Is it worth paying ABSD for the 2nd property?

Writer: Ling CK

CEA: R056727F

Contact: (+65) 90110636

Email: [email protected]

A client asked me whether was it worth paying 20% ABSD for a 2nd property. He currently owns a landed property with his family. He had thought of investing in property but was hesitating because the ABSD rate for Singapore citizens had risen from 7% (2012) to the current 20%.

Although it seems to be a no-brainer answer; to pay so much more Additional Buyer Stamp Duty (ABSD) for an investment property. This amount can only be recouped if the investment property can enjoy an appreciation of 20% or more. IRAS is not going to return this even when it is sold at a later date.

I like to provide more than lip service by consolidating the project appreciation when a new launch receives its TOP (Temporary Occupation Permit). In the past before the pandemic, a new launch would be able to receive the permit for around 3 years. And, many transactions happened near or at TOP since most investors will let go of their units after 3 years, so as not to incur SSD (Seller Stamp Duty).

From Table 1, I then realized why the government had set the 20% ABSD. There were on average 40% of projects that could achieve more than 10% appreciation at TOP, as this is very near to 50/50 chances. So, to the investor, it is a very high success rate, moreover, they could still able to take a step back to hold on to the property and rent it out if they couldn’t achieve the targeted profit at TOP. They could even stay in if the rental yield is not in favor.

Setting this ABSD rate is to ensure it is high enough to discourage citizens from speculating on property. The government does not want citizens to profit from just buying and selling property. And prefer them to focus on investing in the business that contributes to the country's growth. The percentage of properties able to achieve 20% or more is near to only 10%. I would say the discouragement is really sufficient!

Lots of people might not be aware that Singapore does not have capital gain tax, this is unlike some of the countries in the world. The capital gain tax rate could be as high as 40% such as in Turkey and Uganda. 111 countries have capital gain tax in place to discourage property speculation. Some of the residents prefer to invest their money in other countries’ properties just only to avoid ABSD. But they weren’t aware that they had to pay a bigger price when they decided to withdraw their profit.

In the last 2 years, Japanese property has been a hot topic. Saying that it was very cheap and low property tax. Easy to get a loan from a bank with a 0% interest rate. It is as good as using other’s people money to invest. Without knowing that Japan imposed 39.63% capital appreciation on property sold.

Some of the popular countries I have been asked about are listed in Table 2.

Back to the topic of the analysis, although these properties received their TOP in the same year. It does not mean they were launched in the same year. Some were earlier and some were later. So, according to the PPI (Private Property Price Index from URA), the price index in 2016 was at the bottom. Those properties launched in 2016 will have a higher gain compared to those launched in 2014 and 2015.

Many external factors affect the gain at TOP. If there were no external forces such as government intervention. It would depend on the consumers’ “feel” on the economic growth. Why did I highlight it, it is because the prospect of the property growth was not solely dependent on the country's performance in that year. It is the expectation that drives the price.

For example, the star performance in 2018 was Coco Palms (25.8%), 944 units, considered a mega project, developed by Hong Leong. It was launched in 2014 at $956 psf. When you comparing to the rest of the projects launched that year. You will notice that this psf brightened like a sun.

The rest of the projects that launched in 2014 with the lowest psf, The Santorini (597 units) at $1,139 psf in Tampines, and the highest was Trilive (FH, 222 units) at $1,562 psf in Hougang.

Although at first glance of the location, most people think it is the location that counts. But the fact is Coco Palms launched at a very attractive psf without knowing that it was not 99 years when it launched, but 6 years less, since the developer bid the plot in 2008 instead of 2013. So, the developer actually made a big buck by releasing at this psf.

The project that did not perform so well was Liiv Residences (Launched in 2017, @$1,947psf), 23 units, in District 5. To be honest, the location is not that bad. Moreover, it is a freehold property, so it can wait to get its share in a later year. This also tells you that not necessarily freehold property will gain a better profit than a 99-year leasehold within a short time frame.

Both projects were not next to the MRT station, or having a mega shopping mall. But they managed to achieve a growth higher than 20% when it reached TOP. So, don’t be confused by that the project next to the MRT station will make a huge profit. You have to see whether the developers are launching at the current market price or the future price.

The project that did not perform so well was a luxury project; Mayfair Gardens (launched in 2019, @$1,947psf), 215 units in District 21 (RCR) developed by Oxley Holdings.

Please don’t get me wrong this is not a good product. Contrarily, it was only 346m away from King Albert Park MRT station and 2 tier 1 prestigious schools within a 1 km radius; Pei Hwa Presbyterian and Methodist Girls. The main reason why the buyers did not make as much was because it was launching at $1,947 psf. The average launching price for 99-year leasehold property at RCR in 2019 was $1,5xx psf to $1,7xx psf. This is what I meant by current market price or future price. Eventually, the buyers will still gain profit from the property but have to wait for a few more years.

So, you have to decide what your objective is. Most buyers like to buy a property that could achieve multiple objectives; short-term gain, and long-term growth, can be passed down to the next generation, cheap to enter, and so on. I leave the imagination to you to carry on the list…