The realities of luxury property investment and why high-end homes don't always equal high returns

When it comes to the world of real estate, luxury properties hold a certain allure. For many, they symbolise the pinnacle of success, the dream house we drool over in glossy magazines, and the 'I-made-it' moment we all aspire to achieve.

It's no wonder that investors often set their sights on luxury property investment, expecting substantial returns in this glamorous arena. However, the glittering facade of luxury property investment often conceals a stark reality — especially when it comes to freehold properties.

In this article, we delve into the lesser-known drawbacks of luxury property investment as well as its future in Singapore's ever-changing market.

The lesser-known risks of luxury property investment

Contrary to the popular belief that luxury property investment always equals to high returns, the reality is far more complex. Let's take a look at the hidden pitfalls of luxury property investments:

Lack of first-mover advantage

In the world of luxury homes, being the first to invest doesn't always guarantee big profits.

You see, luxury homes are usually built in areas already known for their wealth, like Districts 10 and 15. These places are like fancy orchestras, with each house adding to the high prices.

People have wanted to live here for a long time, so prices are already very high. So, unlike new areas where prices can skyrocket, these established places don't leave much room for big price increases.

This lack of potential for big price increases makes it hard for investors to make a lot of money. Even experienced investors struggle to make huge profits in these areas.

Freehold status: Not a strong selling point in prime areas

In the posh areas of Orchard and Marine Parade, the allure of owning a "freehold" property has lost its sparkle. Why? Well, the majority of homes in these places are already freehold.

This means that owning a freehold property isn't as special because almost everyone here already has one. The feeling of exclusivity that comes with owning a freehold property is not as strong anymore.

Moreover, high-net-worth buyers usually prefer freehold properties with land, like big houses, over freehold condos. These properties are rare, and it's quite hard to buy them. Because of this, buyers with deeper pockets tend to choose these landed properties over luxury condos. This choice is making the demand for freehold luxury condos to decline.

In the future, it might become even harder to make money by investing in these types of condos because they won't be as popular anymore.

Limited pool of buyers

Another obstacle that plagues the luxury property market is the limited pool of potential buyers.

High-value luxury properties come with a hefty price tag, making them inaccessible to the average homebuyer. Even with significant discounts, serious inquiries take time to materialise, resulting in prolonged listing periods and slower sales.

The exclusive nature of these properties often means that finding the right buyer who can afford such a luxurious lifestyle is a time-consuming and challenging endeavour.

Luxury market vulnerability to cooling measures

One of the significant challenges faced by the luxury property market is its vulnerability to cooling measures imposed by regulatory authorities.

Luxury properties are often the first to be impacted, especially when it comes to foreign buyers facing high Additional Buyer's Stamp Duty (ABSD) rates (current rates stand at 60 per cent).

The constant revisions of ABSD rates create a downward pressure on the luxury segment, making it a less attractive option for investors seeking stable and profitable returns.

Properties purchased for own-stay use

One significant factor contributing to the challenges faced by luxury property investors is the tendency of these properties to be purchased for personal use rather than as investment assets. The allure of enjoying a lavish, exclusive living space often outweighs the desire for financial gains upon resale.

This unique mindset creates a scenario where owners are more concerned about living in their dream homes than maximising profits, making it challenging to predict substantial returns in the future.

Preference for modern luxury properties

Affluent buyers nowadays tend to prefer modern, luxury homes. This means older condos are not as popular as they used to be — even if they're big and have lots of space. As such, the idea that bigger means better is changing.

Families in Singapore are also changing. Before, it was common for children to live with their parents even after they grew up. But now, this is no longer the case. Families might not need such large houses.

This shift in family structure affects what people want in a home. So, there might be less demand for these big, traditional luxury homes. This change can make it harder for these properties to make money for investors. People might not be as interested in buying them, affecting the chances of making a good investment.

So, what does the future hold for our luxury property market?

Looking ahead, the luxury property market could face challenges, especially if ABSD and bank loan rates continue to climb.

But all hope is not lost.

Luxury properties with unique amenities and standout features, like unblocked views, may still attract interested homebuyers.

The overall takeaway? The property market is changing. People are not just looking for ways to make money; they are looking for homes that suit their needs and lifestyles. As such, focus is shifting from making profits to finding a forever home - and investors would do well to keep this in mind.

Wrapping up

Navigating the complex world of luxury property investment requires a deep understanding of the realities at play. While there are many challenges that come with these properties, there's no doubt that investing in some of them can still be a smart choice.

So, if you're thinking about entering the world of luxury property investment, make sure to have the right guidance - it'll make all the difference.

ALSO READ: UBS expects home price growth to moderate: What's next for Singapore's property market?

This article was first published in 99.co.