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Ways to invest in properties with higher-for-longer rates

Felicia Tan
Felicia Tan • 5 min read
Ways to invest in properties with higher-for-longer rates
There is still a mismatch between buyers’ and sellers’ expectations in the higher interest rate environment, says Samuel Lee of Fraxtor. Photo: Albert Chua/The Edge Singapore
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Transaction volumes in Singapore’s property sector are expected to stay low due to prolonged high interest rates, says Samuel Lee, CEO of Fraxtor Singapore, a blockchain-enabled real estate co-investment platform.

The latest official flash estimates for 1Q2024 indicated a 20% q-o-q drop in private residential properties changing hands. “There is still a mismatch between buyers’ and sellers’ expectations in the higher interest rate environment,” says Lee at The Edge Singapore’s Mid-Year Investment Forum 2024 on May 25, held at Guoco Midtown. “Buyers cannot meet the sellers’ asking prices because of the higher costs. So, volumes will still be muted.”

“We see weakness in the core central region (CCR). The rest of the central region (RCR) and the outside central region (OCR) have been a bit more resilient, but as the gap narrows, CCR will once again come back,” he says.

Lee also observes that pick-up rates for new launches here are still “positive” but softer. “For the right products, we still think there is a lot of potential, so it’s very project-specific.”

Among projects with potential, are “unique” ones such as integrated developments due to the work, play and live situation in a post-Covid-19 world.

“Unique projects with a potential increase in capital values through the development of the area and the scarcity of the project will continue to do well,” adds Lee.

See also: Mapletree sells student housing property in US

Cost of borrowing

In a prolonged high-interest rate environment, investors have less elbow room to leverage and therefore enjoy lower returns. “The spread between the asset yields and the interest rate or cost of borrowing is very low. Or it can be negative in most markets, even in Singapore.”

Nonetheless, investors with sufficient means should include real estate in their portfolios as a form of diversification from just equities and bonds. With interest rates peaking, capital values have room to appreciate when rates are cut, leading to higher returns in real estate.

See also: Singapore’s home prices could remain ‘flattish’; rents may drop by 5% - 10% in 2024: Bloomberg Intelligence

“If you’re able to lock in assets with longer leases ideally escalating leases and then you will guarantee some of that income in the next couple of years. When interest rates start trending downwards, you do get the upside… similar to [that of] 2021, when interest rates were at an all-time low,” he says. “Now you’re on opposite sides. So you want to lock in higher income, and when rates come down [in] the next one or two years, you benefit from that increase in the spread.”

However, not all investors can afford an investment property. This is the gap that Fraxtor hopes to fill, offering an entry into real estate at a more attainable price point via what is dubbed “fractional real estate investing”.

In his presentation titled “Opportunities in Fractional Real Estate Investing,” Lee explains that fractional real estate investing addresses common issues like cost, access and property management time. He notes that it involves buying a share of an asset that has already undergone due diligence by the platform’s team.

“You are able to access very unique and rare opportunities [such as] the Singapore landed home space… and opportunities in countries like Australia and Japan,” he says. “Ultimately, it is every investors’ goal to achieve higher returns and in these markets at the right time you’re able to achieve higher returns.”

Real estate investment trusts (REITs), a popular asset class, already offer investors the chance to own a piece of real estate and enjoy a steady payout. How are REITs different from Fraxtor’s investment method?

Lee says Fraxtor combines the best aspects of REITs and fractional real estate investing. Both options are tax-efficient and allow investors to start with a smaller sum. However, fractional real estate investing offers a wider selection of properties, enabling investors to choose those best suit their portfolio needs.

He also highlights Fraxtor’s track record of delivering 10% to 15% returns, stating that fractional real estate investing offers more stable prices and higher returns. Still, there are additional fees ranging from a subscription charge and also a “success fee” upon the exiting of a project.

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Fractional real estate investing enjoys “development upside” and “value-add plays”, unlike buying multiple real estate properties. It also doesn’t require investors to pay the additional buyers’ stamp duty (ABSD).

Like REITs, however, investors will not have any say as to how their “properties” are being managed, as the developer will do the actual management, says Lee.

In a worst-case scenario, investors must understand that they may lose everything they put in.

“Obviously [our investments] go through a very rigorous due diligence process before… we put it [on] the platform. It’s the same as coming together with a group of friends investing in one property. The returns are not guaranteed. It depends on the underlying performance of the real estate,” he says candidly. “But… our track record [has been] double-digit returns so far.” 

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