MOP Matters — When Do EC Capital Gains Plateau?

Every Executive Condominium (EC) owner knows that the Minimum Occupancy Period (MOP) matters. The MOP restricts sales and rental activities. Within the 5-year MOP, EC owners are not allowed to rent out their entire property, though renting out rooms are permissible. EC owners face a dilemma: sell once the MOP is over, or wait a little longer? This seems like a deceptively simple question, but there is more to it than meets the eye. In order to better resolve this dilemma, we rephrase the question to look at when EC capital gains plateau. Having this information would help EC owners optimise their selling decision.

This article will cover why the MOP is important, the plateauing patterns for capital appreciation, and the opportunity cost of holding on to an EC after MOP. If you are a current EC owner or looking to buy resale ECs, this article will help you make a more informed decision. Regardless of who you are, we hope that this article will be useful for your property journey.

 

The Executive Condominium Market

Buyers of new EC launches are typically described by the existing press as a “sandwiched” class of buyers. Their income levels put them in a spot where HDBs are not a viable option and Private Condominiums cannot be bought without potentially jeopardising personal finances. Technically, ECs are designed for this group of home buyers. However, these home buyers have to wait a very long time before they can liquidate their property. New EC launches usually take 3-4 years to reach Temporary Occupation Permit (TOP) and another 5 years after to fulfil the MOP.

The subsidised nature of ECs  is why we see ECs appreciate handsomely, catching up with neighbouring condominiums and perhaps outperforming them. Having fulfilled the EC purchasing criteria set up by HDB, first-hand owners enjoy the benefits of having housing grants and other subsidies. This helps them buy at a much lower price than market alternatives and have a higher potential for making a profit when selling.

 

 

Elaborating more on the dilemma we mentioned earlier, EC owners want to reap all the benefits from waiting but are not sure when exactly to let go of their property. After waiting for 9 years, what’s another 2 or 4 more years of waiting? We will explore both options: hold and sell. Thereafter, we will evaluate which group of EC owners would benefit the most from either decision. Afterall, this is a huge decision. Whether holding or buying is for you would depend heavily on the aspects of personal finances, priorities in life, and investment objectives.

We will now move on to the bulk of our article covering why the MOP period is important, the plateauing patterns for capital appreciation, and the opportunity cost of holding on to an EC after MOP.

 

Why does MOP Matter?

MOP matters more than just to keep sellers in check. ECs are subsidised housing much like BTOs and are meant for the owner’s occupation. Hence, the minimum 5 years MOP. Once released on the resale market upon MOP, owners would earn almost all of that “subsidised portion” and more depending on market forces. MOP matters because the 9 years of capital gains are held back and released all at once when it enters the market. This change in liquidity creates a dramatic effect in the price movement of the property with much higher volume. Naturally, we expect the MOP to have a significant effect on the capital gains of ECs.

As the EC turns liquid, we also see that the number of transactions takes off. The surge in demand and supply both meeting the market allows the price to be more accurately valued. Market observers who have kept keen watch over the EC project may jump in at the chance to buy right after the MOP. To say the least, the moment right after an EC MOP is a dramatic one.

The difficult part of analysing MOP among ECs is the aspect of timing. Different ECs end their MOP in different years. The property and financial markets perform differently every year, not to mention the changes in cooling measures every now and then. Not to mention, every EC is different. They have different locations, amenities, and convenience factors that influence the value of the property. That being said, it is difficult to attribute capital gains solely to the MOP event, since all these different time and space factors influence the change of the property’s value.

Thus, to overcome this difficulty in analysis, we focus on using case studies to help us reach a contextualised understanding of how the MOP affects capital gains and the relative pricing of the EC with comparable properties. We also group ECs that MOP in a similar time frame to see if there’s any clear MOP timing effects on the aggregated scale.

 

Why does EC Price Plateau?

EC might experience a capital gains plateau because of a few reasons:

1. Status ranking of EC

2. Capital gains distributed to first owner

3. Tenure & shrinking buyer base

First, it is clear from policy making and social perspectives that ECs lie between HDBs and Private Condominiums (condos) as a property class. This status ranking of EC contributes partly to the plateau. When an EC enters the resale market, the buyers would be comparing resale ECs with that of Private Property (resale and perhaps new launches). This is because they are the nearest comparable property alternatives for investors; since the second buyer does not need to go through the MOP again and also because of the absence of the income ceiling. As prices get higher, and the disparity gap between condos and ECs narrow, condos get more attractive compared to EC peers. Even if we do not consider status, condo alternatives of a similar launch period, will be newer and have a longer remaining lease as compared to ECs, since condos do not have the MOP requirement.

Next, ECs have a skewed capital gains distribution. The first owner benefits the most, and rightfully so, since they are required to hold on to the property at least 9 years before selling. However, if the pie is sliced this way, there is much less capital gains to be had for subsequent owners of the EC. A caveat here is that an EC project with great location, amenities, convenience factors can still continue to appreciate well for subsequent owners if there are no reasonable alternatives nearby. If the EC is near an MRT, it would be extremely rare as most EC land parcels are created not near to MRT stations. Projects like Esparina Residences beside Buangkok MRT is an example.

Our last point on why EC capital gains plateau is because of the remaining tenure and shrinking buyer base. As mentioned in the first point, the MOP takes up 5 years of the lease. This is enough for at least one ownership cycle. Because of this, for subsequent owners, the buyer base would shrink. Perhaps, at quite a substantial rate. This coupled with the threat of condo alternatives could potentially dry up the demand for ECs in the later years of the project. The caveat from our second point still applies to this.

 

Data from Selected MOPs

Now let’s look at the data. We look at 3 batches of selected MOPs in order to have some contextualised understanding of the situation. The first batch consists of 2004 MOPs (Eastvale, Westmere, Chestervale), the second batch consists of 2008 MOPs (Bishan Loft, Lilydale, The Dew), and the final batch consists of 2018-2019 MOPs (Prive, Esparina Residences, Austville). The objective of using these 3 batches is to attempt to differentiate MOP effects from the effects of cooling measures on the general property market, which has an overwhelmingly strong effect. We use 2 batches of older ECs so that we have the data across time to observe how the plateauing pattern plays out in reality.

 

 

 

 

In order to make sense of the 3-batch MOP analysis, we first need to establish a comparable baseline. Cooling measures were introduced in January 2013. We see the effects in the above aggregate performance graphs of ECs and Condos. The measures resulted in a property slump (in both price and volume) from 2013 to approximately 2017 and stabilised prices. Subsequently, we see a rise in price and volume after 2018. We shall compare this 2013-2017 cooling measure plateau to the effects of MOP plateau.

 

 

 

For the analysis of the MOP batches, ignore the polynomial trend line as it is an oversimplified fit to the data. From our first selection of 2004 MOPs, we see a positive linear trend from 2004 to 2013. This trend subsequently breaks and forms a plateau from 2013 to present. This is not surprising and is in line with the general performance of the EC market. However, from 2018 to present, the prices of these ECs have stagnated while the general price and volume has recovered in the EC market. The MOP plateau effect here is observed 14 years after MOP. However, the initial 9 years of capital gains were driven more by the overheated property market rather than the MOP alone.

 

 

 

We see that the effect of the cooling measures are consistent with the second batch of 2008 selected MOPs. Prices of ECs in this batch enjoyed 5 years of capital gains from 2008 to 2013. The price plateaus from 2013 to 2020 and picked up slightly afterwards. The re-establishment of the upward trend post-2020 is more evident for Lilydale and Bishan Loft. Again we see that post-MOP capital gains looks to be driven more by the general market sentiment rather than from the MOP pattern itself. However, from this batch we observe that ECs which are younger and arguably better locations have a chance of re-establishing the upward trend after the effects of the cooling measures waned.

 

 

 

We finally arrive at our final batch of 2018/2019 MOPs. Austville had its MOP in 2019 whilst Prive and Esparina Residences had it in 2018. We see that despite having their MOP after the effects of the cooling measure, there is some residual stagnancy. If you look closely again at the general EC trend from the start, there is still a period of stagnancy from 2019 to 2020. This is due to another cooling measure introduced in July 2018. We see that the post-MOP appreciation is muted. The EC market only showed marginal capital gains, with a non-trivial amount of transactions falling through the cracks and potentially making losses. Post 2020, we see the upward trend resumes. Though this is again subject to the cooling measures introduced in late 2021.

Usually, EC will see close to no losses due to the low launch price of EC at the balloting stage in the past. However, in recent years, the EC are launched at a higher psf. For example, Piermont Grand EC was launched at 1100 psf. The transactions falling through the cracks here might be the penthouses with a large size and lower psf. Or they could be owners that had special approval to sell before MOP. Pre-MOP sales usually see a lower psf transacted because the valuation by banks are not yet in line. In the case of batch 3 ECs in our article, Prive, Esparina Residence, and Austville had no unprofitable transactions. Thus, it is a rather rare occurrence to fall through the cracks.

This finding might have some of you scratching your head. What happened to the earlier 3 reasons why ECs capital gains plateau? It has got nothing to do with it! The simple answer to this question is that it is near impossible to divorce the effects of those reasons and that of the general market trend. It is more likely that ECs capital gains are determined by general property market sentiment rather than purely their MOP date. This is evident from how we see the 3 batches of ECs have their capital appreciation follow the market trend rather than a fixed number of years after their MOP timing (first batch – 9 years, second batch – 5 years, third batch – marginal).

Opportunity Cost – Hold or Sell?

Hold is not gold. Based on the analysis in the previous section, the capital appreciation is driven by market sentiment rather than holding on past the MOP date. Therefore, the decision to hold should be motivated by market trend and property traits rather than simply MOP timing. This resolves a lot of the earlier dilemma on whether holding the EC past MOP is worth it. It becomes a problem of opportunity cost rather than simply a HODL (hold on to dear life) game. The annualised returns from capital gains for a post-MOP EC is approximately 2-3% from batch 3. For this amount of gains, the main trade-off for holding on would be the (a) decline of transaction volume and (b) the gains from investing in an alternative property.

 

 

 

Looking at the transaction volume for batch 3 ECs, we see a spike in volume around the MOP period and it rapidly declines thereafter. This is an important trade-off because lower transaction volume can have three main implications. First, a shrinking pool of buyers over time due to the shorter remaining tenure and more attractive alternatives for investors. Second, lower transaction volume makes it more difficult to arrive at an accurate valuation of the property. Lastly, lower transaction volume makes it more difficult to find a desirable buyer in order to liquidate the property. These factors are not trivial. We also see that the lower transaction volume is coupled with periods of price volatility across 2020 to 2021. However, we should not jump to the conclusion of selling just yet. While we have discussed the (a) decline of transaction volume, we will now move on to discuss (b) the gains from investing in an alternative property.

We now compare the performance of the EC with neighbouring Condos to have a picture of the relative performance of ECs. Let’s examine Esparina Residences from batch 3 and a neighbouring Condo, The Quartz.

 

 

Looking at both charts, we see that Esparina Residences had a marginally higher growth rate by 2%, but performed better most of the time on price. In terms of transaction volume, the EC wins hands down due to the MOP effect. However, the transaction volume of EC declines thereafter, eventually equalising with Condos.

We look at another example of Prive and nearby condos Parc Centros and A Treasure Trove. Here are the charts:

 

 

In the price chart we see an interesting trend. The better a condo performs at price, the worse it performs in growth rate. This may sound paradoxical but it is not. The higher the price, the harder it is to continue to appreciate. That is because most of the capital gains have already been sliced and taken by the previous owners. In this case, we see that the EC has a much better growth rate by the margin of 20-22%. This is significant because Prive is actually located further away from Punggol MRT as compared to the other two condos. The transaction volume follows a similar trend as we have discussed.

The comparisons lead us to the conclusion that in the 4 years immediately after MOP as compared to nearby condos, EC outperformed Condos and sometimes by a large margin. However, is this growth sustainable? Will it taper when we compare it on a longer time horizon? In order to answer this question, we compare the performance of 11-20 year old ECs (to control for the MOP effect) with Condos and Landed properties.

 

 

These charts more accurately reflect the opportunity cost of holding on the EC past the MOP period. Over the period of 18 years, Condos outperformed ECs by a margin of 7% and Landed properties outperformed ECs by a margin of 95%. That is a significant opportunity cost to bear for holding on to the EC and suffering from lower transaction volume as well. The volume chart here simply shows us the number of Condo alternatives in transacted volume when compared to ECs past MOP. The difference is stark and the competition with Condo alternatives is fierce.

Nevertheless, the decision to sell your EC (or buy one) should be driven by a deeper understanding of the property market sentiment and your personal financial situation. This article hopes to give you a better understanding of how MOP truly relates to the price and volume performance of ECs.

 

Closing Thoughts

We find that the MOP plateauing effect strongly affects transaction volume rather than price, which is driven more by market conditions. Overall, there is limited evidence pointing to MOP as the cause of EC capital gains. It is more likely that market sentiment and cooling measures have a larger part to play. There are also limited benefits to holding onto ECs due to the high opportunity cost of low transaction volume and better long term performance for Condos and Landed property as compared to a post-MOP EC.

From an investment standpoint, we support the sell decision rather than the hold decision. This is of course barring any unique situation arising from the property traits, personal financial situation and life goals. If you have any questions about the specific property you’re holding or if you want customised analysis and advice to your situation, you can contact our experts here.