The Longer You Hold; The More You Earn?
We usually associate the above question with an investment in a paper asset, for example, an index fund, using a “buy-and-hold” strategy. However, do you think it will be true if you associate the above question with a residential property asset?
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Yet, as we read this article published in yesterday’s Sunday Times Invest section, “Will owners make more money by holding on to residential properties longer?”, the writer mentioned that there is a common belief that it may not be financially wise to hold on to a residential property for too long. When a property hits about 20 years old, the value may start to decline as it ages, potentially leading to financial losses.
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So, this leads us to the question – is there an optimal holding period for residential property investments?
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Also, are older properties destined to steadily lose their value, thereby causing owners to contemplate selling them as efficiently as possible?
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If your curiosity is piqued, then let us dive deeper to understand more in today’s 209th week of our #SundayTimesRecap learning series, with a summary of the pointers below:
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To answer those questions above, one perspective is to look at historical transaction data to assess how the duration of property ownership impacts the financial gain. For instance, will a homeowner or investor generate a higher profit by selling the property before or after the 10-year mark? Here are some research findings:
1. Many homeowners sold their properties within 10 years. This finding was based on the data set collected of individual private residential units’ buying and selling dates to determine how long they were held and the calculations of the gross gains and losses by comparing the Urban Redevelopment Authority’s Real Estate Information System new sales caveats with the resale caveats of the same units.
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Specifically, 50.8% were resold between 5 years and 10 years of purchase, and these are usually new homes resold in the secondary market within five years of obtaining the temporary occupation permit (TOP). Another 15.5% were resold within five years, and these are new homes resold before or immediately after TOP.
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About a third of the owners held on to their properties for extended periods before reselling: 23.5% of transactions were of those resold at around 10 years to less than 15 years, while 6.4% were of those resold at between 15 years and less than 20 years. A small minority of properties, comprising 3.8%, were resold after 20 years.
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2. Landed and freehold properties are kept longer. Such owners are probably not concerned about their lease expiring and are not in a rush to sell their units. Others might hold on to their property for a better profit, as freehold properties are generally pricier and less common in the market.
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For instance, a higher proportion of freehold condominium owners, at 35.7%, retained their properties for at least 10 years before reselling, compared with 32.6% of leasehold condo owners.
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Landed property owners usually hold on to their properties longer. A significant 43% resold their properties only after 10 years, while another 7.5% kept their properties for a minimum of 20 years.
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3. The longer the holding period, the higher the gross profits. Selling a property quickly does not always guarantee high profits. Historical data indicates that property owners who hold on to their investments for a longer duration are likely to experience increased profitability, particularly if there is consistent price growth, as has been the case for Singapore’s properties over the past few decades.
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Steady rental growth, indicating strong investment potential for our residential properties, has also supported property values. Moreover, many older properties were bought at significantly lower prices, resulting in greater profits.
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Higher profitability over extended holding periods has been observed across all property types, including leasehold and freehold properties.
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Generally, those who held their properties for 20 years or longer earned an average gross profit of around $665,000, while those who held them for 15 years to less than 20 years earned slightly lower at around $600,000, and for 10 years to less than 15 years, the average gross profit dips to about $320,000.
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While many owners resold their properties within five years to 10 years of ownership, this group of buyers reaped the lowest average gain at around $200,000.
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4. Profit margin is smaller for quick sales. Some might worry that leasehold condos may not be as profitable as freehold condos. If the investment period is short, data shows there is minimal profit difference between the two. If the purchaser intends to retain property ownership for a considerable duration, then the profit potential between freehold and leasehold properties can be significant.
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For example, the average gross profit of a freehold condo is 17% or around $27,000 more than a leasehold condo if sold within five years of completion. However, if the property is sold after 20 years, the average profit margin widens to 33%, or almost $200,000.
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Therefore, leasehold condos in Singapore can be profitable and demonstrate increasing value over time despite their finite leases. On the other hand, freehold condos outperform their leasehold counterparts in terms of long-term profitability.
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5. Majority of ECs are resold within 10 years. Intriguingly, a high proportion of executive condo (EC) owners opted to sell their properties relatively quickly. Close to 70% of the EC-matched caveats were resold between five years and 10 years, while slightly less than 10% were retained for at least 15 years.
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The rapid turnover of ECs is remarkable but not entirely unexpected. This is because an EC sold within five years of its TOP yielded an average gross profit of about $300,000, which significantly surpassed that of all other property types – like landed properties ($213,000), leasehold condos ($159,000), and freehold condos ($186,000) – sold within the same time frame.
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The high profits enjoyed by EC owners may be attributed to the significantly lower purchase prices compared with those of private condos, given the substantial subsidies from the Government.
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6. Losses can also increase with time. Holding on to a property for too long can be risky too as losses tend to increase over time for unprofitable deals, although they make up only 17.2% of total matched transactions.
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The average gross loss for properties held for between five years and less than 10 years was approximately $210,000. For properties held between 10 years and 15 years, the average gross loss widened to around $250,000, and for properties held between 15 years and 20 years, it further increased to an estimated $684,000.
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Owners must assess the likelihood of incurring losses and determine if the risk of losses is greater than the potential gains when deciding whether it is worth retaining the units.
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In summary, it is crucial for buyers to thoroughly assess their individual needs and risk tolerance when determining how long to keep a property. The profitability of a property can rise with the holding period, but so can the losses. They must also weigh the potential gains against the expenses of maintaining an older property.
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Moreover, many investors adopt varying strategies. Some prefer a shorter investment horizon, selling their properties early for a modest profit and reinvesting the proceeds to generate additional gains, instead of waiting for extended periods for appreciation. Over 20 years, they could engage in multiple property transactions, yielding incremental profits. However, this approach necessitates enduring the inconvenience of changing houses and incurring additional sunk costs, such as renovation expenses and stamp duties, which can erode their profits with each transaction.
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Other homeowners may prefer to keep their homes for sentimental reasons or if they need larger units for personal use.
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Perhaps a more comprehensive strategy may involve carefully timing the market entry, selecting a property with desirable features, exercising prudence, and buying within one’s financial means. This approach increases the likelihood of achieving profitability and minimising the investment timeline, irrespective of prevailing market conditions.
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