Picking a GOOD Property to Purchase
We are in an era where property prices are at all-time highs. The URA Private Residential Property Price Index reached 152.6 in Q2 2020, just 2 points shy of 2013’s record high at 154.6.
Looking at it pragmatically, the type of astronomical price growth we’ve seen over the past decade may well be a thing of…the past, especially in the face of a long-term slowing global economy and gloomy jobs market post-Covid19.
While I believe property prices generally should hold steady, making a future profit on the property you purchase today may also be challenging – the ‘incidental costs’ involved in property transactions (think buyer’s stamp duty, loan interest, legal fees, etc.) could easily wipe away the already meager paper profit you think you have.
If you want to preserve the value of your property as an asset or even make a profit, picking the right one today will therefore be more important than ever.
Have an Exit Strategy
A property purchase is essentially an investment. After all, in choosing to buy (rather than rent), you are displaying the desire to own the property as an asset – your home.
However, an asset is only as good as its namesake if it can be converted to cold hard cash someday when you need it.
A $2 million 3000sqft penthouse in Sembawang may sound attractive and cheap to you. However, how many buyers looking to move to an area like Sembawang will have a $2 million budget to buy it over from you in future?
A $13 million luxury condominium unit in District 9 may appear as a lucrative investment. However, how many buyers will be able to afford the $13 million price tag in future? While waiting months (or even years) for that rare buyer, will you be missing other investment opportunities?
Having an exit strategy is therefore very important. It is the mantra of any investment – equivocally so for a property purchase in Singapore.
In the property sense, buy something which can be sold easily in future.
5 things which matter to property buyers
1) Quantum
In simple speak, “Quantum” refers to the price tag on your property.
According to Ministry of Manpower figures, the median gross monthly income of full-time employed residents in Singapore in 2019 was $4,537.
With that, the average property buyer can afford a property priced around $1.1 to $1.4 million.
In Singapore, where the desire to ‘upgrade’ remains high, it’s not unusual to see buyers stretching their budget just to afford the cheapest condominium units. From my experience, many are even willing to downsize to a two-bedroom unit just to fit within their budget.
The median price of a condominium unit in Singapore stands at around $1.4 million in 2020 (based on research using URA property transaction data).
There may therefore be plenty of buyers for properties costing up to $1.4 million.
However, stretch that beyond to...say, $1.6 million? Less.
For a $2.5 million property? Even less.
As the price tag of the property goes higher, less buyers will be able to afford it.
Less buyers = harder to sell.
2) Budget
Buyers usually come to a condominium looking to buy with a budget based on its existing median transaction prices.
So, if a typical two-bedroom unit in XYZ Condo costs $1 million, buyers looking for a two bedroom unit there will most likely come with a budget of around $1 million.
However, if your unit in XYZ Condo is a two-bedroom unit with a large PES space, a patio or roof terrace - which implies a larger than normal floor space and therefore a higher price tag – you’re going to have a problem, since the price tag on your unit will likely be above most buyers’ budgets.
Unless you die-die want that roof terrace because you have an obsession with observing the stars and moon, you should think twice before buying a unit that’s bigger than others within the same condominium.
3) Rental Yield
Even if you plan to live in the property you are buying, it still makes sense to consider the property’s potential rental yield.
A property’s value is intrinsically linked to its rental yield as it is effectively the dividend paid on the asset. Investors will favour a property with a higher rental yield since it offers higher returns.
In simple speak, if I were to buy a $1 million property – would I buy one which I can rent out for $3000 a month? Or the other one which I can rent out for only $2000 a month?
Choosing a property that has higher rental yield will be an advantage since it appeals to both home buyers and investors.
That said, a property with a high rental yield alone may not always be one that is easy to rent out….
4) Tenant Pool
…Investors will also want to know that it will be easy to lease out the unit. So what if rental yield is high? If the unit sits empty for 6 months, its lost income for the landlord.
In Singapore, the majority of residential tenants are foreigners – people who are less likely to own a car and drive. These tenants therefore usually prefer places which are easily accessed by public transport or near to their places of work or study.
Before buying a property, do some research around the area to determine if there are sources of tenants. For example, the condominiums lining Pasir Panjang Road have a very high take up rate owing to NUS, Science Park 2 and Mapletree Business City being strong sources of potential tenants.
In fact, if a property is appealing to potential tenants, it will likely be equally appealing to home buyers.
5) Presence of good schools
Yes, this actually matters.
One of the condominiums which I have marketed a couple of times is High Oak Condominium. All my listings at High Oak draw in many buyers (the most I have experienced out of literally every other property I’ve marketed).
It sits just 600 metres away from Pei Hwa Presbyterian Primary School, giving parents priority placement during registration.
A large proportion of buyers coming to High Oak's units are families with a child that the parents want to send to Pei Hwa.
Buying a property near a school like that offers some assurance that you will not be short of potential buyers when the time comes to sell.
Some (Surprisingly) Less Important Factors
Surely you would think I may have missed out some items on the list of “things which matter to buyers”.
Well, it’s because some of these factors (perhaps, surprisingly) haven’t appeared to matter as much!
1) Age
You may be tempted to think that no one wants to buy an old condominium unit.
That may be true – if the condominium is falling apart and has a poor location. However, there are many older condominiums which still have pretty solid value, some even transacting at all-time high prices during the current Covid-19 crisis.
Why?
The believe in en-bloc potential remains high.
Somehow at the back of plenty a property buyer’s mind lies the hope of a future windfall with their property going en-bloc.
It is an understandable hope, since history has shown that profitable en-bloc sales do come about with relative ease. For that reason, age isn’t always a key consideration.
Nonetheless, for a myriad of reasons (nicely articulated in this article) it makes sense to be cautious when buying into an older development relying on a future en-bloc sale as your exit strategy.
2) Tenure
Are freehold properties more valuable than leasehold ones?
Freehold properties tend to have higher price tags than their leasehold counterparts. Not surprisingly, many buyers still settle for leasehold choices, surrendering to their affordability limits. In any case, there’s really nothing wrong with a leasehold property – a case in point which I discussed in another editorial.
3) Location
As much as location matters, it doesn’t really matter as well.
Huh?
Here is an example - performance comparisons between two similar-sized condominiums, launched at around the same time (end-2012).
The Hillion Residences - built at the doorstep of Bukit Panjang MRT Station
Eco Sanctuary - a 10 minute bus ride from the nearest MRT station (Hillview MRT or Bukit Panjang MRT)
You would think that Hillion Residences should outperform Eco Sanctuary However, the data does not agree – why?
Check out the difference in launch prices:
In the former example, Hillion (right above Bukit Panjang MRT Station) had a much higher entry price at an average of S$1413psf versus Eco Sanctuary's at S$1130psf.
It looks pretty much to me that the location premium was already priced in at entry, which for a long time has already been the case with many new launches.
In that sense, when it comes to selling on the resale market in future, the location factor may no longer attract a gain in your property price. It could even see a loss, if the entry price was simply too high!
The importance of location and its supposed benefits on price gain, in this sense, loses its relevance in the resale market.
I will discuss Entry Pricing in a future editorial – register on UppMarketSG’s mailing list if you would like to be notified when its published! (no spam, just one email per week – I promise!).
Conclusion
Picking a property to purchase can hardly be considered an easy task. With hundreds of options available to the average buyer and varying opinion on what to look out for … plus the noisy sales pitches from my industry compatriots (oops) … what would you choose to believe?
I can understand why many buyers end up making poor purchase choices.
Yes, you may love your property as your home – but when the time comes to cash out and sell, will there be buyers coming to offer? Do you have an exit strategy?
Part of my service with UppMarketSG includes helping buyers do research – you tell me what properties you like, I’ll dig into their price trends and make recommendations (or suggest alternatives) for you through a formal report. It’s a service I do for free in helping you as a buyer find the ideal home and asset!
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