Are ECs a better long-term investment than condos?

Prices of executive condominiums (ECs) do catch up with private condos after the initial five-year minimum occupation period (MOP), and even more so when they are fully privatised 10 years after purchase.

A study by OrangeTee has found that the average price gap between new condos and ECs starts at around 20 per cent, due to the sales restrictions that apply to ECs, as well as their lower land and construction costs.

But upon fulfilling the MOP and at privatisation, the discount narrows to 9 per cent and 5 per cent respectively.

At the end of the MOP, ECs can be sold in the open market to Singaporeans and permanent residents; upon privatisation, ECs can be sold to foreigners.

This is not to say that buying an EC is a sure-profit investment, as history shows that much still depends on the initial purchase price.

By matching caveats at 21 EC projects already privatised and analysing their profits made at the end of five and 10 years, the study found that 13 projects made a loss after five years, mostly because they were bought at the boom period before the Asian financial crisis. The remaining eight projects managed gains of over 20 per cent.

But at privatisation, all the EC projects became profitable. How much money owners made depended on the ECs’ locational attributes and surrounding supply at the time of sale.

“Based on historical data, first-hand owners of currently privatised ECs are sitting on considerable gains,” the report said.

The report also alluded to a trend that The Business Times had highlighted in an article in January – that increased vacancy rates may be a sign that buyers are starting to treat ECs as an investment product, as young-couple EC buyers continue to live with their parents after marriage while waiting for EC prices to re-calibrate over time before they sell.

OrangeTee said this trend is plausible. But its study found something even more surprising. Comparing between buying an EC and a private condo and holding each for 10 years, the report said that the EC could in fact be the better long-term investment due to their higher internal rates of return over 10 years.

This is because of their subsidies and lower prices compared to private condos. Also from year six onwards, entire EC units are allowed to be rented out, and their rentals tend to be on a par with private condos’. This helps to significantly defray their holding costs.

The hypothetical study assumed a 1,100-square-foot EC home bought for S$875,000, and a comparable condo for S$1.09 million.

The hypothetical couple has a household income of S$14,000, with a not very financially prudent loan-to-value of 80 per cent for 25 years at a fixed rate of 2.5 per cent per annum.

Rents for both units are fixed at S$3,000 per month. To simplify matters, other costs such as stamp duties, maintenance fees, and taxes were not considered.

At the end of just five years, the private condo proved to be the better buy, because the EC was not able to offset its monthly mortgage payments with rental income, as regulations forbid renting out the whole unit. This dampened its otherwise stellar capital appreciation.

But once rental restrictions are lifted, the EC quickly outperformed the condo.

Asked if the findings, which support an investment case for ECs, mean that the partly state-subsidised housing designed for the “sandwiched class” home buyer has become irrelevant, OrangeTee’s research analyst Celine Chan said no.

“(This is) given the significant price gap between ECs and private condos. ECs provide an affordable option to HDB upgraders or first timers who aspire to achieve a higher standard of living. Though some may plausibly be buying ECs for investment, majority are buying them for their own occupation,” she said.

BT – 25 Feb 2016

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