which the rest of the world could not provide – Peace of Mind.

Property upgraders, property buyers, local and foreign have been able to leverage on the above factors to ride on the property growth for many years. Singapore’s property market has seen its fair share of ups and downs as well but the charts have shown that the new low is always higher than the previous high!

Property has always been a good form of investment and hedging tool against inflation. With the right advice and proper guidance, you will get the early advantage of understanding the market and will know what the trend is and head towards financial freedom with ease and comfort. Without the right knowledge and understanding, you may be headed straight into a storm with unknown outcomes.

Bank Financing

The other good thing about buying property in Singapore is about bank financing. Financing is about leveraging. How does it work? You can obtain financing of up to 75% for a property in Singapore. And with a mere 25%, you get to leverage on the full capital upside of the property value.

As was mentioned earlier on my own example, my wife and I had a total of $200,000 in CPF savings, we used this and took a loan. After 5 years, we made a decent profit of approximately $420,000! If we were to base it on return on equity(ROE), my ROE is easily about 200% over 5 years! That is about 40% per year! That’s not too bad for ROI. What investments gives you that sort of ROI?

In today’s context, bank financing takes into consideration multiple factors like age, salary and outstanding loans. In short, with the introduction of the Total Debt Servicing Ratio (TDSR), borrowing has become more stringent than before. Borrowers should bear in mind that careful calculation of facts and figures are important. Engage the knowledge of a professional real estate person to assist you in your journey instead of DIY. You are preparing to spend a huge amount of money, don’t save on the time and effort to meet the real estate professional. They have the knowledge and experience to advise on what are the options. No point going through the DIY route and make costly mistakes. The real estate market information in Singapore is pretty much transparent but YOU need to know where to get them and you need to know what to compare. Most of the time, we do not know – what we don’t know. This results in us going on a wild goose chase for info.

Cash vs CPF

The question of using cash or CPF has never been a big concern in Singapore. I remember my family seniors telling me that real estate agent’s job is unstable and no CPF. I asked why is it important? They told me: “no CPF, how to buy a house next time?” Does this sound too familiar to you?

The CPF was introduced in 1953 and came into effect on 1^st July 1955. It was meant as a compulsory form of savings for Singaporeans to plan for retirement. In 1968, the Public Housing Scheme was introduced to assist Singaporeans to own public housing. This was later expanded to private properties in 1981. What originally was meant as a form of compulsory savings for retirement was expanded to allow for the acquisition of real estate in Singapore.

Singaporeans became dependant on CPF for the purchase of property? Not exactly true. You need to know that CPF generates an interest payout of 2.5% per annum and this is really not too bad in the current market. No banks will pay you that sort of interest rates. Any amount that is withdrawn from the CPF savings attracts and accrues interest of 2.5% per annum as well. Which means that for every dollar that you take out from CPF, you need to pay back with an interest of 2.5%. What originally was generating interest of 2.5% to you has been taken away and you have to pay back with an additional 2.5%! Which means that you probably lost 5%!

“But it goes back into my CPF.”

You are right to say that but you will need to use your profits from your property sale to top up the accrued interest and please remember that cash is much more liquid as compared to CPF funds. Because of the not so liquid state, the interest is higher. The question now is “so how? To use CPF or not to use?” There is no right or wrong. It depends on how savvy you are with your numbers. If you tweak your numbers correctly, you probably will be getting a loan at very low interest or maybe 0 interest.

“But if I don’t use my CPF, it is doing nothing at all!”

It is generating 2.5% per annum, not bad…. If you have $100,000, it gives you $2500 per year. If you have $400,000, it gives you $10,000 per year! You decide whether this number is attractive enough. If you must use your CPF, pick the right property and make sure that your ROI is at least higher than 2.5%. If it is not at least 2.5%, then it makes more sense to leave the CPF savings alone.

If you have fully paid for your HDB with your CPF, does it make sense to sell and progress onwards to private property? Even if you have fully paid, your accrued interest is still accruing at the rate of 2.5% per annum. Is your HDB value growing beyond 2.5% per annum? This is unlikely because, since 2013, it was confirmed that all HDB will be returned to 0 value when the lease runs out after 99 years. To understand how the calculations are done, continue to read the below that was extracted from the CPF website.

This is how accrued interest is being calculated:

“Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.”

Source: areyouready.sg

If you have fully paid up for your HDB, let’s say you have used a total of $400,000 from your CPF savings to pay up, your accrued interest would have been at $10,000 per year and it is being compounded and this may just add up to quite a huge number. You don’t need to actually understand how the calculations are done, all you need to do is to log into your CPF account at www.cpf.gov.sg, you will be able to get your accrued interest.

From the above chart, we can see that HDB resale prices were at its all-time high in 2013. It started coming down consistently. From the below chart, we can see that HDB prices have been on the decline since 2013. An average of approximately about 2% drop in value since the high in 2013. This chart is based on the average of the whole Singapore resale transactions. So the question is whether should you be selling when you reach 5 years of MOP or later. It will all depend on your numbers and what are your objectives. Please bear in mind that asset progression is not a definite YES for everyone. You will still need to run through your numbers before making that all-important decision to go on this path.

Resale vs New Launch

This has always been the biggest question on which type of property to buy. The question should be which is the right property to pick. It is not about whether it is new or old. It does not matter. Developers in Singapore tend to give good discounts on the 1^st day of the launch or if not during the early stage of the project launch. From the bottom few charts, we will be able to see that a couple of new launches has actually profited from the increase in pricing since launch day till TOP. Is this a common trend for all new launches? Not exactly but almost all. Cost of project financing and dollar-cost averaging will result in the inevitable situation for developers to raise the selling prices during the construction phase all the way till TOP. Some will continue to sell even after TOP. During the early stage, developers will need to fulfil a certain percentage for the financing to flow. When that happens, prices will start to move upwards, edging up in a minute manner that is unfelt until the last unit is sold. Take a look at the data below:

We do not need to search high and low to see how new launches are performing against resale units. Just take a look at Commonwealth Towers. The data shows that profitable transactions. The number shown is a whopping $345,000 profit over a short span of less than 4 years.

The below shows the transactions that were profitable for High Park Residences in Sengkang. It does not necessarily mean that you need to get a high-end location for your investment to be profitable. You must be thinking – Condo in Sengkang also can make money?? It is not so much about the location but very much more on the pricing. As long as the pricing is correctly priced at a discount against future pricing, there is definitely room for growth.

High Park Residences transactions Chart

Caspian was a project that was launched near to Lakeside MRT Station. The location was reasonable and the pricing was seen to be not too bad. Within a short span of about 3-4 years, the prices rose all the way to close to almost 100% profit for the initial buyers. From the chart, we can see that the resale units resulted in the pricing staying stagnant for quite a while from 2014 till now. This is not the only project but a lot of resale projects are not moving up fast enough.

Another advantage of new launch projects would be the progressive payment structure. The progressive payment structure will attract less interest cost in view of the payment structure. Remember, you only pay interest on what you borrow and in this case of progressive payment, the developer will only call on what is required at different stages of the project construction period. The home loan full interest will not kick in until the project reaches the stage of Certificate of Statutory Completion, usually about 4 years after launch. CSC is usually 1 year after TOP.

Selection of Property

Many clients and readers are always asking this question of where to buy. Let’s not jump into where to buy but let’s look at your financials. Without an understanding of your financials, we will be like groping in the dark, not knowing where we should be heading. This is not advisable. Lots of heartaches and disappointments may follow through if this step is not complete. The case studies that will be shown below are the real-life cases that we have worked with previously but the names and details have been removed to protect the privacy and confidentiality of the clients.

As per what was mentioned earlier, pricing at this moment is of a higher priority compared to location. If the location is not as good, there must be a certain level of discount to cater to the so-called bad location. In Singapore, it is never about a bad location, it is just probably the location has yet to have been developed yet. Key facts to consider when selecting properties are a lot more than the 2 factors as mentioned earlier, pricing and location. We need to understand the demographics of the location and what is the government’s direction and plans for the future in that location. Any more land in the vicinity for future developments? Major infrastructures coming up or are there any major transformation that is coming up?

One good example would be the Greater Southern Waterfront. The southern region in that part of Singapore has been quite sleepy for quite a while. With the recent announcement by the government on the changes that are coming up, the area suddenly sprang into life with lots of buying interest.

Source: singstat.gov.sg

Understanding the population growth in Singapore is also a key crucial factor to consider. With the government looking to increase the population to 6.9 million by 2030, what does this mean to you as a property investor or a homeowner? What are the impacts and the opportunities that you see? What are the types of new citizens and PRs we are expecting in Singapore? What are the key housing policies that will affect the PRs and new citizens? These are key facts to know and of course, there are clear signs that are showing the trends on where the market is heading. Is selecting a property near to the MRT is always a good choice compared to other projects? If you like to understand the key to selecting the projects, continue to read on, more will be uncovered.

Case Studies.

Case Study of Mr James and Miss Rose.

Both are Singaporeans and married. Jointly owned a BTO HDB from HDB for about 10-12 years. Please see attached Excel worksheet of the before and after situation.

Table 1: Current Situation

 As we can see from the table, the couple is working and have the following assets in their overall cash reserves in both CPF and cash savings. They do have substantial savings on hand in view of the previous employment and business activities.

Table 2 Current Property and CPF Accrued Interest

Please take note of the amounts that were withdrawn for housing from their CPF accounts. Please take note of the accrued interest as well. Miss Rosalind Tan’s accrued interest is almost $45,000, Table 2 shows the accrued interest amount of $44,599.

They both have decided to look into buying a 2^nd property. They have intentions to keep their HDB in view of the location because of convenience. This situation may not be the best option as they may have to incur ABSD because it is the 2^nd property.

After studying the numbers, they may have an opportunity to upgrade to a condo and yet have spare cash and CPF funds to purchase a 2^nd unit for investment purpose.

Table 3 – Sale of HDB

From Table 3, we can see that when the sale was done at $880,000, the cash proceeds less of the CPF funds to be returned to CPF, the fees and outstanding loan to HDB works out to be a positive cash amount of $354,088. The CPF balances have also been increased in view of the return of the CPF funds that were previously used for the HDB.

The CPF balances are as follows:

James:    $342,297

Rose:       $277,046

Total Cash Savings: $854,088

The situation at that point was to decide between a new launch condo or a resale. Unless there were alternative options like new launch condo projects that were ready to move in or near to TOP. That was their preference. The project of choice was chosen in view of the price and location. The details of the purchase are as follows in Table 4.

After making the purchase for the first property, the balance of the finances are as follows:

Table 5

The number of years of funds that is available for the payment of the mortgage is approximately about 14 years. This is an assumption that in the event that both James and Rose does not earn an income.

As the 1^st property was concluded, they proceeded to consider the 2^nd property purchase, a smaller unit for investment purpose. They decided on a 2 bedroom unit in a new launch project, valued at $1,017,000. Please see table 6 for the purchase details.

Table 6 – Purchase of 2^nd Property

Based on the finances as per table 5, Rose was able to use her finances to make the payment for the initial

20% of the purchase for this 2 bedroom unit. As this is a building under construction project, the monthly payments are smaller as this is based on the progressive payment structure. The full mortgage payment will only take effect when the project achieves CSC but for calculation purposes, we will assume the mortgage payment to be at the full amount at CSC as shown in Table 6.

Table 7 – Current finances after the purchase of 2^nd Property

 From Table 7, we can see that the couple still has a strong cash flow position of funds amounting to approximately 7 years. This is taking into consideration of the CPF balances and cash savings on hand. As mentioned earlier, these are assumptions made on the basis that both James and Rose are not having any more income. In reality, this is not the case as both are still working and generating an income. To explain further on the possible outcomes during the TOP period, Rosalind may have the option to rent out this 2 bedroom unit for investment to generate an approximate rental income of about $2,500 per month. That will further reduce their monthly mortgage payment. Please see below table 8 for illustration.

Table 8

Based on Table 8 illustration, we can see that with the rental income of $2500, the reserves are further stretched to about 9 years compared to 7 years previously. (This also taking into consideration of the mortgage payment for the 1^st property as well.) Please bear in mind that the future income and current income from both of the clients are not considered in the calculation. This would mean that the actual numbers will be a more prudent number in view that both are still working.

In summary, not all HDB dwellers are in a position to upgrade or to buy 2 condominium units. It is still safer to be prudent when it comes to real estate purchasing. As real estate purchases are big-ticket items, it pays to exercise prudence with proper planning and calculations to ensure that affordability is a priority.

In some cases, it is just advisable to just to upgrade to a condo and not buy 2 properties. Age is another consideration when taking a loan to finance the property. The next case study is about a couple with 2 kids who has a long-awaited dream to move into a condominium.

Case Study 2

Jenny and Lionel have been staying in their resale maisonette in Bishan for about 12-15 years. They have a strong desire of wanting to move into a condominium. This is their situation and their process.

Table 9

Table 10 Current Situation

Based on their finances, the situation does not permit them to sell and purchase 2 condominium units but it is possible for them to leverage on their profits that they have gained to upgrade to a private condominium unit.

Table 11 Sale of Existing Property Proceeds

From the sale of their existing HDB flat, they were able to collect a cash sales proceeds of approximately $266,713. The CPF and accrued interest amounted to be a total of $376,595. Based on the above, their finances are as follows:

Cash:       $386,713

CPFOA:   $633,597

After much consideration, the new property was decided. The purchase price is at $1,214,000. They were contemplating between a 75% loan or 55% loan. The tables are as follows:

Table 12 based on 75% loan

Table 13

They decided on the 55% loan, and this is their finances after the purchase:

Table 14

As this is a building under construction project, the loan repayment is shown as the amount from CSC. This is based on an assumption that the loan interest is at 2%. This would give them a reserve of approximately 12 years. This is assumed that in the event that both will not be earning an income. They still have cash for rainy days as shown in Table 14. The CPF balances in their accounts will be able to last them for the mortgage payment without touching the cash for approximately 6-7 years. This is based on the assumption that both will stop contributing to their CPF as of now. In reality, they are still working and contributing to their CPF.

Summary

Based on the above 2 case studies, it is possible for HDB dwellers to upgrade to private condominiums. As per what was mentioned earlier, not all are eligible. Proper calculations and planning must be done to ensure that clients do know what they are getting themselves into.

But truth be told that Asset Progression is not for everybody. It is best to engage the professionals to advise you on your current situation. HDB upgraders do need to know on what are the pitfalls and what to look out for when doing the upgrading. Buying a property should be an enjoyable process. Being stressful about it is not good. Why get all stressed up about having to purchase property? With the right knowledge and information, it is a breeze.

Whether it is a go-ahead or no go, the knowledge you will gain is definitely helpful in your future of building a retirement fund. But bear in mind that market changes are very real and what you know today may not be applicable in the future. It is the same as what our parents understand about real estate in the past is no longer valid today.

It is always good to know your financial standing before embarking on the journey of asset progression. Getting emotional in this journey will cause more harm than good unless you are searching for a home instead of an opportunity. You will be pleasantly surprised on the options that you do not know but nonetheless, knowledge is key for asset progression.

If you have read till this point, it only goes to show that you are dead serious about wanting to understand more about how you can embark on this journey. My contact details are below. If you should want to uncover the opportunities you have, feel free to give a call and we can have a short 15 minutes tele-conversation to understand briefly on your current situation. Please take note that asset progression is not all about selling and buying another property, it is a lot more than that.

If you should need more information on asset progression, feel free to contact me at 91287788 or email me at jarreyng@gmail.com