Bad Property Investment

 

The property market is in a state of euphoria currently. The thing about a positive property market is that buyers may be rushed into making a bad investment decision. What may seem like a good investment currently may not turn out to be so in a couple of years.

I have always maintained that in a good property market, buyers make bad decisions.

It is not just property but in all other asset classes as well. In the stock market, most tend to lose money because they went in close to the peak, only to see their investments plummet when the market corrects. For stocks, if you are diversified, you can mitigate such corrections. For properties, buyers tend to have limited cash and thus it is difficult to diversify a property portfolio the way an investor would diversify his portfolio of stocks.

Let us remember what happened approximately five to six years back. The Singapore residential market was rather tepid as buyers were still waiting on the sidelines as the Total Debt Servicing Ratio (TDSR) had just come into effect. One of the segments which saw rather good demand was the commercial segment.

 

A popular concept at that point in time was to build mixed developments. Retail malls with residential units above.

Developers built many commercial spaces throughout Singapore. In theory, this was an extremely good form of investment as the residential units would have access to amenities below and the retail shops would have a natural catchment of customers. The reality was that most of these developments are located in places which do not have a large catchment area of customers. They are located within the landed property areas or are not close to an MRT station or town centre. Moreover, because these developments were individual strata units, it was left to the owners to find their own tenants. There was no plan for an anchor tenant to draw crowds and after many months, many of these strata owned retail units were still vacant. In fact, many such developments can be found strewn across Singapore. Places like Kensington Square along Upper Paya Lebar and Promenade @ Pelikat are just a few examples.


In fact, even pure retail malls in seemingly good location can work out to be very bad investments. Places like Alexandra Central Mall along Alexandra Road would seem like a good investment as it is located close to high rise residential buildings as well as offices and industrial areas. However, if you were to go into Alexandra Central Mall to take a look, there are still many vacant units. Some have never been rented out since it was completed. In fact, the developers sold the units bare to the investors. They did not come with glass frontages and buyers or tenants had to install their own flooring and glass panels.

 

One of the worst commercial investments I have ever seen in my 15 years as a real estate salesperson has to be The Flow along East Coast Road. The Flow is located on the same stretch as i12 Katong Mall and Roxy Square. It has already been completed and the units have been handed over to the respective owners for many months. However, to date, only one unit has been rented out. The fact of the matter is that these units were sold to the owners at ridiculously high prices. Thus these owners have to rent them at prices which, in some cases, are more than twice the per square foot price of the neighbouring mall, Roxy Square. To make my point more compelling, here is my walkthrough video of The Flow.


Let us focus this discussion on The Flow because I believe that this is a very good example of a very bad property investment in Singapore. Buyers were lured to the East Coast area as the area is an area with a strong expatriate crowd and generally the people who live in the area are from the upper middle class with good disposable income. On weekends especially, the row of shophouses opposite The Flow is usually packed with diners patronising the various restaurants. The theory was that because this area was crowded, The Flow should attract a strong crowd.

No one to run the mall properly.

There was no anchor tenant as all the units are individually owned and no one had any incentive to draw in an anchor tenant. To draw an anchor tenant, you would have to make an attractive offer for the anchor tenant to move into the mall and no particular owner would have an incentive to do that to his own unit for the benefit of all other owners. The people who bought The Flow were also perhaps not knowledgeable about the business around the Katong area. Retail is not doing as well as eateries in the area.

It would be better to seek the opinion of business owners in the area rather than rely on the salesperson who is selling the property.

Moreover, the assumption was that rents should be correspondingly higher than that in neighbouring Roxy Square. The reality was that businesses are profit-driven enterprises and they are not going to pay a higher rent to move over from Roxy Square. Moreover, some of these businesses are already established and their customers are familiar with them being in their usual location. Also, when additional supply comes onto the market and there is no corresponding increase in demand, rents should fall. Thus taking Roxy Square’s rental and adding on a premium to that was a very large miscalculation for most investors of The Flow. How then can this situation alleviate itself? I would say that if one of the developments were to undergo an en bloc sale, removing a large supply of retail space. Only then will the situation at The Flow see an improvement.

 

To find out more on the point being made and some videos, visit Daryl Lum’s blog at: https://www.daryllum.com/good-example-bad-property-investment-singapore/