Singapore central bank’s move to dampen ‘boom and bust’ cycle will impact on London rental property investment

Singapore’s central bank has taken measures to protect its citizens from possible future rises in interest rates, ensure prudent lending by its financial institutions and reduce the likelihood of economic ‘boom and bust’ cycles. However, the move is likely to impact on how Singaporeans invest in London property, as well as how they seek finance.

The New Measures

The two new requirements are:
1. A property buyer’s monthly payments must not exceed 60% of their income.
2. Singaporeans who buy in companies must pay in cash and must not be financed by Singaporean financial institutions.

The Monetary Authority of Singapore (MAS) has commented: “The TDSR (Total Debt Servicing Ratio) will apply to loans for the purchase of all types of property, loans secured on property, and the re-financing of all such loans.”

The loan applies to an income figure which is: total basic salary + 70% of any additional income. The MAS appear to be doing this in order to prevent investors from over-gearing themselves to pay for property while interest rates are currently so low.

The Impact on London Property Investment

Clearly, the measures are designed to dampen Singapore’s housing market, where prices have increased 60% in three years while interest rates have been extremely low. However, this will probably also have an impact on investment in the UK property market, particularly in London, which continues to attract high numbers of rental property investors from Singapore thanks to its good rental yields and potential for good capital gains.

Implications for Singaporean Residents

A limit on monthly interest payments from Singaporean financial institutions will make borrowing from overseas lenders a more attractive proposition and we expect UK banks to review their lending policies as a result. However, Singapore residents will face higher interest rates and charges from banks with a bias against non-UK residents.

Property investors should be aware that, if they now decide to buy as an individual (to avoid the requirement for Singapore residents to pay in cash if buying in a company) they will be liable to UK Inheritance Tax. This was something they could previously avoid if buying in a company.

So what is the likely effect of these new measures on Singapore investors? We expect a drop of 30% – 40% in the number of Singaporeans buying UK property in the short term. However on the plus side, the requirements only apply to loans made after June 6th 2013 so will not affect Singapore residents who invested before this date.