Introduction To Asset Progression
Asset progression is not something new in the property market. Nor is it a fancy word for property agents to influence people to sell their homes and purchase another one. Some Singaporeans have successfully made use of asset progression to build their retirement nest egg and live happily ever after. So, what exactly is asset progression?
Most Cities Around the World Always Have High Real Estate Prices
Unlike the rest of the world, Singapore has a unique residential property market. If you happen to visit major cities around the world and look at their property prices. The real estate prices in the cities are always significantly higher compared to the suburbs. So, the question is this, how does the government keep housing affordable in this island city-state known as Singapore?
HDB is the Main Reason Why Housing Is Kept Affordable In Singapore
To this end, the Housing Development Board (HDB) was started in 1960. The objective was to provide affordable low-cost housing to Singaporeans. Today, around 80% of Singaporeans stay in an HDB and is the cheapest and most affordable type of residential housing in the market. The HDB is also the most basic “residential asset class” you can choose to live in. I will list down the various types of housing available to give you a better idea. To put things into perspective, the prices of each of these classes did not intersect in the past. Of course, today with our million-dollar HDBs and $73 million penthouses, there is some blurring of the lines.
From Most Basic to Most Sophisticated
2. Executive Condominiums
3. Private Condos
4. Landed Property
What Is Asset Progression?
The term asset progression refers to the selling of one class of asset and moving to the next one. Think of it like climbing a ladder. Some people call this upgrading, but there is a much more important reason why some people do this. Asset progression gives you several financial options later in life. If you do not plan for asset progression, these choices are not available to you. It is as simple as that. To give you a better idea, I will use an example for illustration.
Young Singaporean Couple Buys a BTO
A BTO or built to order flat is one of the most affordable forms of housing available to a young married Singaporean couple. What’s more, there’s even a subsidy in the form of the additional enhanced housing grant. Assuming this young couple bought a $300,000 BTO. With the grant, they might only pay $250,000. Now, $250,000 is not a small amount, but it is also not a very large sum of money either by today’s standards. After booking the unit and staying inside for five years, some couples can fully pay off their mortgage loan. By then, the BTO would have gone up in value and would likely fetch around $500k in the resale market.
The Same Young Couple Sells the BTO and Buy An EC
Previously, this asset progression ladder was easier to climb. Upon reaching MOP of their BTO, they now decide to go and book for an executive condominium. In the past, there was no need to pay the resale levy. Since prices of ECs are always lower than that of neighbouring condos, buying such ECs are no brainers. However, with the introduction of the resale levy for 2nd timers and the higher land prices for some of the latest EC plots, you would need to be extremely cautious in finding out which ones have a capital upside.
Let’s assume we are back in the past and the same couple decides to buy an EC that is around $800k. Since they have already fully paid the HDB, they would need to take a loan of $300k. At this stage, the couple is likely in their thirties.
Couple Now Sells the EC and Has A Few Options Open to Them
After the EC obtains its minimum occupation period, the couple is now in their forties. Again, with a loan of $300k, it is not difficult to pay off the entire sum during this time. By then, the value of the EC would have caught up with the neighbouring condos. Assuming the EC was 20% undervalued plus a 2% increment per year, you would be looking at a market value of $1.218mil.
Now, with a fully paid property that is $1.218 mil, there are several options open to you. You can sell this EC and take the sales proceeds to purchase another private condo that has a significant capital upside. Or sell this EC and purchase two condos instead. One under the husband’s name and the other one under the wife’s name. What you intend to do at this stage depends on your risk appetite and your financial ability. At this point, this middle-aged couple should be in middle management.
Retired Couple with Plenty of Choices Available to Them
Depending on what choices you made in your forties, you would be looking at either one or two fully paid private property at the happy retirement age of 65. Twenty years is a long time, assuming the property appreciated 2% annually, your $1.218mil private condo should now be worth $1.811 mil. At this point, even if you only own one private property, you have plenty of options. Here’s what you can do
- Sell the condo, take the sales proceeds and rent instead. With $1.811mil, you can rent for the rest of your life and still travel around the world. Or put the funds in a fixed deposit to collect the interest.
- Sell the condo, buy a resale HDB and enjoy the sales proceed.
- Rent out (Or Sell) the condo and stay in a country where the cost of living is cheaper.
- Pass the asset to your children so they can go and pursue their own goals.
Do You Prefer to Have Options or None at All?
If you have already acquired two properties, there are even more options available to you. However, if you do not plan, your options are limited. Assuming you did not intend for asset progression and continue to stay in the same BTO for 40 years. Firstly, it is almost impossible for this BTO to appreciate to $1.811mil. Secondly, the lease decay issue will start. I have written on this in my earlier article on “When do HDB Flats Start Depreciating?”. At this point, what can you do? Sell the remaining tail end of your lease back to HDB under the lease buyback scheme? Rent out one room for additional income? Cash-out and downgrade to a smaller HDB? How much sales proceeds can you get from this? Do you still have sufficient money to do the things you love?
Real Estate Can Be Part of Your Retirement Planning! Start Now by Talking to Us!
In a recent study conducted by OCBC, they found out that 1 in 3 Singaporeans do not invest and most of them are financially unprepared for retirement. In this scenario, we have shown that through asset progression, it is possible to plan for retirement while changing from one asset class to another. However, the problem today is that not all condos you buy will appreciate. Purchasing the wrong one can be extremely costly and will seriously affect your retirement objectives. To find out how we can help you obtain your goals and pick all the winners, do contact us for a free consultation today.
Article contributed by Jerry Wong
Jerry Wong is a realtor with Huttons Asia Pte Ltd. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home or make that capital upside in just a matter of months. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following
- How certain factors affect real estate prices. (Using historical transactions as references)
- Applying lessons from history to determine if a condo has the potential for upside or not. These condos can be those under construction, resale or the very one you are staying in right now.
- Or just prepare the toughest question you have on your mind! If it is interesting enough, the answer will be in a blog post and shared with everyone!
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