Recently, Mr. Sun Tongyu, the co-founder of e-commerce giant Alibaba, bought a penthouse in the Le Nouvel Ardmore for $51 million, which translates to an impressive $3, 676 price per square foot.
SRX Property defines an ultra-luxury property as a residential home valued at $20 million or greater.
According to SRX Property, Mr. Sun is one of only eleven buyers of ultra-luxury properties in 2015.
In comparison, there were 64 ultra-luxury transactions in 2010.
What makes Singapore attractive to ultra-luxury buyers?
There are many reasons, including economic stability, strong property rights, and the location of Singapore within Asia.
For example, there is little doubt that one reason 2010 was a high water mark for ultra-luxury property deals was that overseas investors were looking for a safe haven to protect their money from the financial volatility of the world’s financial markets.
But, there is another important consideration when investing and that is the Singapore dollar.
When an overseas buyer invests in a Singapore property, he (or she) is converting his home currency into Singapore dollar. As such, he is taking a currency bet.
As you can see from Quadrant A in the Currency Bet Outcome graph, what the buyer wants to happen is for both the value of his property and the Singapore dollar to increase. If this happens, jackpot!
First, he makes money on his Singapore property. Then, he converts his Singapore dollars into his home currency and makes more money from the currency differential.
The worst outcome is Quadrant D. A drop in property value and a weakening of the Singapore dollar deliver a double whammy. Not only does he have less Singapore dollars than when he started, but he converts his Singapore dollars into less home currency.
The unknown outcome occurs when property value and the Singapore dollar move in opposite directs to one another. (See Quadrant C &D.)
Whether the investor comes out ahead or loses depends on which of the two variables had the stronger positive movement.
In order to illustrate, let’s look at a hypothetical transaction that was based loosely on an actual transaction in Sentosa. (The currency has been changed but the principles of the transaction are reflective of the actual situation. Also, the illustration doesn’t account for transaction costs, taxes, etc.).
In June 2012, a Japanese buyer exchanges 1.25 billion Japanese Yen (JPY) for $ 20.2 million and buys a house in Sentosa. (Exchange rate: 1 SGD = 61.96 JPY.)
Almost two years later, during the property market’s downturn, he sells the house at $ 17.0 million.
This results in a loss of $ 3.2 million (i.e., 20.2 minus 17).
He then changes the $17 million into JPY, which gives him the SGD equivalent of 1.37 billion JPY. (Exchange rate: 1SGD = 80.76 JPY.)
His net profit in Japanese Yen is 1.37 billion minus 1.25 billion or 120 million JPY, which is about $1.5 million.
In this case, despite the fact that he sold the house at a loss, he made a profit.
Now, back to Mr. Sun. Without knowing him or the details of the transaction, it looks like a shrewd bet.
First, he has bought after the Cooling Measures have dampened the market, so he has likely bought near the bottom.
Second, even though he is a Chinese citizen and a Singapore permanent resident, he likely bought the penthouse using wealth originally accumulated in Chinese Yuan. Not only does he diversify his Chinese holdings by owning this Singapore penthouse, he stands to benefit from a strengthening of the Singapore dollar.
However, when it comes to currency movements, there’s no guarantee that Mr. Sun will win. As is the case with many other investors in Singapore’s ultra-luxury property market, Mr. Sun is making a currency bet. Only time will tell the outcome.