WHY IS IT STILL A GOOD BUY DESPITE PAYING FOR HIGH PSF
Property buying these days have all turned price sensitive as Singapore’s property price index and the new launch condo prices have been increasing almost daily.
We like to reminisced the good old days where property prices were more palatable, I still can remember in the 90s or early 2000s, new launch condo prices were below $1,000 psf. The Sail at Marina Bay when it was launched in 2004 was only selling at $888 psf, River Place in Havelock, was launched in 2000 at only $921 psf and Heritage View in Dover , launched in 1998 was sold at only $520psf.
Today, eversince the enbloc fever in 2018, that has brought up new launch condo prices to above $1600 psf even in the OCR area, eg. Sengkang Grand at $1686psf.
So, is paying a high per square foot price for new launches the right approach to investing or is buying a property at high psf a bad idea ?
One of the first factor that home buyers always do is to compare the price per square foot ($/PSF). Their assumption is that a high price per square foot is “bad”, and a low price per square foot is “good”.
All along , there has been much debate over whether to buy a new or resale properties is better. Of course, new condo will always command a higher psf, and thus many will think about whether paying a higher psf for new launch is the right way to investing?
So, in this article, I will highlight the reasons for the diminished effects of this Price Per Square foot in an investment decision.
In recent times, many new launch projects are now selling at a high psf.
Eg.
· In CCR, Kopar at Newton is selling at averagely $2200psf , The M was sold at averagely $2450psf, Royal Green at Bt Timah is sold averagely at $2733 psf
In RCR projects like Woodleigh, it is sold at $1750 psf averagely, or Stirling Residences at around $1929 psf, Avenue South Residences averagely at $1975 psf.
· In OCR projects like Affinity at Serangoon is going for averagely $1533 psf, Dairy Farm Residences are averagely $1577 psf, and The Florence Residences is going at average $1510 psf.
So why are buyers still going for these properties despite its high psf ?
The answer is simple, they are more concerned over the overall amount to pay, or the quantum.
In a research by DBS back in 2018, it was forecasted that new private homes prices will cost between $2,300 to $2,900 psf on average by year 2030. This may sound absurd, but look at now, prices are already crossing the $2000 psf mark.
But why are people still buying at such high psf. As I mentioned earlIer, it is not just psf that they are looking at, there are many other reasons such as
- Quantum amount to pay for the unit
- Will the property fetch good returns and good rental yields
- The layouts of these new launch units (higher psf) versus older resale (lower psf)
Reason 1 - Quantum amount to pay for the unit
It has always been an industry practice that developers will price smaller property with a higher price per square foot, whereas for larger property, it will be at a lower price per square foot.
So nowadays, the sizes of properties are getting smaller and more compact.
1 bedroom units can go for 441 sqft, or 2 bedroom units can be 570 sqft. Although their price per sq foot may be high, but the overall quantum multiplied by area, will be more acceptable and affordable to the buyers.
For example, The M Condo has 1 Bedroom units selling below $1 million.
This is really low price for a Core central region property located along Middle Road, and within walking distance of Bugis MRT station.
Or Parc Esta, at Sims Ave. They initially have 1 Bedroom 420 sqft sold at $1760psf or $739,000 or Jadescape, at ShunFu, 1 Bedroom 527sqft, sold at $1670psf or $881,000.
Usually these high psf 1 Bedroom units start from a very affordable price range of $700,000 – $850,000; this is a quantum which one might not be able to get a new launch condo.
Reason 2 - Will the property fetch good returns and good rental yields
For those who are buying for rental, or intend to stay a short period then lease out, the rental yield factor is important. The psf price of the property has no bearing on rental yield
Eg. If you buy a small unit in town 441sf at $2,300 psf, the cost is $1,014,300 , rental yield is 4% based on rental income of $3200
But if you will to buy a bigger unit in suburbs 614sf at $1,850 psf, the cost is $1,135,900 rental yield at higher rental $3,300 is 3% only.
Capital gain is also important for investors who buy for rental. When you resell your new condo later at $1,200,000 , your capital gain is almost 18% ($1,200,000/$1,014,300). Hence your initial price psf is irrelevant.
Buyers of this new launch condo know that they are buying at high psf, but they don’t mind because as long as it is affordable and a good investment prospect, and in a good location, they can rent out with good rental yield.
Reason 3 - The layouts of these new launch units versus older resale
With the introduction of new URA regulations, most developers have designed more efficient layout of new condos.
They have done away with bay windows, oversize aircon ledges, big balconies, bomb shelters, etc, and make the layout with more usable space.
So new launch condo while higher in psf price, it does give a more efficient layout with less wastage, and more useable space and at a lower quantum.
So new launch condo while higher in psf price, it does give a more efficient layout with less wastage, and more useable space and at a lower quantum.
If you compare 2 projects at different locations, or compare new with resale, then price psf is not relevant or accurate.
It is only fair and more accurate to compare psf of the same development or at least adjacent developments, because locations does make a difference to the psf.
Eg. If the psf of 1 unit is $1450 and another unit is at $1550 psf, it does not mean cheaper is better because there are many other factors such as
· Facing of the unit – direction face N.S.E.W
· Level of the unit – high or low floors
· View of the unit – pool view, blocked view, face a road, face MRT track, etc
· Layout shape of unit – L shaped , odd shaped, Columns in unit,
Does lower PSF make it easier to make a profit?
Does it mean that buying a resale property at a lower price per square foot automatically makes it easier to make a profit?
The short answer is no.
A low psf does not automatically mean a profit for resale buyers.
To illustrate this, let’s take a look at some new launches compared to their neighbouring resale properties over the last few years.
Trilinq , a 3bed 915sf unit #29-19 was transacted at $1403psf in 2016
Recent sales of similar unit #27-19 was done at $1672 psf
Regent Park, a resale unit #07-07 was transacted at $951 psf in 2018
Recent sales of similar unit #05-07 was done at $1000psf
Trilinq was launched in 2016 at a clearly higher price than Regent Park resale at that time, but it still make more profit than the resale.
Both are 99 years leasehold.
Sky Habitat was launch in 2012 at a high price
Launch 2012, 2 bed , 710sf unit #03-02 was done at $1518psf or $1.078 mil
Recently, a similar stack unit 710sf, #10-02 is done at $1576psf
Compared to a resale RAFFLESIA Condo in Bishan
In 2012, a resale unit #14-07 sold at $1093 psf
Today a similar unit #18-12 was done at $1147 psf
As shown, buying at lower psf does not mean you will make more money.
In this final example, I will elaborate on the reasons why we see such a trend.
The Total Debt Servicing Ratio (TDSR) was implemented in 2013, its greatly affected resale prices more than new properties.
Because older properties are larger in size, it is less affordable and with TDSR, it makes it more difficult to get loan for bigger sums.
Eg. In 2016
Gem Residence, new launch, 3 Bed 936sf, unit cost $1.2 mil
Trevista a resale property, 3 Bed 1141sf cost around $1.5 mil or $1297psf
Using TDSR, max 60% of income, a buyer for Gem would need to make just $7500 monthly income to afford the unit while a buyer for Trevista would need to earn at least $9000 a month.
And if you will to pro-rate the land tenure of GEM vs Trevista, it will show even more that Trevista don’t look such a good buy.
Trevista tenure started in July 2008, and by Mid 2016, the remaining years of lease is only 91 years out of 99 years
If we were to pro-rate the 2016 price of $1297 psf to factor in this lease depreciation, the actual selling price we will arrive at is $1410psf ($1297psf divide by 91 remaining years multiply by 99 years). This price of $1410psf is then good for fair comparison with a brand new lease at Gem Residences in 2016.
Another set-back for resale property is that besides higher quantum and less efficient layout, the buyer has to put in additional renovation cost and also do not get a 1 year warranty on the existing fittings.
With so many disadvantages, many investors do not see it as a total consideration, and only focus on one factor , that is psf of the property ( this is disappointing ).
The Need For Space Vs Location
If you are the type who do not need alot of space then choosing new projects with a high price per square foot is not necessarily a big deterrent.
Higher psf could mean you can live nearer the CBD, or to have condo facilities which complements the lifestyle you want.
For investors, who buy for rental, they are only focus on getting the best value for their investment, than on the psf of the unit.
Eg.
If investor is on a lean budget, getting a
- 3 Bed at $1600psf means a quantum of $1.7 million
- 2 Bed unit at $1650psf means a quantum of $1.2 million
- 1 Bed unit at $1700psf means a quantum around $800,000-$900,000
This may be a more palatable investment sum for investors, even if the price per squarefoot is higher. After all, the affordability of the unit as well as the maximum bank loan 75% is based on the unit’s price, not it’s price per square foot.
Conclusion
In summary, it is best not to immediately assume that a higher PSF price is a bad deal.
Brand new projects selling at a higher psf as a result of the systemic changes such as TDSR’s in 2013, and the fresh tenure that buyers will get.
It is important to compare like for like (new condo with new condo and not with old condo) , when we compare psf prices.
Comparing psf is a useful basis if you’re comparing units within the same development or about the same age (in which case, the psf edge may indeed tilt your winning odds).
However, PSF is not the only important consideration, because sometimes paying a higher price per square foot could make you a smarter investor if you had considered all the other factors.
Do let me know your thoughts on this topic and if we can catch up over zoom or over coffee to discuss this, I would be most glad to meet you. Do make an e-appointment here or whatsapp me your convenient time. Thank you
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Rick Fok is a realtor with OrangeTee & Tie Pte Ltd. He has been in this real estate business for 10 years. He is very focus in helping his clients rent properties and he does help many customers to buy new projects according to their needs. His interest include sports such as running and soccer besides just real estate work. He loves to connect with people to discuss properties related issues and gets enormous satisfaction in helping them fulfill their needs
If you have any queries on this topic or other , please do give Rick a call and he can arrange for a discussion over a cup of coffee..
