Singaporeans have a penchant for properties. It is not difficult to understand this, because, land is scarce in Singapore and we often hear stories about people making a lot of money from properties. However, are properties really better investments than shares?

A week ago, Today published an article by OrangeTee titled ECs: Gaining Value Over the Long Term, which shows the gains by Executive Condominiums (ECs) at the end of the Minimum Occupation Period (MOP) and upon privatisation. The results are reproduced below for easy reference.

The results show that at the end of MOP, which is approximately 7 years from the launch of the EC, not all ECs make money. The average gain from the 21 ECs listed in the study is 5.9%, while the median gain is -13.0%. As Today pointed out, at the end of MOP, ECs are not "sure-win" investments. However, upon privatisation, which is another 5 years from the end of MOP, the average gain of ECs improves to 64.2% while the median gain improves to 43.0%.

How do the above gains compare to that of the Straits Times Index (STI) over the same period, assuming that an investor chooses not to invest in an EC but wait until the end of the year and buy the STI? The results for each batch of ECs and the corresponding returns from STI at the end of MOP are shown below.

In the figure above, all ECs having the same year of launch and MOP completion are grouped together. Using the first batch "1996 - 2004" as an example, the first figure (i.e. 1994) shows the year of launch while the second figure (i.e. 2004) shows the year of MOP completion. Together, they show the holding period from launch till end of MOP.

From the figure above, not all ECs make money at the end of MOP. Those launched before 1999 lost money while those launched after 1999 made money. Compared to shares, all batches of ECs underperformed the STI except for the batch launched in 2001 and MOP completed in 2008. Overall, for the 21 ECs studied, ECs returned an average of 5.9% while the STI returned an average of 50.8% over the 7-year holding period. Shares outperformed ECs by 44.8%. 

Fig. 3 above shows the performance of ECs and shares at the end of privatisation, which is approximately 12 years from the launch of the EC. The performance of ECs upon privatisation improved significantly compared to that at the end of MOP. Compared to shares, there are 3 batches of ECs that outperformed the STI, namely, the 1999-2010, 2001-2013 and 2001-2014 batches. However, overall for the 21 ECs studied, ECs still underperformed the STI. The average return by ECs is 64.2% while the average return by STI is 101.5% over the 12-year holding period. Shares outperformed ECs by 37.2%.

The above comparison involves only ECs and not other condominiums. However, according to the study reported by Today, new ECs have an average discount of about 20% compared to new condominiums. This discount reduces to 9% at the end of MOP and 5% upon privatisation. Thus, if ECs, with their price advantage over mass market condominiums, already underperform shares, it can be inferred that mass market condomiuniums will also underperform shares. 

It should be noted that the above comparison does not include rental yields by ECs and dividend yield of STI. The average rental yield is around 3-4% while the average dividend yield is 3%. Thus, the exclusion of rental yield and dividend yield does not significantly affect the outcome of the comparison.

Having said the above, although properties generally underperform shares, there are vintages for both properties and shares. Properties bought in certain years tend to perform better than properties bought in other years. Shares have the same characteristics. Thus, there will be periods when properties will outperform shares. It is therefore important to be selective and buy properties and shares when they are undervalued. 

In conclusion, the comparison shows that, contrary to popular perceptions, properties are, in general, not better investments than shares. The main reason for the popular perception is likely because properties are usually bought with bank loans, thus magnifying the gains on the downpayment. On an unleveraged basis, properties are not better investments than shares.

See related blog posts:

• Properties and the Population Picture
• Properties, the Population White Paper and the Land Use Plan
• Properties