Hello there!
And I hope you're coping well with Phase 2!
As we ramp up for the weekend, my team is reporting a flurry of activities from the ground as property buyers and upgraders resume their physical viewings and visit the show flats of purchases they have made through virtual viewings over the last 2 months.
Anecdotal stories I have come across point to a common revelation - that many whom have worked from home during circuit breaker, have found their homes either too small or not conducive for a prolonged work from home culture and are seeking options in case a 2nd wave returns.
Hence, realtors are experiencing a very busy weekend ahead and hopefully make up for the lost months of income.
Of the many questions I get from my readers and recently addressed on CNA93.8FM, this is one that has been repeated frequently enough that deserves a post of its own.
So let's dive in!
Are Early Bird Discounts At New Launches Genuine Or Just A Marketing Gimmick?
We have all heard the phrase "Early bird" discounts and "First mover advantage" being bandied around by marketing agents touting about the benefits of a new launch property.
Typical Sales Pitches:
"You will enjoy good capital gains as a first mover."
"Early bird prices means you buy at the lowest possible price."
"The developer's profit margins are the thinnest at launch."
Today, I would like to share with you how developers typically price their new project launches and the reasons why early bird discounts are not just a marketing gimmick but serves real estate developers in managing their risks and bottom lines too. It is important to understand both the pleasure and pain points of being a real estate developer to comprehend their pricing strategy. As much as developers like to maximise their profit margins on each project, most of them have to completely sell out their projects within 5 years of land purchase to avoid hefty Additional Buyer's Stamp Duty (ABSD) and, within 2 years of TOP to avoid Qualifying Certificate (QC) extension charges meant to prevent land hoarding on our tiny island. Hence, most developers apply this tried and tested strategy to balance between cost pressures (pain), profit margins (pleasure) and a rapidly ticking clock.
Developer's Pricing Strategy
In a new launch project life cycle, there are usually a few major phases.
Phase 1, which is the main launch, the middle phases and then TOP, when the temporary occupation permit is issued and keys handed over to buyers.
Let's Start With Phase 1 - The Main Launch
2 weeks prior to the main launch of a project, developers typically hold previews to gather interest and gauge whether a project should be launched at a higher or lower range of their pricing bandwidth.
A loss leader strategy may be applied in order to generate sufficiently good sell-through rates. (Despite its name, it is not so much a loss but lowered profit margins on initial sales)
The ideal outcome during the main launch is that the market will bite and sell-through rate is brisk enough for good media publicity (And steady shareholders' nerves), but not too brisk so that more units can be sold at a higher profit margin in later phases.
The ideal sell-through rate varies according to the developer management's threshold but is usually within 30-40% of the total number of units before phase 2 price increments creep in.
When sales move too quickly, like in the case of a 50% sell-through on day 1 of Park Place Residences in April 2017, the developer halted sales and increased their pricing by 10-15% more in phase 2 a year later as you can see below.
Phase 1 buyers were very pleased to have made size-able capital gains within the span of a year as you would see from the the phase 1 and 2 launch prices highlighted in different colours.
During Phase 2, 149 units were sold over the weekend and by Sunday evening, Park Place was 84% sold out with only 70 units of mostly larger sized units left.
What Happens In The Middle Phases (Phase 2 and 3)
As the developer might have made razor thin margins with their phase 1 early bird pricing, this is where they average up their profits over phase 2 and/or 3 by increasing prices or reducing discounts.
Prices usually move upwards for new launches as a result of this strategy, which also pleases and rewards the loyal supporters aka VIPs of the developer as they would have enjoyed a capital gain by riding on the developer's strategy.
Is Capital Appreciation In New Launches Always Guaranteed?
Nope, it's definitely not. Just as there isn't any guarantee when buying from the resale market.
There have been cases of new launches, although very few, which offered more discounts after its initial launch.
In the recent weeks, you might have read about additional discounts at 38 Jervois, 8 St Thomas and One Pearl Bank amidst others that gave investors today, a price advantage over earlier buyers.
Does this always happen? Fortunately for new home buyers, it seldom does.
It is important for us to remember that developers are for-profit organisations that need to manage their liquidity risks to stay solvent and preserve jobs. When market visibility is murky, they need to do what they need to do to stay afloat.
The bright side though, is that losses are not realised and owners can usually hold out till profitability or till rental collected offsets any capital losses.
** A side note on property investment guarantees
When rental, buy back or any other form of guarantees are made by developers whether locally or abroad, I put on my cynical hat as it means that by its own merits, a property does not attract sufficient suitors. So just be aware when you encounter such deals.What Happens To Prices After TOP
When TOP comes around, there usually are few units, if not none, left in the entire development.
By this time, prices would have gone through a few rounds of increment and it is safe to say, buyers at the TOP phase pay the highest price.
At this stage, there are more units appearing on the market aside from the developer's remaining inventory as first hand owners start looking to offload their units for a profit.
Having held their properties for years and incurred mortgage interest expenses on top of stamp duties and opportunity costs, most of them expect to sell at a decent profit.
We would seldom find units sold at a loss as people have a natural loss aversion tendency and would generally prefer to hold on to their properties and rent them out if they do not get a reasonable return.
Take for example Botanique at Bartley, Coco Palms and Commonwealth Towers in the slideshow below.
You would commonly see several profitable ones, and few or no unprofitable ones as a result of this human tendency based price resistance.
This is perhaps also the reason why an analysis of past data shows that over 9 out of 10 new launch owners make a profit as you would see below.
Most New Condos Were Resold With Profits
Profitability Analysis Of New Launches By Region
Out of the 3 regions in Singapore, the Outside (OCR) and Rest of Central Region (RCR) properties saw a much higher profitability rate and lower losses.
It is likely that genuine end users residing in these areas, who needed a place to stay immediately upon selling their HDB flats or were expecting new additions to the family within a few months, did not have the luxury of time to wait 3-4 years for a brand new launch and could only turn to ready TOP properties.
So, are early bird discounts and the first mover advantage an important part of your investment decision?
It certainly won't hurt you to be early in the game if you have done prudent research before investing in a project and know your developers well.
Some developers have a reputation of offering discounts quicker than others, which can be detrimental to early buyers, and you might do well to factor this in before investing with them.
While we should not generalize that all new launches are safe or even that history will repeat itself in terms of your probability of profits, I hope you now have a better understanding of what it means when marketing agents come to you and pitch about early bird discounts.
In the next article, I'll share some case studies of launches that unfortunately, had to reduce prices substantially after its initial launch and what it subsequently meant for their early-bird buyers.
Till then, stay safe and prudent when out shopping!
Need an opinion on your property investment plans, the best buys available or help marketing your properties?
Get a 1-time free 30 min Property Wealth Planning consultation with Stuart and his team of Property Wealth Planners. Schedule one right now.
A PWP consultation includes:
- An in-depth financial affordability assessment and timeline planning
- Highly relevant investment insights
- A clear and customised investment road map
- A curated list of best buys in today's market with good growth potential & minimal risks
- Selecting units with the highest potential in a new launch project
- Advice on marketing and getting a buyer for your property fast
- Has your property stagnated in price? What options do you have?
Stuart Chng, Executive Group District Director at Huttons, is a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
Professionally, he is a licensed real estate agent, an avid stocks, options and real estate investor, business owner, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications.
Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.
Stuart has also coached many top million dollar producing agents from different real estate agencies in Singapore. Read his agents' reviews here.
Relevant Reading:
Comments