By PropertyNet.SG (guest contributor)
Many people think Executive Condominiums(ECs) are a good buy. Even Minister Khaw Boon Wan likened the EC scheme to offering buyers an upmarket Lexus ata much lower price of a Toyota Corolla. But are ECs really such a good deal?
With that question in mind and with permission from our client, Rachel, we are sharing with you the analytical process we used in assessing if an Executive Condominium was suitable for her, and how we plan to help her achieve her goals of moving into a bigger space and owning a second property. We hope there will be a few good pointers in this article you can use to assess if Executive Condominiumsare suitable for you.
Background of the Buyer
Rachel currently owns a resale HDB 4-bedroom flat purchased back in 2001 with a CPF grant.
She is looking to move into a bigger home (i.e. more rooms) for her growing family within a year. With her HDB flat paid off, she is deciding if she should purchase a private condominium, move into it and rent out her HDB flat, or if she should simply buy an Executive Condominium. She intends to stay in the northern part of Singapore as she wants to minimize the disruption to her kids’ studies.
Financially, she is able to purchase a property worth around SGD 1,000,000 and hopes to own at least two properties before she retires. Like most buyers, she hopes to have a decent gain for this property purchase in five years’ time. Let’s start by figuring out how much a Resale Private Condo and a New Executive Condo in the Woodlands would cost.
Estimated Price of a Resale Private Condo in Woodlands
The average PSF of a private condominium (resale) and executive condominium (resale) (size around 1,000 sqft) that obtained its T.O.P less than 10 years ago around Woodlands is around SGD 966 PSF.
Note: The above table is based on the last 24 months transaction. Source: URA, PropertyNet.SG Research. FYI: La Casa is an Executive Condominium.
Based on the statistics above, a 3 bedroom of size 1,066 sqft would cost around SGD 1,029,756.
Next, as she would be holding onto her HDB, she is liable to pay an ABSD of 7%, bringing up the cost of her property purchase to SGD 1,101,839. For discussion purposes, we will round down the cost of purchase of the private condominium to SGD 1,100,000.
Estimated Price of a New Executive Condo in Woodlands
Based on the pricing of a nearby Executive Condominium, Bellewoods, she can get a 1,066 sqft 3-Bedroom unit at SGD 918,000 (SGD 861 sqft). For discussion purposes, we will round this up to SGD 920,000. (Also, at the time of writing, there is only one 3-bedroom 1,066 sqft unit available at Bellewoods).Luckily for her, a second timer buying Bellewoods need not pay the resale levy.
Let’s see what happens in 5 years’ time based on the two scenarios: (1) Buy Resale Private Condo and Rent-out HDB and (2) Buy Executive Condo.
Scenario #1 – Buy Resale Private Condo and RentOut the HDB Flat
Rental income from an HDB 4-Room flat
Let’s say Rachel decided to buy a private condominium (resale) and rent out her HDB 4-room flat. Over the next five years, she would collect close to SGD 108,000 of gross rental income. Taking into consideration the agent’s fee, repair costs, tax, and periods with no tenants, she would collect about SGD 90,000. Not bad for a property with a market value of around SGD 360,000 (the gross rental yield will be around 6%).
Value of HDB 4 Room flat
However, based on research done by the Institute of Policy Studies, HDB flats, being 99-year leasehold assets, will depreciate in value as the lease reaches expiration. Further, in a January 2014 exchange in Parliament, former National Development Minister Khaw Boon Wan said, “Like all leasehold properties, HDB flats will revert to HDB, the landowner, upon expiry of their leases.” And there is no guarantee you will be offered SERS or a lease extension.
Given Rachel’s HDB flats lease commencement is in the year 1985, its remaining lease will be 62 years after the next five years. Thus it is likely that the value of her HDB 4-room flat would depreciate rather than appreciate.
Value of Resale Private Condo
We do not have a crystal ball to determine if the value of the private condominium will be heading upwards or downwards in the next five years. So, let’s skip this for now and move on to the scenario that Rachel purchase an Executive Condominium instead.
Scenario #2 – Purchase an Executive Condominium
By buying an Executive Condominium, Rachel would make a potential “paper gain” of approximately SGD 180,000. This “paper gain” is the difference between the cost of private condo (resale) (SGD 1,100,000) and Executive Condominium (SGD 920,000). We will discuss this “paper gain” in detail in the following section.
Comparing the two scenarios
By purchasing an Executive Condominium, Rachel would be sitting on an additional gain of approximately SGD 90,000 (the SGD 180,000 paper gain net of the estimated rental income from Scenario #1). To arrive at this “paper profit”, we have assumed that the value of the Executive Condominium will be on par with the value of the private condominium in five years’ time. This is based on studies by Orangetee that shows the price gap between a private condominium and executive condominium is approximately 9% after MOP and 5% after privatization, and this price gap is due to a newer development typically commanding a better price.
The value of the newly purchased Executive Condominium could be further boosted by the completion of the upcoming Woodlands South station. Based on the study of properties near Circle Line by three researchers from NUS, it was discovered that the value of non-landed private property increases by approximately 6.3 percent by the opening of the new rail station that is within 600 meters.
Apart from sitting on a comfortable gain, by purchasing an Executive Condominium, after fulfilling her MOP period, Rachel would be able to unlock the value of her Executive Condominium through an equity term loan at a desired time to purchase her second private property.
If she has taken the option of buying a private property and renting out her HDB, she may face difficulties in cashing out her ageing HDB. So, by buying the executive condominium, it creates a better opportunity for Rachel to achieve her dream of owning two private properties a few years down the road.
Factors to Consider
We do hope that the above case study provides you with an excellent overview of the thought process you should go through before making your decision to purchase your next property. You should not make your purchasing decision based solely on the above case study as each person’s circumstances are unique (be it family circumstances, financial situation, future plans, etc.).
Nonetheless, here are some of the factors you may consider in your assessment/planning:
- The purpose of your purchase
- Your financial position now and (expectation) a few years down the road
- Value of your existing property now and (expectation) a few years down the road
- Your plans in the next 5 to 10 years
- Location of the property you are looking to purchase.
Article by guest contributor, PropertyNet.SG. PropertyNet.SG is your trusted network to Singapore Real Estate, providing you with unrestricted access to Project Information like Price, Availability, Floor Plans, etc. and connecting you directly to the official developer sales team. They are also a believer in empowering property buyers through education by sharing of property guides and tips to help them make a well-informed decision.