Investing in Tiong Bahru privatised flats: The allure and the pitfalls
Last November, Singaporean property investor Peter Chiu was shopping for a flat in Tiong Bahru. After visiting several flats, he made an offer on a 990 sq ft unit on the third floor of Block 57, located above Tiong Bahru Bakery on Eng Hoon Street. The former four-room SIT (Singapore Improvement Trust) flat had been renovated by the previous owner, an interior designer who had owned it for 20 years. She had knocked down the walls of two bedrooms and converted the unit into a spacious one-bedroom apartment.
Chiu paid $928,000 for the renovated, privatised flat, and when he put it up for lease in late December, he secured a tenant within a fortnight. “I had a lot of enquiries, and three offers on hand,” he relates. “I have never encountered such a scenario, and I have invested in a lot of different types of properties over the years.”
In fact, all three offers came from expatriates. The tenant he eventually agreed to lease the apartment to is an Italian expatriate who made an offer within a day after viewing the unit. The agreed rent was $4,000 a month, which translates to a gross rental yield of 5%, based on Chiu’s purchase price.
Elena Ang, associate district director at AAG division of OrangeTee, brokered the sale of the unit to Chiu. Ang has been handling the rental of the unit at Eng Hoon Street on behalf of the previous owner for almost 20 years. “It has always been easy to rent out,” she says. “For the past 20 years, the rental rate has typically been between $3,400 and $3,800 a month.”
The previous owner was an expatriate in Singapore who has since returned to her home country. She had purchased the unit for just $200,000 two decades ago, Ang relates. “The area has changed a lot in the last 20 years,” says Ang. “Before, a lot of the shops were rundown, and there were no cafes. There was no Tiong Bahru Bakery then. Now there are so many hip cafes in the area.”
High rental yield
Half a dozen other flats in Tiong Bahru were put up for sale around the same time that the Eng Hoon Street unit entered the market. There was another unit at Eng Hoon Street, as well as Chay Yan Street, Guan Chuan Street and Tiong Poh Road. And they have all been snapped up too, notes Chiu, who is also a realtor and an associate marketing director at Huttons Asia.
“A lot of Singaporeans are exploring investments in Tiong Bahru,” says William Tan, marketing director of Singapore Realtors Inc (SRI). “Although capital gains are slower, the rental yield is high.”
The SIT units have a wide variety of sizes and layouts — from studios to bigger four-room units with balconies. “They are popular with those in the creative industry, millennials, professionals and LGBTQ (lesbian, gay, bisexual, transgender,
transsexual, queer). They attract those who are looking for something unique,” says Tan. He recently brokered the sale of a 550 sq ft, one-bedroom unit at Chay Yan Street. As the unit is nicely renovated, it fetched $635,000 ($1,155 psf).
The main draw of these units is that they are the first public housing flats built in Singapore, between 1936 and 1940, by the former SIT — the predecessor of HDB. They were privatised in the 1960s, and foreigners are eligible to purchase too. The 99-year leases on these apartments start from Jan 1, 1967. Hence, they have a remaining lease of 45 years.
Due to its heritage and architectural significance, URA gazetted 20 SIT blocks from Block 55 to Block 82 in Tiong Bahru for conservation in 2003. Another 36 shophouses fronting Outram Road were also conserved in 2003.
Alvin Yeo, a realtor with Knight Frank who has been focusing on the Tiong Bahru area for the past 17 years, reckons there are only 700 of these privatised SIT flats in the conserved area.
Having grown up in Tiong Bahru, Yeo had moved away only to return to the neighbourhood after starting a family. “When I moved back to Tiong Bahru in 2004, I began to look at the place with a fresh perspective,” he says.
Jump in prices
Since 2H2020, Yeo has seen a huge increase in interest and transactions in Tiong Bahru. “Prices had actually softened to about $800 psf just before the start of 2020,” he relates. “Then Covid came and everyone thought it was the end of the world. But the market returned to life again in the second half of last year.”
Yeo has been keeping track of transactions in Tiong Bahru. Recent privatised units have changed hands at prices in the range of $900 to $950 psf. Asking prices are now above $1,000 psf, he notes. “With the sudden jump in prices, a lot of owners think it’s a good time to sell,” he adds.
Yeo is marketing a loft unit on the top floor of the five-storey, signature block on Yong Siak Street. “Back in the 1930s, it was the tallest block in the neighbourhood,” he says. There are only 16 such units in the neighbourhood. The owner has removed all the internal walls to create an expansive 1,001 sq ft space. The unit is currently tenanted until July 2022. It is on the market for $1.05 million ($1,049 psf).
Another unit that Yeo is marketing is a groundfloor unit at Tiong Poh Road. It has a floor area of 1,260 sq ft, with 5m ceiling, and a covered airwell. The unit, which has been fully restored and renovated, is on the market for $1.98 million ($1,571 psf).
The privatised flats in Tiong Bahru are typically around 900 to 1,000 sq ft, says Yeo. Units that have been renovated can command asking prices above $1 million, with average monthly rental rates hovering in the $4,000 to $4,500 range. Unrenovated units are priced about 20% lower, at around $800,000, with monthly rental rates averaging $2,500, he estimates.
“For every five home buyers of these privatised units, only one is likely to be an owner-occupier,” says Yeo. “The other four are investors.”
Premium of privatised over HDB flats
The privatised flats in Tiong Bahru command a 20% premium over their HDB counterparts just across the road at Blocks 17 to 50. Built during the post-war years (between 1948 and 1951), these HDB flats have 99-year leases from 1973. Hence, they have 51 years left on their leases — six years more than the privatised flats, Yeo points out.
As these flats are under the purview of HDB, buyers are bound by the HDB rules such as minimum occupation period (MOP) of five years, Singapore citizens (or permanent residents of at least three years), having to buy as a couple or a family unit, or to be at least 35 years old if buying as a single. Hence, there is a 20% price disparity between the HDB flats and the privatised units, notes Yeo. For instance, an unrenovated 990 to 1,000 sq ft, privatised unit is likely to have an asking price of $800,000 today; while a similar-sized HDB flat will be indicating $600,000. “The buyers of the HDB units are predominantly owner-occupiers, and generally older, in their mid-40s and 50s,” he observes.
When it comes to getting a mortgage, however, the remaining lease matters. “Banks have guidelines on financing old properties,” says Eugene Huang, founder and director of Redbrick Mortgage Advisors. “They generally require a remaining lease of between 20 and 30 years at the end of the of the loan tenure.”
MSR, TDSR
For a property with a remaining lease of 45 years, such as the privatised Tiong Bahru flats, a young home buyer will not be able to borrow up to 30 years. Instead, the loan tenure would be between 15 and 25 years, depending on the bank providing the financing, adds Huang.
Monthly instalments will be higher for shorter loan tenure, which makes total debt servicing ratio (TDSR) of 60% of gross monthly income more of a challenge, notes Huang. If one were to borrow $1 million on a 30-year loan tenure, and had no other financial commitments, the monthly income has to be at least $7,500. If the property is old and the borrower’s loan tenure is halved to 15 years, the monthly income threshold would be $12,000.
However, there is a difference in the borrowing limits between the HDB and privatised units, Huang notes. HDB properties have to abide by the MSR or mortgage service ratio, which is capped at 30% of a borrower’s gross monthly income. In order to borrow a million with a loan tenure of 30 years, the monthly income requirement would double to $15,000. A loan tenure of 15 years would require a monthly income of at least $24,000, Huang estimates.
One would assume that relative to their HDB counterparts, privatised-unit owners at Tiong Bahru would have less to worry about in the face of a shortening lease. “On the contrary, the owners of these privatised units should worry more, because these blocks are conserved, which means there won’t be redevelopment possibilities,” Huang observes. “There is every likelihood that the government could take back the properties at the end of the lease. Those under HDB have at least a glimmer of hope of SERS [Selective En Bloc Redevelopment Scheme].”
‘Not bothered’
Huang is of the view that “it’s going to be a straight-line depreciation” from here on. “I can’t think of any upside possibilities,” he says. “Rental yield should be quite decent at about 4% based on listing prices.” Assuming an investor holds the property to the end of the lease tenure, he would be able to take back about double what he paid in the next 50 years — with inflation adjustments, he notes.
Property investor Chiu concedes that he was “worried initially” that there were only 45 years left on the lease of his Tiong Bahru flat. “Now I’m not bothered by the lease as I see value in the property,” he says. “With prices of new properties appreciating, the older properties will see prices move up too.”
What’s more, these privatised flats in Tiong Bahru are rare, with demand outstripping supply, adds Chiu.