In the final part of a two-part series, Bernard Tong, managing director of The Edge Property, assesses the advantages of buying condominiums that are selling closer to cost.
SINGAPORE: I spent some time off recently at Surin beach in Phuket, basking under the sweltering sun. At times, the heat became unbearable. Beach peddlers were selling chilled coconut, the perfect drink to quench my thirst - if not for the S$5 asking price.
There was no way I would pay that kind of money for a coconut in Thailand! Or so I thought. Over lunch, I had no qualms paying S$8 for the same drink served by waiters at a restaurant, just 10 meters away from where I was on the beach.
Was I behaving irrationally? Perhaps. Context matters a great deal in pricing. Subconsciously, I thought it was fair paying S$8 for that coconut in the restaurant - the ambience was cosy, the waiter was kind and the AC was on full blast.
Can the same theory be applied to properties? Are you more likely to purchase a property if the developer paid dearly for the land, furnished it nicely and then priced it slightly above cost? Knowing you will only be paying slightly more than what something costs may be the psychological nudge a person needs before committing a purchase. After all, nobody likes paying S$10 for something which costs S$1 to make!
In our first ‘hunting for deals’ commentary, we provided a list of projects which have been substantially discounted from the initial launch phase.
In this article, we will be looking at projects that are selling close to cost, i.e. projects with the smallest margins. It is important for us to note that small margins may not be reflective of great deals (for example, the developer could have overpaid for the land due to unique circumstances), but it gives buyers a fresh perspective to look at properties amidst an abundance of discounts and deferred payments in today’s market.
Singapore’s transparent business practices make it relatively easy to estimate a developer’s total costs based on site GFA, which includes the tender price for land, construction costs, financing fees, marketing costs and other professional expenses.
By comparing these against the average selling prices, we are able to gauge projects that are selling with small margins, hence the greater perceived value to the buyer. The tiny margins may also mean a smaller likelihood that these developers will cut prices in the future.
In our analysis, we looked at all Government Land Sales (GLS) sites since 2012. We excluded private and en bloc deals because the costs are difficult to quantify. To estimate construction costs, we used S$400 per square foot (psf) for projects within central regions, S$350 psf for projects in the rest of central regions and S$300 psf for projects outside central regions. These figures were estimated based on an analysis of average contracts awarded.
Property developers typically enjoy a 20 per cent margin, on average. In the list of condos we analysed, the estimated margins range from 1 per cent to 45 per cent. To highlight the ‘real deals’, we only included the ones where the estimated margins are 15 per cent or less.
There are no projects selling at a loss. The Panorama, a 698-unit condo with 99-year leasehold, came close. Sales for the project, which is located about 400m from the upcoming Mayflower MRT station, averaged S$1,258 psf, which is only marginally above the estimated break even price. Back in May 2014, the project was relaunched with a 10 per cent discount to trigger sales momentum. Since then, it has maintained healthy sales - with an average of 15 units per month being sold since the beginning of this year.
(The average selling prices for The Panorama is only marginally above the cost for the project Source: The Edge Property)
The next two deals on the list, Highline Residences and Sky Vue, have average selling prices which are only 7 per cent above their break even costs. Keppel Land, the developer for Highline, paid S$550.8 million (S$1,163 psf per plot ratio) for the site in Tiong Bahru, which was a record for a GLS site back in April 2013. The development, which is located on Kim Tian Road, is left with about 50 per cent of its units unsold. Sky Vue in Bishan on the other hand, is only left with 37 out of 694 units. CapitaLand, the developer, relaunched the project late last year by giving out a S$150,000 discount for selected units.
Sophia Hills, a development by Hoi Hup Realty located within prime district 9, is priced at 9 per cent above costs on average. The project, which was launched in November 2014 and has 406 remaining units, was also in the list in our first deal hunting article as recent prices have been substantially reduced compared to the launch period.
Newer launches such as Gem Residences also made the list. The estimated margin for the project is in the lower 14 per cent range. The bid for the site at Toa Payoh was a hotly-contested one, which drew more than 14 bids back in 2015. The project sold 300 units, slightly more than 50 per cent of the entire development in the first two days of launch.
The three remaining projects on our list - Riverbank @ Fernvale, Stratum and The Santorini are mass market projects located outside the Central Region.