This write-up was reproduced with permission from Ray’s Estate Clinic, written by Founder, Raymond Chng. Please refer to the end of the article for more information on Raymond.

Since 2018, we have been sharing with our clients and readers that resale properties are good options. Today, as of the date of writing, there are still a handful of readers asking us if resale properties can be profitable. The simple answer is – Yes! There are considerations that property buyers should note about New Launch properties, in particular for HDB upgraders.

Most HDB upgraders who are selling off their BTOs would have a sizable profit, while some HDB owners who have previously bought resale HDBs may only be breaking even or have a small profit.

Whether you have a small or large profit, your decision for your next move is significant and important for your retirement goals. Making the wrong move and getting stuck in an expensive property can set your financial goals back by years.

In this article, we hope to share our views on why Private Resale Condos may be better for HDB upgraders.

 

1. Cost of renting

Most new launches take 3 to 4 years to build. If you are buying at the launch stage to take advantage of the “lowest” price for the development, the waiting time will be the full 3 to 4 years.

For calculation purpose, we will take 3 years. An average rental unit for a family of four is around $3,000. This figure could be less if you take a smaller unit, but for purpose of illustration, we will use $3,000. Assuming a waiting time of 3 years and a rental of $3,000, the total cost of rental of the unit will be $108,000.

The above is your fixed sunk cost. You will only be able to get this sunk cost back if your next property makes a profit, and even then, it will only be a paper gain.

Assuming you purchase a 3-bedroom new launch condo, depending on the location and size, the gross profit range we have seen for profitable new launch properties are about $150,000 to $200,000. Most of these properties were bought at much lower prices and lower PSF values during the 2014-2016 period. Do note that there are also some properties that have $0 profits.

Based on the above scenario, your gain would be $92,000 (200k less 108k). If you intend to sell your property for profit, transaction costs will be about $30,000 (assuming $1.5m property at 2% broker fee).

Your nett gains will be now $62,000 (not including interest payments, legal fees, and other minor costs).

One of our readers bought a resale property of similar price in 2016 and is sitting on a gross profit of $200,000. Without having to pay rent, because he was staying in the resale property, he was actually paying himself because every month, he was repaying his principal payment for the loan.

In this scenario, the property owner who bought the resale property was in a much better position as the owner who bought the new launch.

This illustration is kept simple, but if you would like a further deep dive into more case studies (we do have quite a lot), we will be happy to showcase these case studies.

Of course, if you are staying with your parents or relatives during this period and have no stress over costs and timelines, the above point will not apply to you.

2. No guarantee on profits as current new launch prices are high

Prices of new launch in the mass market areas (OCR), started from $1,000psf in around 2012 to an average new launch price of $1,450psf currently, with some mass market new launches going as high as $1,700psf.

Image: Average price of new launches in OCR, Source: Edgeprop

The question now remains if these properties at $1,700psf can resell at $1,900psf. Do note that at $1,900psf, you could buy a resale property in locations like Newton.

On the other hand, most industry stakeholders will say, the PSF is high, but the quantum is affordable.

The truth is the real measure of price has always been the PSF and not price quantum, because PSF is the amount you pay for each square foot of the property. Developers have been making smaller units so that price quantum are lower, but in the long run, majority of home buyers will look at practicality and value, which often bring them back to considering the PSF.

3. Size of units may not be what you expect or want

Unless you are buying the same unit type as a showflat unit, developers often build only up to 5 showflat units, and there are usually 20 or more types of floorplans for a development. This means most buyers will be purchasing a unit that they are not able to see and get a sense of the space.

Some of our readers have commented to us that they got a shock when they went to collect their key of a new condo because the size of the rooms was really small. Obviously, the showflat’s interior design played a role in making a compact room look bigger.

4. New launch units rarely have yard area unless you purchase a larger unit type

Property buyers who have visited new launch showflats would know that many of the 2 and 3-bedroom units do not have a yard area. Those with yard area might be over budget, the only option may be a unit without a yard.

It is easy to buy a unit before living in it thinking its ok, but when you move in and reality sets in, you might just regret the decision.

We have spoken to a good number of clients who decided to sell their condo because they want a yard area or a bigger unit.

5. Private resale can have capital gains too

Many property buyers believe that only new launch properties can help make money. Of course, there are many new launch owners who made money. On the other hand, there are also resale property owners that made up to 30% gains over the past 4 years.

In point 1, we illustrated the fact that one of our readers made $200k on their resale property and in that case, buying a resale property is better. We also have clients who made money from new launches in the same period.

What is important is to get yourself educated and know your options so that you can make a well-informed decision.

6. Consider that buying a new launch at the lowest price in the development, but could be paying the highest in the cluster

When you bought that BTO, you were likely paying the lowest or at market rate in your cluster and you became the most expensive of your cluster.

Image: HDB BTO and Resale price in 2011, Source: Edgeprop, HDB

Take for example in 2011, 1205 sqft 4-room resale flat at Blk 144 Tampines Street 12 transacted at $480,000 ($396 psf) while a 1216 sqft 5-room bto flat at Tampines Greenleaf would cost you $430,000 ($353 psf). In this scenario, the new property cost less than the resale.

In the current private property market, the new launch PSF price in some locations have a premium of up to 40% compared to the resale properties. You are paying much higher for the new launch compared to your nearby peers.

So you pay the lowest price within the condo assuming that the developer increases their selling prices in stages, but you are actually paying the highest price in the cluster, which in some cases up to 40% premium. Is this considered a good buy? You would have to decide.

7. Uncertainty of TOP date for a new launch property could give owners anxiety (closer to TOP)

If you are renting while waiting for your new property to be ready. The months closer to the TOP could be stressful. This is because the process of collecting keys, doing defects check and then starting your renovation works could take some time. This process could be delayed especially in a pandemic environment we are currently in.

At times the TOP date for a property could be in June, but it may be delayed until October or even December if there are work delays. Your moving in plans could be affected and you would also need to give your landlord notice of lease termination. The worst case would be that you already gave notice to your landlord to terminate the lease, but your key collection and renovations are delayed. This has happened many times.

Of course, if you are staying with your parents or relatives during this period and have no stress over costs and timelines, the above point will not apply to you.

 

Concluding thoughts

To be profitable, property buyers will need to understand the reasons for price growth, the various consumer behaviours and preferences. Since cooling measures were introduced, speculation activity has slowed down. Most buyers now are buying for their own use, with the rise of occupier demand, the demand for properties with practical layouts and functionality has been rising.

A practical, functional and spacious home are basic desires of homeowners, and looking for such properties can help you create wealth while you enjoy staying in your home. As always, we will be happy to assist you with your next move.

 

About the Author

Ray’s Estate Clinic (REC), founded by Raymond Chng, is a platform for Investors’ and homeowners to have a Property Portfolio Health Check by utilizing data analytics, ensuring that their portfolio remains healthy providing optimized returns.

“Health is Wealth” is what Raymond believes in, and it is not related only to your own body’s health, but it also refers to one’s financial health. Having a Property Portfolio that is not performing does not help improve an investor’s wealth. Hence, converting non-performing assets into optimized performing assets is essential to portfolio’s health improvement.

Raymond can be reached at raysestateclinic@gmail.com. Do visit his blog HERE for more information.

 

Disclaimers

Please refer to Raymond’s blog for the disclaimer HERE

Also, please refer to my disclaimer HERE