Phew, sorry to keep you waiting!
It's been a few weeks since I last wrote as the market roared to life in June and July and I was caught up in the surge of sales and team mentoring activities!
Fortunately, in the past months I was able to help a few of my old clients and friends find buyers for their properties and great investment properties for their next move.
It is pretty much as the industry expected with the pent up demand released and consumer rush to settle their upgrading and investment options in case a 2nd circuit breaker takes us by surprise.
Anyway without further ado, let's discuss a topic that some readers have asked me about.
Alright, admit it.
We have all been comparing and living in the past at one point or another.
Comparing property prices of today, with those of our parents' and even grandparents' generation - The good old days when HDB flats were $30,000 and landed properties nary $500,000 each.
Or even if you have not reminisced such days, how about the more recent decades, like the early 2000s when The Sail at Marina Bay launched at $900+psf and thereafter doubled in value within the decade.
The pain of missing the boat is so real and further compounded by the new executive condos such as Piermont Grand and OLA going at above $1000psf today.
Throughout time, there has been much debate over the investment returns between buying a new launch condo or a resale property.
- Is paying a higher per square foot for new launch projects the right or wrong way to invest in real estate?
- Should we head straight for the lower per square foot resale condo every time a new condo comes up around it?
In this article, I'll walk you back in time to highlight the pertinent reasons for the diminished significance of price per square foot in an investment decision.
Point 1 - The Per Square Foot Fallacy
One of the first and main factors home buyers are taught to compare is the price per square foot ($/PSF).
The usual assumption is that a high price per square foot is “bad”, whereas a
low price per square foot is “good”.
Is that always the case and are there other considerations to weigh on top of PSF prices?
In recent times, you'll notice many top selling projects with a high price per square foot.
For example, Kopar at Newton, is selling at averagely $2200psf at this time of writing. The M Condo by Wing Tai, which sold out 70 per cent on its long weekend, had units that went for averagely $2,450 psf and the upcoming Irwell Hill Residence launching for an estimated $2500psf.
By contrast, the average psf for a condo today is only around $1,500 psf to $1,600 psf.
So why do buyers still go for these properties?
The simple answer is in the overall amount you pay, or the quantum
A smaller property will almost always command a higher price per square foot, whereas a larger property, a lower price per square foot.
Compact units (properties that are 510 square feet or under) are often the most expensive on a price per square foot basis; but in terms of the overall quantum, they always make up the most affordable units in the development.
For example, The M Condo had one-bedders with a quantum of below $1 million.
This was a really low price for a property located along Middle Road, and within walking distance of Bugis Junction and MRT station.
Another example is Parc Esta, at Sims Avenue. The smaller, one-bedder units there went for between $1,700 to $1,800 psf, higher than the average of $1,600 psf done for the entire project so far.
Usually these high per square foot one bedders start from a very affordable price range of $700,000 - $800,000; a quantum at which one would normally not be able to get a new launch condo at all.
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.
Stars of Kovan (SOK) was launched in 2016 at a clearly higher price than Kovan Residences (KR) which was launched in 2008. Both are 99 years leasehold and the price gap between them at launch was almost $200psf.
Despite this, buyers who chose the cheaper alternative of Kovan Residences made lesser profit than Stars Of Kovan.
Symphony Suites was launched in 2015 at $300psf higher than Lilydale which was completed in 2003. Both are 99 years leasehold.
Both are leasehold but despite the price gap, Symphony Suites owners made decent gains over the last 3 years while Lilydale buyers, unfortunately, saw their average property worth declining by almost 17%.
By the same token, Forest Woods which was launched in 2016 and is still under construction, has seen prices appreciating by 12.4% since, while The Minton, which was launched in 2008 has seen prices growing at a mere 0.66% since then.
Both are 99 years leasehold.
Similarly, Sky Vue's performance till date has been alot better than Bishan 8 despite being launched $150psf higher at that point. Both are 99 years leasehold.
The average owner at Sky Vue would be sitting on a profit of 25% today vs owners of Bishan 8 who are sitting on much lesser profits after 7 years.
The recently TOP'd Gem Residences vs Trevista which launched in 2008 is another good example of how lower priced resale properties might not perform as well as buyers had hoped for.
In this final example, I will elaborate on the reasons why we see such a trend.
The Total Debt Servicing Ratio (TDSR) affected resale prices more than new properties
A major factor that hurt resale price growth is the implementation of TDSR, which made larger (Usually older) properties less affordable than before.
As you can see from the last chart above, a 3 bedder unit at Gem Residences started from only $1.2m vs Trevista which was averagely selling for $1.5m.
To put into context, 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.
No prizes for guessing which income bracket would have a bigger pool of buyers.
Pre-2009 Bay Windows Tax Incentives Resulted In Resale Units With Less Efficient Design
In 2008, URA stopped the gross floor area (GFA) exemption loophole for bay windows and developers were no longer incentivised to build them into their projects ever since.
The change was mainly due to an increasing abuse of the loophole which resulted in inefficient layouts where more than 20% of a property can be "lost" to air con ledges, bay windows and planter boxes.
Hence, many properties heralding from that era had larger areas but less efficient floor space as compared to the smaller yet better designed units today; making them less desirable to resale buyers.
One of the further consequences of plugging this loophole is that developers then had load their profit margins onto the absolute floor space they had, therefore increasing prices per square foot across the board from 2009.
Prorating Land Tenure For a Fair Comparison
Furthermore, Trevista's land tenure started back in July 2008 which means by mid 2016, the lease remaining is 91 out of 99 years.
If we were to pro-rate the average price of $1350psf in 2016 to factor in this lease depreciation, the actual selling price we will arrive at, for fair comparison with a brand new lease at Gem Residences, is $1469psf (1350psf divide by 91 remaining years multiply by 99 years).
Now, does Trevista look like a good deal then when you consider these points?
Aside from costing more in quantum and per square foot, and having less efficient layouts, a buyer would also have to factor in renovation costs and have no warranty on any of the supplied fittings. Ouch.
Unfortunately, most laymen investors are unaware of these and continue to be attracted solely by low per square foot prices.
To be fair, there are resale properties that have done well over time (And new launches that flopped too), but with the recent media spotlight on the remaining tenures of properties, buyers are now alot more particular and savvy than before when buying an older property.
P.S. In NAVIS, we curate a monthly updated list of the top projects in Singapore titled NAVIS Selections
Schedule an appointment with Stuart and his team of Property Wealth Planners to find out which are the top projects today within your budget that is worth making the trip down to check out.
Point 2 - The Need For Space Vs Location, Lifestyle And Affordability
If you are not the type who needs alot of space (e.g. you’re going to remain single), then
a high price per square foot is not necessarily a big deterrent; it could mean an
opportunity to live nearer the CBD, or to have condo facilities which complements the lifestyle you want.
Investors too may not mind a higher price per square foot
This may come as a surprise, given that many investors are focused on getting the
best value for their dollar. But there are two reasons why even investors may not
mind paying more per square foot.
The first is that new investors are often on a leaner budget. A three-bedder unit, at a
typical price of $1,500psf, often has a quantum of about $1.6 million.
For many investors, it will take decades of disciplined scrimping and saving to afford this.
However, a small single-bedder may only have a quantum of $700,000 to $900,000.
Many developments have two-bedders that start from just $1.2 million (outside of
central regions).
This may be a more viable purchase for new investors, even if the price per square
foot is higher. After all, the affordability of the unit – as well as the maximum bank
loan– are based on the unit’s overall price, not it’s price per square foot.
Point 3 - Rental Yield
Remember that price per square foot has no bearing on rental yield.
Your (gross) rental yield is the annual rent generated by the property, divided by the total cost of the property. For example:
You purchase a property in the Rest of Central Region at a $1,500 psf at a price of $1.6 million. Based on average rental yields in the RCR region, you should be getting somewhere between 2.5-3% gross rental yields today.
Now, let’s say you move closer to town and purchase a smaller property with a higher price per square foot of $2,200 psf but at the same price of $1.6 million.
For the same quantum though a higher per square foot, it is possible that you will be enjoying a higher rental yield of even up to 4%, which means your money works harder for you on an absolute returns basis.
As such, a higher price per square foot should not be an immediate dis-qualifier if you are searching for an investment property.
Banks do not consider the price per square foot when granting a loan. What they care most about is whether you pass the TDSR hurdle which considers the price quantum above all else.
In summary, it is best not to assume that a higher price per square foot is always a bad deal.
Brand new projects selling at a higher psf are the result of systemic changes, TDSR's implementation in 2013, and the fresh tenure that buyers get..
It is important therefore that we compare apples with apples (i.e. new with new and old with old) the next time we discuss psf prices.
In the right context, it is a useful basis for comparison, such as when 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, it is not the end all and sometimes paying a higher price per square foot could make you a smarter investor after all.
Alright, that's it! It's been a longggg write (pun intended) and it's time to rest.
Let me know your thoughts below and catch you soon!
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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.
Related readings:
- Time Tested Strategies To Profit From Real Estate In A Crisis - Methods to Beat ABSD and Own Multiple Properties in 2020 - 4 Important Entry Signals That Will Greatly Improve Your Property Investment Returns
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